Manufacturers of Generic Drugs May Soon Be Charged with Collusion
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Manufacturers of Generic Drugs May Soon Be Charged with Collusion

Several manufacturers and some individual executives have been subpoenaed

November 4, 2016

Federal prosecutors may soon file criminal charges of price-collusion against several major players in the generic drug industry.

The Wall Street Journal (WSJ) reports that the U.S. Department of Justice (USDOJ) may bring cases before the end of the year, though the timing of potential enforcement actions is still uncertain.

Scrutinizing "communications with competitors"

The particular companies at the heart of the antitrust investigation were not immediately known, though Bloomberg reports that more than 12 companies and roughly 24 drugs are involved. WSJ writes that USDOJ has issued subpoenas to numerous generic drug companies as well as to some individual executives. According to the filings made by the companies with the Securities and Exchange Commission during the past two years, the department is trying to find information regarding pricing of the companies' products as well as their "communications with competitors."

A few of the drug makers to receive a subpoena are major players in the industry, while others are less known. They include Mylan, Teva, Actavis, Lannett, Impax Laboratories, Covis Pharma Holdings Sarl, Sun Pharmaceutical Industries, Mayne Pharma Group, Endo International subsidiary company Par Pharmaceutical Holdings, and Taro Pharmaceutical Industries, writes Bloomberg.

Drug pricing practices have come under fire from lawmakers and the public alike this year, writes the news outlet. "Former hedge fund manager Martin Shkreli set off the firestorm and drew the ire of Democratic presidential candidate Hillary Clinton after he acquired an old antiparasitic drug and raised the price to $750 a pill from $13.50. Valeant Pharmaceuticals International Inc. was lambasted by Congress for boosting prices of older drugs. In September, representatives grilled Mylan Chief Executive Officer Heather Bresch over the company's sixfold price increase since 2007 to $600 for a pair of EpiPen allergy shots."

While companies are allowed to raise their prices at the same time, it is illegal for competitors to agree to either fix prices or work together to organize discounts, production quotas, or fees affecting prices. Such collusion can be prosecuted by the federal government, which can try to obtain penalties and possibly send executives to prison.

A number of state attorneys general are conducting a separate investigation of certain generic drug manufacturers for potential price fixing, writes WSJ. That investigation, which falls under the heading of civil rather than criminal, is headed by George Jepsen, Attorney General of Connecticut. It started in 2014 and involves smaller manufacturers as well as some of the biggest companies in the U.S. and subsidiaries of foreign companies located in the U.S.

Generics in the Spotlight

Until now, most of the attention paid by lawmakers and the public to the issue has been focused on brand-name medications. Now, however, generics are beginning to come under scrutiny as well.

Generic prices have begun to rise in recent years. According to the Government Accountability Office (GAO), more than 300 out of 1,441 established generics analyzed by the Office experienced at least one drastic price increase of 100 percent or greater between 2010 and 2015.

If federal prosecutors can prove that companies have engaged in price collusion, it could undermine one of the main objectives of the rules that lead to the development of generics: the reduction of spending.

The specific nature of the government's investigation is still unclear; however, some companies have identified particular drugs of interest. According to an SEC filing made by Endo, the USDOJ requested information from its Par unit regarding at least two generics, digoxin (a heart medication) and doxycycline (an antibiotic). Mylan stated that its subpoena requested information about its generic doxycycline.

There are numerous generics that are produced by more than one company. The report issued by the GAO stated that the prices of both digoxin and doxycycline had risen significantly since 2012, but it did not specify which companies produced the drugs.

Lawsuits have been filed at both the state and federal levels by labor-union health-benefit funds and other drug purchasers against some of the manufacturers, such as Mylan and Endo, claiming that they had conspired to fix the prices of these two drugs. Between 2012 and 2014, the plaintiffs allege in a court document, digoxin's average market price went up by 884 percent, while doxycycline's rose by 8,281 percent. In a filing made with the SEC, Mylan stated its intention to defend itself against the claims.

A spokeswoman from Mylan claimed that the company is unaware of any evidence that it engaged in price fixing and that it is cooperating with the USDOJ's investigation. Teva stated in its SEC filing that it too is cooperating with the subpoena. A spokesman from Taro stated that his company is also cooperating and that it cannot make any comment on the details of the pending investigation.

"Courts are clear"

Although it is illegal for companies to set prices or divvy up markets, prosecutors have had a hard time winning price collusion cases, says University of Iowa law professor Herbert Hovenkamp. This is because the courts have established a high barrier for prosecutors to prove a conspiracy amount several different companies.

According to Hovenkamp, "[c]ourts are clear" that evidence of an agreement between the companies to follow each other's lead regarding product priceing must exist. Examples of such evidence could include a written document, a phone conversation, or an in-person meeting.

The majority of criminal cases on price fixing end in settlements rather than going to trial. Recently, dozens of auto-parts manufacturers agreed to enter a guilty plea for fixing new car part prices. They have been fined almost $2.9 billion in consequence.

Bloomberg reports that, according to the Generic Pharmaceutical Association, 88 percent of prescriptions dispensed in the U.S. are generic drugs.