Co-opting Regulation for Profit

by on September 13, 2014 at 7:24 am in Uncategorized | Permalink

Regulations often increase monopoly power. Indeed, increasing monopoly power is often why regulations are enacted. In other cases, however, ostensibly neutral regulations are co-opted by entrepreneurs who spot an opportunity to leverage the regulation for profit. Derek Lowe points us to an interesting case of the latter involving drug pricing and the FDA.

Retrophin recently purchased the marketing rights to the drug Thiola and they are increasing the price from $1.50 per pill to over $30 per pill. Surprisingly, Thiola is off-patent. Ordinarily, we would expect such a large price increase to be met with entry and price pushed to marginal cost. To enter into the market, however, a generic producer must prove bio-equivalence which requires that the generic producer obtain a small quantity of the branded drug. Branded drug firms don’t like competition from generics and they try to impede the process but it’s typically not a big deal for a generic producer to obtain some of the branded drug for their bio-equivalence trials.

In 2007, however, the FDA was officially authorized to approve drugs conditional on the firm implementing a Risk Evaluation and Mitigation Strategy (REMS). The FDA approved thalidomide, for example, only if physicians signed a patient-physician agreement and enrolled each of their patient’s directly with the producer. Indeed, a unique prescription authorization number was required for each prescription which could be filled only at specially authorized pharmacies. The idea, of course, was to prevent anyone from taking thalidomide during pregnancy. The purpose of the regulation was probably not to create monopoly power but it didn’t take firms long to realize that REMS regulations could be co-opted. Simply put, a REMS agreement can make it illegal for generic firms to obtain a sample of the branded drug through ordinary channels. In the thalidomide agreement, for example, it’s even the case that all unused thalidomide must be returned to the producer! Retrophin is hoping to use a similar REMS strategy to keep generic competitors out of the market for Thiola.

Addendum: Derek’s post aroused the ire of the CEO of Retrophin and may have gotten him banned from reddit.

1 Bill September 13, 2014 at 8:11 am

Can’t you obtain the drug overseas and do the bioequivalence testing and study with that sample? Do the US regulations say that you have to use in your study drugs purchased in the US, or just that the product be bioequivalent

Regulations are country by country.

2 Bill September 13, 2014 at 8:12 am

You might have to do the study abroad, like in such a god forsaken place as Canada.

3 Bill September 13, 2014 at 8:15 am

By the way, this is not to say the US regulation should not be changed. I would see if you could get the FTC or DOJ and OMB alerted to this issue. FTC and Congress did quite a bit of litigation and legislation on a similar problem involving generics and the possible misuse of a different regulation.

4 dan1111 September 13, 2014 at 9:59 am

I, too, find it hard to believe that access to the drug for development can really be cut off this easily. However, Lowe links to presentations from the drug company that make this claim.

5 Boonton September 14, 2014 at 6:49 am

You are assuming the company sells the drug overseas. But if they did I don’t think the location of where the study is done matters.

6 Jan September 13, 2014 at 8:21 am

This is not going to happen. FDA assigns REMS to drugs where there is a clear risk, usually at time of approval, in cases where there are lingering questions about safety but still a medical need for the drug to enter market. Thiola has been on the market for a long time with no REMS, and there is no indication of new safety information that would lead the agency to think it needs to be restricted. Those who created this closed distribution scheme will not be able to implement it, and not just because some guy on the internet exposed it. Somebody has made a very big mistake if this was integral to their strategy for this drug.

7 dan1111 September 13, 2014 at 10:03 am

Lowe links to a presentation from the company discussing their plans. It appears to me that raising the price is based more on the current market than preventing future generics (their main competing drug is much more expensive). Even if the market remains open, it would take awhile for generics to come to market.

Closed distribution is only mentioned briefly and is only one of several strategies mentioned. I don’t get the impression that they are banking everything on this. They could view it as a long-shot with a big payoff.

8 Yancey Ward September 13, 2014 at 12:07 pm

It isn’t even clear to me that REMS assignment is required to set up a closed distribution loop. Unless I am reading it wrong, the FDA required the loop in the case of thalidomide’s second act, but I am not sure what regulation prevents a company from doing so on its own initiative.

9 Bill September 13, 2014 at 1:08 pm

You’re correct, but incorrect. Correct in the sense that nothing prevents the manufacturer from imposing a resale restraint (telling a pharmacist: you can’t sell this drug to a person other than a consumer), but incorrect in that non-price vertical restraints are subject to the antitrust laws, so the vertical restraint, if judged under the rule of reason, might be held to be unreasonable.

Similar vertical restraints involving soon to be off patent products have been challenged successfully. One company whose product was coming off patent entered into exclusive supply contracts, for example, with the sole supplier of an ingredient necessary to manufacture the product. That agreement was successfully challenged by an enforcement agency as an unreasonable restraint.

10 Jan September 13, 2014 at 2:04 pm

Right, FDA is the one requiring the REMS, as in the case of thalidomide. It’s not clear to me either what’s to prevent the company from doing something like this unilaterally.

However, Alex’s whole point is that this is a problem created by FDA regulation–companies are leveraging the REMS program for profit. Of course, this will not be the case for Thiola. Therefore, this is quite a poor example for a broader position that Alex often tries and fails to convincingly argue: that FDA regulation is in general harmful.

11 andrew' September 14, 2014 at 1:52 am

I’m convinced and I can convince you too.

They still have to price bioequivalence through the fda hoops. Until they do this, the difference in welfare is $1.50-$30 times sales per time times time.

The nefarious REMS use is just to extend “time”

These guys are just more clever patent trolls.

12 Jan September 14, 2014 at 8:00 am

There are costs to regulation and there benefits. It’s obvious where regulating drug safety and effectiveness comes fall on that spectrum.

You’re not taking into account all the other factors that make this a rare strategy. One, with the vast majority of drugs that go off-patent, there are a number of companies that submit an ANDA to produce them and compete on price, making this approach unworkable. Second, optics are bad. Look at how pissy the CEO has gotten because of the media exposure. A company can do this once, maybe, but then they have an image problem as well as an economic problem. Assuming the company sells other drugs, the buyers of them–PBMs and insurers–will use their leverage to move away from this company’s products and toward their competitors’ for pulling this crap. Third, it is temporary–once another ANDA is approved, the strategy stops working. FDA has taken extraordinary measures to ensure access in shortage situations before. If this becomes a persistent problem, where people can’t access drugs because of price gouging, they may take similar steps, like fast-tracking ANDAs for alternative generic suppliers or allowing foreign imports.

So no, I am not convinced we should…what, remove safety requirements for generics? Do that because a few schmucks can bilk the system once in a while for a relatively small amount of money? I mean, Alex mentions thalidomide above, in the most ironic example ever. Babies born with flippers for arms, that’s what thalidomide does. There is a reason we have an FDA and examples like this don’t convincing argue for scrapping it.

13 Michael September 13, 2014 at 8:58 am

Prof. Tabarrok, what is your solution to this problem? Would you like to dissolve the FDA?

14 dan1111 September 13, 2014 at 9:57 am

Huh? This post is about a very dumb policy with an obvious, simple fix that has no clear downside.

15 andrew' September 13, 2014 at 12:04 pm

Dissolve? You mean like in acid?

16 dsgntd_plyr September 13, 2014 at 9:51 am

I don’t use reddit often, but a lot of it’s users are pissed that the moderators are disappearing posts for pissing off powerful people (“GamerGate”) and being un-PC. For instance multiple posts discussing the Memphis Kroger Vibrant Youf Protests were taken down last week.

17 ThomasH September 13, 2014 at 10:33 am

Demonstrating once more the standard Liberal position on regulation, the need to weigh all the costs and benefits of regulation on an ongoing basis.

18 Michael B Sullivan September 13, 2014 at 10:55 am

That’s in practice impossible when you consider the sheer mass of regulation out there.

19 andrew' September 14, 2014 at 1:47 am

They don’t even read the bills. Do we believe they do followup?

20 Dan Weber September 13, 2014 at 10:40 am

may have gotten him banned from reddit

I don’t want to say “this is a really fucking stupid thing to say.”

So I’ll just say “you don’t understand how reddit works, at all, and should not say anything about it.

21 Dan Weber September 13, 2014 at 11:13 am

This was over the top, I apologize.

22 Derek Lowe September 13, 2014 at 10:46 am

I’ve been “un-shadowbanned” from Reddit, so that issue is resolved (although I’m still banned from r/news, as far as I know). Someone reported my post to Reddit as spam, because it linked back to my own content, which the site is very sensitive about. One could suspect that the person complaining about this might have some links to Retrophin, since this wasn’t the sort of thing that a company would want on Reddit’s front page, but I have no evidence of that.

23 Dan Weber September 13, 2014 at 10:53 am

Each subreddit is more-or-less its own kingdom, and some subreddits are complete outgrowths of the mods’ sad little egos. If a mod said you would be banned from reddit as a whole for breaking his little empire’s rules, message the admins (not the mods), because that guy is probably doing other sorts of abuse.

It’s perfectly OK to submit links to your own things if you participate in the discussion, which you do.

24 Chip September 13, 2014 at 7:15 pm

Didn’t Reddit ban climate skepticism?

25 andrew' September 14, 2014 at 1:54 am

I banned reddit except for links to ama s of really smart people answering mostly really dumb questions .

26 Dan Weber September 13, 2014 at 11:01 am
27 Ray Lopez September 13, 2014 at 11:21 am

In theory Usenet is for unmoderated posts, though I don’t like the fact your posts are not typically anonymous in it, and/or can be spoofed by somebody pretending to be you, though Google did a decent job making it semi-anonymous and spoof-proof. As for the substance of this post by AlexT, it seems it’s just speculation as to what was the cause of the price increase of this off-patent drug. I am pleased, as a pro-patent person, that there was a price increase, proving that something worthy is not free, or, put another way, something free is usually either stolen or worthless.

28 andrew' September 14, 2014 at 1:59 am

What if the price differential simply represents the friction of fda compliance?

That would make it unlikely the fda is fulfilling their mission in that case.

The fact that retrophin is performing a patent troll function in this instance makes it unlikely this is incentivizing innovation.

29 Derek Lowe September 13, 2014 at 11:20 am

I was indeed banned on the whole site for a while, but (as you mention) it got reversed. Apparently this happens fairly often – makes you wonder how much of the admin’s time is taken up with this sort of thing.

As I say, I’ve no idea if the thread was taken down because of anyone sympathetic to Retrophin – it certainly wouldn’t seem to have been Martin Shkrell himself, since he stepped in and made the whole discussion even more prominent than it already way. It could well have been some Reddit user alert to the chance to Stick It To the Corporate Spammer Man (or perhaps to Stick It To Big Pharma, if they read that far on me, since I work in the industry). Either of those would fit a prominent Reddit user demographic pretty well.

30 Ray Lopez September 13, 2014 at 11:23 am

Well I was threatened to be banned from Wikipedia once, and, as you say, it’s annoying, though in my case I was trying to be more of a troll than usual, albeit my points were IMO well taken but unconventional. If you want a totally un-moderated site try Usenet, where you can self-publish though few people are likely to read it nowadays.

31 prior_approval September 13, 2014 at 11:27 am

‘Indeed, increasing monopoly power is often why regulations are enacted.’

Yep, truth in labelling laws are all about ensuring that apple juice sellers are the only ones allowed to say on the label that their product contains apple juice.

Which might explain why Beech-Nut Nutrition Corporation was so unhappy to learn that such laws prevented it from cornering the market of sugar water labelled as apple juice – ‘The Beech-Nut Nutrition Corporation pleaded guilty yesterday to Federal charges that it had sold phony apple juice intended for babies and agreed to pay a $2 million fine.

The corporation also agreed, as part of a plea arrangement with the Government, to pay $140,000 in investigative costs to the Food and Drug Administration. Beech-Nut, a subsidiary of Nestle S.A. of Switzerland, is the second-largest maker of baby food products in the United States after the Gerber Products Company.

”We believe that Beech-Nut’s fine represents the largest fine ever paid under the Food, Drug and Cosmetic Act by at least sixfold since the act’s enactment in 1938,” Richard K. Willard, the Assistant Attorney General in charge of the civil division, said in Washington.’

32 Cliff September 15, 2014 at 12:26 am

Newsflash, apple juice is sugar water

33 Evan Harper September 13, 2014 at 11:47 am

Rightly or wrongly, Reddit tends to aggressively ban people who exclusively submit their own blog links to Reddit.

34 andrew' September 13, 2014 at 12:18 pm

If only we had something called programming.

35 Bryan September 13, 2014 at 12:31 pm

It is unfortunate the original patent doesn’t adequately describe the drug, and as such, why following it doesn’t prove equivalence.

36 Willitts September 13, 2014 at 12:52 pm

Not that I expect spectacular results, but I have to ask: have you submitted this to the FDA under its rulemaking authority to guarantee access?

37 Jan September 13, 2014 at 2:06 pm


38 Nathan W September 13, 2014 at 2:15 pm

Perhaps they could insert a specific requirement that companies which to perform bioequivalence tests must be allowed to purchase samples at the market price, with some reasonable delay, just as 2 weeks, to allow them time to find a box, call the courier, and send it.

Companies need profits to do R&D. The bottom line in regulation is consumer welfare (social function is highly debatable), not profit.

39 ThomasH September 14, 2014 at 6:56 am

What is the difference you make between “consumer welfare” and “societal function?”

40 Nathan W September 15, 2014 at 2:38 am

Societal function being like, the mathematical objective. Actually, it’s usually called something slightly different, but that works too. Basically … What’s the goal? One form of the objective is to maximize everything that the king has and damned everyone else. Another form is to achieve perfect equality (not even Marx suggested that!). Another form is to maximize the income of the poorest. Another is to maximize the number of pieces of paper with $1 written on them that we can shuffle around the economy.

Consumer welfare being the assumption of max U in a mainstream setup with all the stuff you learn in 1st and 2nd year micro and macro.

41 Nathan W September 15, 2014 at 2:39 am

One social functions could be “achieve MDGs”. That’s kind of like maxmin with a threshold.

42 jerseycityjoan September 13, 2014 at 10:25 pm

Whatever the whys and wherefores, we should not allow things like this to go on.

There is no good reason for us to allow any company to take an established substance that sells for $1.50 and then charge $30.00 for it.

43 andrew' September 14, 2014 at 1:42 am

Let’s start by not forcing it. Then we can talk about allowing it.

44 andrew' September 14, 2014 at 1:45 am

They still have to prove bioequivalence to get over the lower fda hurdle. It is about making something hard harder (and slower), it us not about claims about making it impossible.

45 manuel istif makinası September 16, 2014 at 3:15 am

elektrikli zincirli vinç Instead a drug company is taking its dementia drug that seems to work off the market and telling doctors to prescribe its similar drug with time release or something covered by newer patents. The idea is to switch patients akülü istif makinaları

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