Mallinckrodt will pay $100 million to settle drug antitrust (price-gouging) charges; why competition, not fines, is the only antidote

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The News:

Irish drugmaker Mallinckrodt PLC (Dublin) and a US subsidiary will pay $100 million and agree to other conditions to settle government antitrust allegations they unlawfully prevented competition for Acthar, a drug that has seen enormous price spikes in recent years.

Mallinckrodt will pay $100 million to settle drug antitrust allegations Click To Tweet

The Federal Trade Commission and attorneys general from New York and four other states alleged the US subsidiary, formerly known as Questcor Pharmaceuticals, violated antitrust laws when it acquired the rights to a competing drug, Synacthen that threatened its monopoly in the US. The Food and Drug Administration originally approved Acthar, an injected drug, in 1952, and it eventually became used as a treatment for many conditions including multiple sclerosis.

Questcor acquired the drug from a predecessor company of Sanofi SA (Paris) in 2001, and in 2007 Questcor began to implement sharp price increases for it, jumping to $23,269 per vial from $1,650, and it has continued to rise since then, according to Securities and Exchange Commission filings.

In 2010, the FDA approved Acthar’s use to treat a rare seizure disorder in infants, which conferred market exclusivity that barred generic versions for that use for a seven-year period. Mallinckrodt acquired Questcor for $5.9 billion in 2014.

Synacthen is used in Europe and Canada to treat patients with the same conditions, but at a fraction of the practice, antitrust enforcers said. They said Questcor acquired the US rights to Synacthen from Novartis AG (Basel CHE) in 2013, outbidding several other companies that might have made the drug available in the US to compete with Acthar.

New York Attorney General Eric Schneiderman said the matter was “an egregious case of a monopolist doing a deal to eliminate potential competition.”

In addition to the $100 million payment, the settlement requires Mallinckrodt to license the rights to Synacthen to another firm that could then commercialize the drug in the US. Federal and state officials said the agreement would allow for the competition that Questcor sought to prevent.

A Mallinckrodt spokesman said the company was “pleased with the agreement reached to resolve this legacy matter, although we continue to strongly disagree with allegations outlined in the FTC’s complaint, believing that key claims are unsupported and even contradicted by scientific data and market facts.”

The outcry over the big price increases for Acthar was a harbinger of the more recent backlash against rising prices for many other drugs, such as Mylan NV’s EpiPen emergency-allergy treatment and Turing Pharmaceuticals’ anti-infective Daraprim. Mallinckrodt closed the week down 9% at $46.08 in New York.

Steve’s Take:

Here we go again. Call it price gouging, or what’s the legal term–that’s right–“predatory pricing.” That’s a much more civil modifier; one that belongs in health care, not the icky world of Wall Street, where such behavior is celebrated.

Just when I’m starting to forget the pernicious antics of Turing Pharma, and Mylan’s EpiPen debacle–oh and let’s not forget Valeant, which bought the drug Syprine for patients with a rare liver disorder back in 2010, then increased the price by a staggering 3,000%. No, that’s not a typo.

And it wasn’t just one Valeant drug whose price tag mushroomed. According to Richard Evans, an analyst with Sector and Sovereign Research, the company hiked net prices for its US drug offerings by over 41% in the 12 months following October 2014.

Then along comes Mallinckrodt; the first specialty-pharma disgrace to start off the New Year. And hold onto your hats. Martin Shkreli, the comic-bookish, former CEO of Turing, who engaged in the same pricing practice, was the one who apparently blew the whistle. Talk about ironic. The infamous pharma badboy apparently tipped federal officers that another drugmaker was monopolizing the market for a critical medicine and jacking up its price to mind-boggling altitudes.

The FTC had been investigating the matter since 2014, and Business Insider says it was Shkreli who reported the wrongdoing, according to the New York Post. And now, Mallinckrodt has disclosed it will pay $100 million to settle FTC charges that Questcor Pharmaceuticals, which Mallinckrodt bought in 2014, illegally raised the price of its best-selling drug Acthar by 85,000% (yes, you read that correctly) and bought the rights to Synacthen–a cheaper competing drug–to keep it out of the US market. The settlement forced Mallinckrodt to give a free limited US license for that cheaper drug to a competitor, Marathon Pharmaceuticals.

While the settlement’s public perception is perhaps sanguine, its actual effect is harder to assess. You would think that a $100 million fine would be enough to reprimand a company for its bad acts. The fine, however, is basically meaningless, amounting to about a third of Acthar’s quarterly sales.

Licensing the cheaper drug, Synacthen, won’t have any effects for a while. Marathon will have to run trials on it.

What’s really going on, and how did we get here?

Price gouging by corporate scoundrels posing as pharma companies, like Valeant, Turing and now Mallinckrodt, has been possible because they have successfully exploited distortions in supply and demand. The free market actually facilitates such distortions but can also correct them, says Forbes.

Pharmaceutical companies have a right to be compensated for research and development efforts that yield new molecules, discoveries that advance medicine. But predatory price increases for generic drugs are indefensible, highly unethical in our egalitarian society and impact all of us, not just those taking the medicines. The higher cost adds to financial stresses on hospitals, forces up insurance premiums and increases Medicaid and Medicare expenditures funded by our tax dollars, Forbes points out.

Companies that seek to exploit the drug industry solely to maximize their profits, turning a blind eye to the needs of the populace, must be reined in by the same authority they have been able to elude, namely, the law of supply and demand.

To restore a more equitable supply/demand balance, we need to revive competition. If there is no competition among US domestic manufacturers for a particular drug, there may be an ample supply overseas. So we should open up the US drug market to generics that have not been reviewed by the Food and Drug Administration but have been approved in advanced countries with high quality standards, including Canada, Australia and Western European nations. Drug approval standards in such nations are as strong as in the United States and, in fact, four of every five active pharmaceutical ingredients in drugs used in the US are manufactured overseas.

The FDA already permits US consumers to purchase online and receive through the mail medicines that are approved in foreign countries, and, in the case of drug shortages, FDA rules permit the importation of pharmaceuticals that have received approval overseas but not in the states. The US government even threatened to import generic versions of ciprofloxacin in 2001 at the height of the anthrax panic, leading Bayer, maker of the brand-name medicine, to reduce prices.

A follow-on step is that the FDA should fast-track review of generic drugs for which there are no competitors, and even where there are relatively few manufacturers. This will require additional funding for the FDA Office of Generic Drugs which, being woefully understaffed, often requires several years to approve new manufacturing applications.

Returning to the path that led us to this unseemly, untenable place, another shift in the priorities of a new type of player has emerged in recent years.

Pharma companies traditionally invest heavily in research and development. The costs required to bring a new drug to market vary widely–anywhere from hundreds of millions to upwards of $2.6 billion, as estimated by the Tufts Center for the Study of Drug Development in 2014. In many cases drug pricing justifiably reflects this investment.

What’s troubling is that this budding breed of players prize profit over drug discovery and manufacturing. They legally acquire the rights to existing drugs and charge exorbitant prices following FDA approval, all without ever having made meaningful research or development investment.

In some instances, as with Catalyst Pharmaceuticals, which specializes in commercializing therapeutics for rare neurological disorders, companies take advantage of their competitors’ and scientists’ drug research and development without even manufacturing the product.

The number of companies using this model has not yet been calculated, but there’s evidence that its use is particularly widespread in the market for rare diseases, says A. Gordon Smith, MD, a professor, vice chair of research, and chief of the division of Neuromuscular Medicine at the University of Utah School of Medicine.

Writing for the Harvard Business Review, Dr. Gordon points out that there are 7,000 rare disorders, affecting 25 million to 30 million Americans, and in many cases identifying an effective treatment for them is easier than for common illnesses, since the discovery of a specific genetic or molecular trigger can lead to targeted therapy. Ionis Pharmaceutical, for example, has succeeded in creating a pipeline of these treatments, such as Nusinersen, a potential therapy for spinal muscular atrophy.

Yet the primary reason this new ilk has burst onto the scene is that the Orphan Drug Act (ODA) substantially increases potential profits. Dr. Gordon points out that since its passage in 1983, the ODA has governed approval of drugs for rare diseases and has stimulated drug innovation through tax breaks and seven years of market exclusivity.

Now, however, companies are utilizing these incentives to profit from patients and private and government insurers. According to EvaluatePharma’s 2015 Orphan Drug Report (pdf), this market comprises 20.2% of total global prescription drug sales and is growing annually by 11.7%, nearly double the rate of the overall global prescription drug market.

Quite noticeably, 44% of new drugs approved in 2014, for example, had orphan status, with seven of the 10 best-selling drugs being approved under the ODA. In 1990 a proposal that orphan drug status be removed for drugs with annual sales of $200 million or that are approved for populations of more than 200,000 people made it through Congress but was vetoed by President George H.W. Bush. Gordon says his idea deserves reexamination.

Finally, the United States is one of the only nations in the world that does not regulate drug prices. The federal government must be empowered to have a larger influence in this process.

President Donald Trump, while not necessarily espousing price regulation, does strongly favor price bidding–especially for government-funded programs like Medicare and Medicaid

The 1984 Waxman-Hatch Act that created the generic drug industry was intended to make drugs more affordable. Aren’t we way overdue opening the pharmaceutical industry to global competition from trustworthy suppliers? Isn’t it time to end price distortions that are wrongly punishing individuals, providers and payers?

Now is the time to compel the US drug-discovery, approval and commercialization process to respond to the breathtaking era of discovery and value-based care. Yes, we have a “free enterprise” economic system in which businesses compete with each other to sell goods and services in order to make a profit. And in which government control is largely limited to protecting the public and running the economy.

But don’t we all deserve the same right to access affordable medicines and treatment, not just to be able to stay alive but to thrive? Behavior that Wall Street routinely winks at should not be allowed in health care. It’s an inherently different “business” and should be treated accordingly.

Steve's Take: Forget fines, unlawful behavior should result in working bans or incarceration Click To Tweet

I say, forget fines on companies like Mallinckrodt. They just get built into the new cost of their product offerings. Rather, as in the case of Mr. Shkreli, we should: either bar the executives responsible for the fraud or other unscrupulous, unlawful behavior from working in the industry for a period of years; or incarcerate them.