JURIST Guest Columnist Daryl Lim of The John Marshall School of Law discusses the implications and predictions of the recent Mylan investigations after 20 US states file lawsuits…

In an age of divisive politics, there has been a surprising amount of consensus on containing the cost of healthcare and ensuring adequate access to it. The Affordable Care Act‘s name itself indicates the aspirations of a president who campaigned for its passage through Congress. While his successor could bring about its avowed demise, even he has been quick to promise cheaper drugs via free market principles and foreign competition.

That consensus permeates an ideologically archipelagian Congress as well. Last month the 21st Century Cures Act received overwhelming bipartisan support, with the Senate voting 94-5 and the House voting 392-26. The bill among other things, expedites drug and medical device approval. More treatment options in turn promises to reduce patient healthcare bills.

Access to medicine is an issue with visceral voter appeal. The logic of lowering drug prices is easily understood and its benefits immediately appreciated, particularly by an electorate frustrated by socio-economic inequity and anxious about their futures. On the other side, many who benefitted from that inequity made their fortunes in pharmaceuticals. Some by engorging themselves on the medically vulnerable.

For instance the price of Mylan‘s two-pack EpiPen, used to treat severe allergic reactions, rose five times in seven years by 400 percent to $600. EpiPen became Mylan’s most important product, accounting for $1 billion of its $9.4 billion in sales in 2015. Mylan’s justifications were the cost of business and the intricacies of America’s healthcare system. Its reports however, indicate that most of its expenditure went to marketing and overhead costs. Likewise the price of Daraprim, used in the treatment of fatal parasitic infections, skyrocketed by 5,000 percent.

In December news broke that 20 Democratic and Republican states had filed an antitrust lawsuit [JURIST report] accusing Mylan and other generic drug companies of conspiring to raise prices on an antibiotic and an oral-diabetes medication. Mylan has denied the charge, but it would not be difficult to guess what the public’s verdict would be.

The Mylan Conspiracy
The US generic drug market is worth a staggering $74.5 billion [PDF]. Generic products account for 88 percent of prescriptions and are crucial to the effort to rein in healthcare costs. In a market with generic substitutes, the cost of a drug falls by 80 percent or more. Robust competition through a measured introduction of generic drugs is therefore crucial in any effort to control healthcare costs.

One battlefront lies in stemming reverse payments, so called because the settlement money flows from the incumbent to the potential generic seeking to challenge the brand’s dominance. In 2013 the Supreme Court held that such settlement agreements could have “significant anticompetitive effects” and could violate the antitrust laws. Subsequent cases by lower courts have taken a broad view of “payments.” For instance non-cash forms of consideration could include the brand company’s agreement not to launch its authorized generic drugs to compete with a generic competitor’s offering, and sharing the duopoly profits.

Another battlefront is found in “product hopping” cases. This happens when a brand company switches from one formulation of the drug to another to evade state drug product substitution laws. These laws allow or require pharmacies to substitute generic versions of brand prescriptions. Courts have distinguished between anticompetitive “hard switches,” where the brand company removes the original drug from circulation, and generally permissible “soft switches,” where the original drug remains on the market.

The third battlefront involves cases such as the Mylan investigation. Here, it is the generics themselves who seek out rivals, agreeing to maintain market shares and avoid competing on prices. In the Mylan investigation, senior executives at the companies allegedly used informal industry gatherings, personal calls, and text messages to share competitively sensitive information. Mylan then allegedly gave up bidding for at least one major wholesaler and one large pharmacy chain to Heritage Pharmaceuticals.

The two drugs at issue in the alleged conspiracy are a delayed-release form of the antibiotic treatment doxycycline hyclate, and glyburide, a commonly used diabetes drug. Members of Congress singled out the surging price of doxycycline as a symptom of the drug price malady. One form of doxycycline rose from $20 a bottle to $1,849 in six months. Two former executives at Heritage, the alleged ringleader of the companies under investigation, were charged with criminal violations.

The lawsuit came just a day after the Justice Department’s two-year investigation into the industry’s pricing practices [PDF]. According to the Justice Department, consumers paid more for one in nineteen generic drugs sold in the US during the past three years because of price-fixing. The average price hike was 1,350 percent. The investigation uncovered evidence of a wide-spread conspiracy to fix prices and allocate markets for several generic pharmaceuticals in the US that went beyond the two drugs involved.

Implications and Predictions

The Mylan investigation is symptomatic of a malaise where the fruits of economic growth are hoarded rather than shared. Naked horizontal agreements among competitors to fix the price of a good or service, or to restrict their output, are usually condemned as per se unlawful. Where a product could not exist without certain horizontal agreements, the restraints are normally analyzed under a rule of reason analysis. This involves balancing anticompetitive effects against procompetitive justifications. However the facts involving Mylan and its associates suggest that the parties had no other motive than to throttle the supply of generic drugs.

The criminal charges the Heritage executives face are significant because they represent a more aggressive enforcement of antitrust law. Last year the Justice Department revised its policy in response to public perception that it was not doing enough to investigate and prosecute corporate executives. The reasoning is that financial penalties against company directors and officers can be borne by companies’ indemnity policies, while the individuals are unaffected.

Individual accountability with the potential for jail time and the stigma of a criminal conviction promises to deter corporate misconduct more effectively. Internal operating procedures now identify potentially culpable individuals early on so as to minimize the risk of evidence getting stale or the expiration of the statute of limitations. Suspects can seek leniency if they admit to illegal conduct and testify in court in a full and timely manner.

The investigation also raises the question of how executives should communicate across companies. The drug companies allegedly knew their conduct was illegal and had tried to avoid communicating in writing, even deleting written communications when their cover had been blown. At one end, intentional exchange of sensitive information is highly probative of a conspiracy. On the other, total avoidance of interaction is highly impractical. The key then is to ingrain best practices in executives through rigorous compliance programs so that they can traverse the murky ground in between.

Behavioral economics can also help improve antitrust outcomes, including ones that concern cartels in the pharma industry. Behavioral economics highlights the role of information asymmetries, heuristics and non-price variables in influencing perceptions of manufacturers, payors and payees in the healthcare system. It challenges traditional assumptions that stakeholders maximize profits in a rational manner, particularly when the facts suggest otherwise. In turn this influences the analysis market power, the identification of anticompetitive effects and any procompetitive justifications, and aids developing creative remedies through behavioral nudges. Reducing the complex technical analysis to intuitive heuristics that executives in drug industries can readily internalize into their daily business behavior would help foster a culture of competition. It would also help judges navigate complex antitrust analysis while reaching more precise outcomes.

Antitrust law aims to lower prices and increase consumer choice, and it will likely be used as a policy lever to control the cost of healthcare this year. The wave of populist angst that characterized much of 2016 will translate into harsher scrutiny of the drug industry. The political rewards of disgorging wealthy pharmaceutical companies will encourage the agency to stay the course under the new administration.

America’s rule of law was admired because it defended the downtrodden from the tyranny of unbridled capitalism. As far as the cost of healthcare is concerned, that age seems all but over. 2017 will continue to accentuate rising income inequality and economic dislocation. An antitrust policy that ensures robust competition in generics is a shot in the arm that will make its citizens stronger together, and on this issue, help make America great again.

Daryl Lim is an Associate Professor and Director of Center for Intellectual Property, Information and Privacy Law at The John Marshall Law School. His book Patent Misuse and Antitrust: Empirical, Doctrinal and Policy Perspectives has been cited in the briefs of opposing counsel to the Supreme Court in Kimble v. Marvel Entm’t, LLC, 135 S. Ct. 2401 (2015). His work at the intersection of antitrust and patent law has also been cited in reports commissioned by the OECD, World Intellectual Property Organization, as well as foreign government and non-governmental publications.

Suggested citation: Daryl Lim, Antitrust and the Mylan Conspiracy , JURIST – Academic Commentary, Jan. 20, 2017, http://jurist.org/academic/2017/01/daryl-lim-antitrust-and-the-mylan-conspiracy.php.