Legal: Authorized Generics: Still Legal—and Holding - Pharmaceutical Executive

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Legal: Authorized Generics: Still Legal—and Holding
Despite the rattle and hum, courts continue to support the practice of authorized generics. The response? Generic manufacturers are changing the way they argue these cases.


Pharmaceutical Executive


A high burden of proof rests with opponents. Authorized generics expand consumer choice, which is more likely to be viewed as pro-competitive than anti-competitive. But even if one assumes they could have negative consequences in a few special cases, there is nothing in the conduct that seems readily challengeable under current law. The conduct is simply not equivalent to practices, such as price-fixing, which can be treated as presumptively illegal. Even the FTC, which has been monitoring the situation for some time even before announcing its Congressionally inspired plan to conduct a study, has never challenged the practice.

New Tacks and Attacks

As the courts send strong messages over the legality of authorized generics, critics are bringing new arguments to the table, and asking questions that may change the way brand-name companies are willing to price their generic equivalents.

"False generic" Mylan has come up with a more imaginative approach in its filing against Procter & Gamble and Watson Pharmaceuticals in California state court. It involves the authorized generic of the branded drug Macrobid (nitrofurantoin)—the same product for which Mylan unsuccessfully petitioned FTC to stop.

Rather than relying on orthodox antitrust theories under federal law, Mylan alleges that P&G's distribution and licensing agreement with Watson constitutes unfair predatory pricing and price discrimination, among other unfair trade practices, under the California Business and Professions Code. Mylan alleges that by offering both the original P&G brand product and an identical generic manufactured in the same facilities, the parties have created a "false generic," which is misleading, perpetuates a hidden price discrimination, and restricts competition in the generic submarket while preserving a monopoly in the brand-name submarket. The company also alleges that P&G offered Macrobid to Watson at a cost that was not offered to other distributors and purchasers, thus leading, according to the complaint, to predatory pricing.

This case is currently pending. In our view, however, the arguments stretch considerably beyond existing law, particularly the allegations about what are pejoratively styled "false generics." The practice of authorized generics is well-known, and we see nothing in the California Business and Professions Code that imposes a substantive pricing strategy on a generic drug. Indeed, the relatively modest discounts often offered by the sole generic during its 180 days of generic exclusivity would seem to confirm this. Moreover, given the profits typically involved in the sale of generics, when two generics compete with a brand-name drug, we find it hard to believe that any appropriate cost standard would allow such sales to be considered predatory. We also note that Mylan's theories appear to apply only to arrangements that involved sales and distribution arrangements, not licenses.

Best price Another emerging issue is how authorized generics play a role in determining the branded drug's "best price" and "average manufacturer price" (AMP). The effect of deeming the sale of an authorized generic equivalent to a branded drug is to reduce the latter's effective price under Medicare and Medicaid.

Prospectively, Congress resolved many of these uncertainties by passage of Section 6003 of the Deficit Reduction Act of 2005. Effective January 1, 2007, all drugs sold under the same NDA will be considered for purposes of calculating best price and AMP for the brand-name drug, even if the authorized generic is marketed under a different labeler code by a third party. Some ambiguity may remain as to implementation of the statute, but it clearly changes the financial calculus that will determine under what terms a branded pharma company will authorize a generic. Oddly, one possible effect of the legislation may be to cause companies to restructure authorized generic deals to diminish incentives for discounting (to the extent this can be done consistent with antitrust law). In this way, it has the potential to reduce the one clear benefit to consumers that now exists.

A generics trade association has advocated Congress to ban all authorized generics during the 180-day period, but to date, no such legislation has been introduced. Such a radical view doesn't appear to have solid support. Indeed, some generics companies benefit from serving as the purveyors of authorized generics. Only if the FTC study demonstrated substantial harm to consumers from a reduction in patent challenges—something we would be surprised to see—do we believe there will be any real movement toward making authorized generics illegal.


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