March 24, 2013

Will Andrew Sullivan finally get a break on the price of his AndroGel?

One of the big changes in my lifetime has been the slow undermining of antitrust law due to the triumph of econ majors. Back in the lefty/populist 70s when I was in college, the conventional wisdom was that the only thing keeping big corporations from conspiring to raise prices were the anti-trust laws (for the benefit of non-American readers who are baffled by the historical relic word "trust:" anti-monopoly/cartel and anti-price-fixing laws).

As I majored in economics at Rice U., however, I learned that the need for anti-trust laws is mostly a big myth, and the magic of the market would take care of all but the most egregious cases. A true believer, I quickly came to scoff at at lawsuits such as the "notorious Utah Pie case" in which the courts upheld antitrust laws despite obviously being Bad for the Economy.

Then I got into business myself, and discovered that competition wasn't perfect like in the Econ textbooks. From the point of view of corporate employees, competition was awful, and that anybody with a brain in his head would negotiate a price-fixing deal or set up a cartel or monopoly with his competitors if the government didn't ban it. 

But, as experience was teaching me the opposite of what I'd learned in college, enlightened opinion (driven heavily by people who got a good grade in Econ 101) was moving toward what I had believed so whole-heartedly in 1978.

Thus, in recent years, huge pharmaceutical firms have been fairly openly bribing their would-be generic rivals to stay out of their markets, and the courts have been fine with this. Now, a Supreme Court case will decide this:

From the NYT:
The case, Federal Trade Commission v. Actavis, No. 12-416, centers on whether the maker of a brand-name drug can pay a generic-drug company to keep the generic version off the market. Based on antitrust law, the obvious answer would seem to be no, the view voiced by the government and most recently upheld by a federal appeals court. 
At least three other federal appeals courts have previously said those payments are legal, however, when made under the settlement of a patent infringement lawsuit. Those courts sided with drug company arguments that the payments are what Congress intended in setting up guidelines to encourage the production of generic drugs. 
The question before the justices pits a company’s constitutional right to protect its intellectual property — through reliance on a patent that excludes competitors — against antitrust law, which holds that a company cannot unfairly exclude others from legitimately entering a business with a rival product. 
When the court rules later this year, its answer could have a sweeping effect on one of the largest segments of the nation’s economy and an industry that touches the wallets of nearly every American. 
“Everybody wants to believe that the big drug companies are bad, that they’re giving us these piles of money to stay off the market,” said Paul M. Bisaro, chief executive of Actavis, whose generic version of AndroGel, a testosterone replacement therapy, is the subject of the case. “But these payments have saved consumers billions and billions of dollars.” 
The agency says in its court briefs that the opposite is true: the payment “allows the brand-name manufacturer to co-opt its rival by sharing the monopoly profits that result from an artificially prolonged period of market exclusivity.” 
The stakes in the dispute are huge. Pharmaceutical sales in the United States totaled roughly $320 billion in 2011, according to IMS Health, a research company whose statistics the agency cites in its arguments. 
Brand-name drugs accounted for only 18 percent of the total prescriptions written by doctors in 2011 but 73 percent of consumer spending, IMS reported. When a generic version of a brand-name drug comes onto the market, the F.T.C. said, it costs about 15 percent of the original, causing the brand-name drug maker to quickly lose about 90 percent of its market share.

18 comments:

Dave Pinsen said...

Clearly, drug companies are colluding here with generic manufacturers to get a de facto extension on their patent monopolies. But maybe the length of drug patents should be extended? That was the opinion of an FT letter writer I referred to in a post last year about the decline of R&D investment in the sector.

Anonymous said...

Set up a monopoly with their competitors? So you don't know what "monopoly" means.

Good to know.

Cartels are great if you can enforce them. Since defection brings greater profits, and contracts to rain penalties on defectors aren't enforceable, they aren't stable. Unless you're OPEC, but that's a sovereign state thing - can't sue OPEC for being a cartel.

Antitrust law is itself highly prone to abuse by those who can't compete - bigger firm has economies of scale, smaller firm is getting priced out, smaller firm brings lawsuit, feds get on board, imprison big firm guys, yay! Now the small firm gets to play, and the big firm has to raise prices. Wonderful! Consumers are shafted, but who cares about THEM?

Sort of funny for you to ignore the capture aspect of the antitrust laws.

Steve Sailer said...

Yeah, that's what I wrote on my final in 1978.

C. Van Carter said...

What have been the positive antitrust prosecutions? I'm not sure who objects to going after cartels and price fixers. That's nothing like destroying a company that's failed to pay tribute based on absurd premises like an HHI score, or predatory pricing, or tying.

Reg C├Žsar said...

... Paul M. Bisaro, chief executive of Actavis, whose generic version of AndroGel, a testosterone replacement therapy...

Bisaro World! Where T-shots make fairies manly, and generics make the sexes less generic.

Anonymous said...

You learn about cartels and oligopolies in a class called Industrial Organization. It was not required for Econ majors, a big oversight I think. I did take it and it was great, with models much more realistic than the perfect competition abstraction of Econ 101.

Anonymous said...

Thought Steve wrote AstroGlide instead of Androgel. Would have been funnier but mean spirited and unworthy of Steve's dry wit.

Dan in DC

Anonymous said...

One of the reasons that testosterone wasn't prescribed much until recently is that no company has a patent on it, so the profit margins on it were too low.

Now that there are patented delivery methods like gels and creams, you see ads in magazines and on television for those. But you never see ads for the injections, even though those are the cheapest and most reliable delivery method.

Matt said...

"...constitutional right to protect its intellectual property..."

The constitution says no such thing. It gives congress the power to issue patents and copyrights for limited terms. That's it.

I'm generally more sanguine about the market than our host - trusts of the kind Steve describes are usually a result of government graft rather than absence of government regulation - but the constitutional argument is silly.

NOTA said...

Anon:

So, the drug manufacturers do, in fact, seem to be managing to hold together cartels to get a few years of de facto patent protection on their drugs. I haven't dug into the details, but it looks like they've found a way to game the normal systems of contract and patent law, alongside the large regulatory barriers to entry for manufacturing drugs, to enforce cartel agreements--something the law is specifically not supposed to allow. Further, this seems pretty obviously to be increasing prices and taking well-being from consumers.

Anonymous said...

I recall that in the 50s, pharmaceutical companies were found guilty of using (antibiotic) patent infringement settlement agreements to divide the world markets, achieving monopoly pricing for years. Plus ca change....

Anonymous said...

"Then I got into business myself, and discovered that competition wasn't perfect like in the Econ textbooks. From the point of view of corporate employees, competition was awful...
But, as experience was teaching me the opposite of what I'd learned in college, enlightened opinion (driven heavily by people who got a good grade in Econ 101) was moving toward what I had believed so whole-heartedly in 1978."

I don't know about big pharma. It seems like medicine and finance are two areas where rules of free markets don't really apply. There's too much collusion/cooperation between big banks and government.
And a lot of regulation comes with medicine, and medical companies are also pressured to offer free stuff to poor countries, and etc. Also, big pharma works with heath insurance companies that is strongly regulated by the government, so who knows why and how stuff happen over there.

But in other sectors where things are more free-market oriented, I think maybe competition is more tolerated than in the past because of globalism. When US companies mostly hired US workers, they had to offer decent wages and benefits. Too much cutthroat competition among companies could cut down profits, and then wages would have to be cut, and then workers would call for strikes and it'd be a headache. And so, some degree of cooperation was needed to control excessive competition.

But now, US companies have limitless access to foreign workers who can be paid a pittance and hardly strike. So, competition has been made less painful for US companies. They can shop for the third world companies to agree to a contract for a pittance.

As for why the intellectual class and liberal-dominated government is less likely to go after big companies? Big corporations have figured that if they donate generously to the Democrats and liberal causes, they are covered and protected. Also, the great majority of the superrich are Democrats, and there are so many superrich Jews in Wall Street and High Tech and etc. Why would big government dominated by Jewish power go after them?

NOTA said...

Dave:

Patents don't exist for the benefit of the inventors, but rather for the benefit of everyone else. We establish a system of patents and copyrights so that we can create the incentives for useful and entertaining things to be created.

If there is some reason to increase the length of patent protection in the future, then maybe we should consider that, as it will create stonger incentives for developing new drugs. But extending existing patents can't possibly do that, unless the drug companies have a time machine lying around. And I'm generally pretty skeptical that extending the patent is going to have all that large an impact on incentives, because by definition, it's happening way in the future from when the actual drug development is going on. All the extra payoff is discounted for being 20-25 years in the future.

By contrast, companies that hold valuable patents and copyrights now have a *huge* incentive to argue for current patents and copyrights to be extended. Especially in the case of drug patents, where the overwhelming majority of drugs the companies spend money to develop never make a dime, because they fail somewhere in the incredibly expensive decade long path from development to actually being sold.

Anonymous said...

There is a catch here.

If free market competition is allowed, companies don't obey the rules of free markets.
So, government has to intervene and curtail economic freedom to ensure that free market competition occurs.

Orestes Brownson said...

Don't worry Steve. Obamacare will drive all the profit out of drug development so we won't have to worry about those darn monopolistic pharma companies.

There is no problem so bad that it can't be made worse by our Ruling Class.

Anonymous said...

The reason a cartel can work is if there are barriers to entry. The manufacturer of the brand name company can only bribe a few companies before it gets too expensive. Complying with regulations is so expensive that a company who wished to start manufacturing generic androgel could not do so unless it was already an expert in regulatory compliance. Thus one branch of the government creates a problems for another branch to solve.

Anonymous said...

So, someone who disagrees with Steve about cartels is a "true believer" in some economics cult. Whereas his convinction that government will create free competition by scribbling volumes and volumes of regulation and taking companies to court is.... patriotic?

David said...

>Complying with regulations is so expensive that a company [...] could not do so unless it was already an expert in regulatory compliance.<

Which is why all regulatory law is written by the largest companies. Your congresscritters merely nod in lucrative acquiescence. It's been like this for years.