Markets Wired

The Federal Trade Commission today issued “Authorized Generics: An Interim Report,” which presents the first set of results from a study conducted to examine the short-term and long-term effects of “authorized generics” on competition in the prescription drug marketplace. An authorized generic exists when a pharmaceutical manufacturer sells a drug under both a brand-name and generic label. The FTC conducted the study in response to requests from Congress. Issues related to generic drug competition are relevant to current legislative debates and health care reform.

The FTC Interim Report examines the short-term effects of authorized generics during an initial period of generic competition. In certain circumstances, the first generic competitor of a branded drug is awarded a 180-day period of marketing exclusivity under the Hatch-Waxman Act. This marketing exclusivity period granted to certain generic “first filers,” however, does not preclude competition from authorized generics. It has become increasingly common for brand-name drug makers to begin marketing authorized generics at the same time the generic firm is beginning its 180-day marketing exclusivity period, leading to questions about the effects of authorized generics on pharmaceutical competition.

The Interim Report finds that drug prices are lower when authorized generics are marketed against a single generic drug than when they are not. With authorized generic competition during the 180-day marketing exclusivity period, retail drug prices are on average 4.2 percent lower than the pre-generic branded price, and wholesale drug prices are on average 6.5 percent lower than the pre-generic branded price.

Authorized generic entry during this time also substantially reduces the revenues of a first-filer generic firm, with declines ranging from 47 to 51 percent. As a result, because a generic can earn greater revenues if an authorized generic does not enter the market, a generic firm may be willing to agree to defer its market entry in return for a brand’s promise not to launch a competing authorized generic during the 180-day marketing exclusivity period. A review of patent settlement agreements, the Interim Report states, reveals that such agreements appear to be more common now than in the past.

The Interim Report concludes that such brand-generic agreements to delay introducing both independent generics and authorized generics can harm consumers in two ways. First, generic drugs, and the accompanying price discounts, would not be available to consumers as soon as otherwise would have been the case. Because generic drugs are often priced substantially below the price of branded drugs, overall prescription drug costs could be significantly increased by even a few additional months during which only the brand drug is available. Second, consumers would lose the benefit of price discounts from authorized generic competition during the 180-day marketing exclusivity period, because the brand has agreed not to compete against the generic drug during that time.

According to the Interim Report, the FTC’s preliminary data analysis found that:

– Compared to the pre-generic brand price, retail drug prices are 4.2 percent lower when an authorized generic competes with the “first-filer” generic drug during the 180-day marketing exclusivity period than when an authorized generic does not enter the market;

– On average, wholesale prices are 6.5 percent lower, relative to the pre-generic prices, when an authorized generic competes with the first-filer generic during the exclusivity period than when an authorized generic does not enter;

– Revenues of a first-filer generic firm during the 180-day exclusivity period drop substantially after an authorized generic enters the market, with average declines ranging from 47 to 51 percent. The revenue effect for generic firms is much greater than the price decline for consumers mainly because the authorized generic represents a very close substitute for the conventional generic, and typically gains significant market share at its expense;

– To prevent this loss of revenue, generic firms may be willing to delay entry in return for a brand firm’s agreement not to launch an authorized generic during the 180-day marketing exclusivity period;

– Between fiscal years 2004-08, about 25 percent of the final patent settlements reviewed by the FTC contained provisions related to authorized generics; and

– During the same period, 76 final patent settlements were with first-filer generic firms. About 25 percent of those settlements involved an agreement by the brand not to launch an authorized generic to compete against the first filer, combined with an agreement by the first filer to defer market entry past the settlement date by an average of 34.7 months.

The vote to issue the report was 3-0, with Commissioner Pamela Jones Harbour recused, Chairman Jon Leibowitz issuing a statement, and Commissioner J. Thomas Rosch issuing a separate concurring statement, both of which can be found on the FTC’s Web site and as a link to this press release.

Copies of the Commission’s report are available from the FTC’s Web site at www.ftc.gov. The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust@ftc.gov, or write to the Office of Policy and Coordination, Room 383, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read “Competition Counts” at http://www.ftc.gov/bc/edu/pubs/consumer/general/zgen1.shtm.

(FTC File No. P062105)
(Authorized Generics.wpd)