Pharmaceuticals are big business. Seriously big business.
No, really. The revenue of the worldwide pharmaceutical market in 2019 was 1,250.4 billion US dollars*. For context, Amazon, Apple and Google made a combined revenue of 701.7 billion US dollars in the same year – just 56% of pharmaceutical income^.
Any study into how these companies make and keep such vast money, therefore, is big research.
Over the last few years, UEA Associate Professor Dr Farasat Bokhari has been investigating exactly this. His research has explored three of the most contentious strategies pharmaceutical companies use to make money – pay-for-delay deals, me-too drugs, and product-hopping. What are UEA doing?
With his most recent studies, Dr Bokhari has paid particular attention to what pay-for-delay deals and authorised generics are, and how they benefit pharmaceutical companies.
So, what are they? In the most basic terms, a pay-for-delay deal occurs when one company with a patented drug pays another to delay the release of a generic copy of their original drug. Often the new drug can enter at a later time as an authorised generic.
This is normally done during patent litigation, - where the new company is trying to enter the market - and the originator does not want their patent, which is weak, to be scrutinised and declared invalid or not infringed.
These types of settlement typically arise when the original patent protecting the drug has expired but there are other secondary patents protecting newer formulations. These type of follow-on drugs (also known as me-too drugs) have a questionable reputation as they often do not innovate much more than the original drug, and therefore show very little benefit to the consumer. But Dr Bokhari found this isn’t always the case.
He said: “In a me-too paper I ended up showing a bunch of cases that led to extremely small welfare effects for the consumers – it had hardly any effect. And yet there was another one which was also a me-too drug but they changed the formulation in such a way that it became very effective for a certain population.
“Basically, children could not take the drug three times a day easily because they were going to school, so they changed the drug to once a day, meaning parents could give the drug early in the morning and then not have to worry about it because they were mental health drugs and there’s stigma associated. So there it was a huge welfare increase.”
If a second drug can enter a particular market it can cause prices to drop significantly - sometimes up to 70% of the original branded price soon after generic entry takes place.
However, a lack of direct competition for a restricted period is sometimes necessary to reward innovation, as Dr Bokhari explained: “We don’t mind prices being high - when it’s a legitimate patent because we value innovation – that’s a trade off as a society we are making.”
However, it was the other side of this that fuelled Dr Bokhari’s research. He went on: “But we certainly are not willing to make that trade off when the underlying patent is invalid. Also, we must make sure that the access to the drugs is not restricted.”
When Dr Bokhari delved deeper into an interesting peculiarity of pay-for-delay deals, he discovered exactly how pharmaceutical companies are able to circumvent the rules – even when the patent for their drug is weak.
He said: “Supposing [a pharmaceutical company] paid another off, let’s say the payment was in the ball park of 100 million or something like that, to stay out of the market for a few years. 100 million is a lot of money – somebody else is going to look at that and say, well, you were paid 100 million, I can also get paid 100 million, so they try to enter and get paid. And then the third person can come along, and then the fourth and the fifth and the sixth. Eventually that first company is going to run out of money. So why do they pay anyone at all?
“And yet, what we find is that you pay off one, two or a few companies and others don’t come around, asking, knocking on your door. So that’s a puzzle we set up – why is it that you can pay off a few companies and others won’t come in?”
What Dr Bokhari and his co-authors (Dr Mariuzzo and Dr Polanski) found was that a patent holder could reach a deal to keep a competitor out of the market for some time, but would also allow them to enter at a later date and before any other firm as an authorized generic with a licensing fee. As long as the advantage of being a first generic is large, and hence so is the potential licensing fee, this arrangement is mutually beneficial for the two parties, and can keep other firms from attempting entry.
Dr Bokhari explained: “If a second guy now comes around and challenges [the company], they will credibly tell them, ‘even if you were to win in the court now, I’m going to get this company that I already have a deal with to enter before you do under our licence. And if they enter before you do, guess what – you’ll be left holding just the litigation costs and an empty victory.’
“Even if the first company has to make the drug themselves, put the licensed company’s name on it, hand it to them and say go sell it, they will be in the market before any other challenger.”
What’s the impact of the research?
As a result of this, Dr Bokhari and his team were able to make policy recommendations that meant the law in the US could not be circumnavigated in this way, as well as further recommendations to suggest that patents be looked at regardless of the size of the pay-to-delay payment. Both suggestions should in theory prevent weak patents. (To read more about Dr Bokhari’s recommendations, see ‘Further reading’ point one below.)
He said: “Basically [this should] get rid of these deals that are happening to take the generics out when the patent was weak, because when two companies reach a deal, what ends up happening is they prevent the court from looking at the patent. If they can’t look at the patent, or the strength of the patent, they can’t declare it to be invalid. If they can’t declare it to be invalid, the monopoly goes on. But if they can declare it invalid, other drugs can enter the market and lower the prices.”
Dr Bokhari’s newest area of study is a practice known as product-hopping.
Product-hopping is where a company creates a new variant of a drug and then moves their customers to this new version. This is usually because the patent for the original was due to expire and other companies may then enter into the original market.
Dr Bokhari explained: “What this can also do is prevent entry into the older market as well. Why? Because once you’ve moved the patients to the newer drug, this market is dried up. So now a generic that is going to enter has to incur huge costs to enter into the market where there’s hardly any business left there.”
2. Bokhari, Mariuzzo and Polanski, “Entry limiting agreements: First‐mover advantage, authorized generics, and pay‐for‐delay deals”. Journal of Economics and Management Strategy, First Published online First published: 21 May 2020 https://doi.org/10.1111/jems.12351
3. Bokhari, “What is the price of pay-to-delay deals”. Journal of Competition Law & Economics, 9(3), September 2013, 739–753. https://doi.org/10.1093/joclec/nht016
4. Bokhari, “What is the price of pay-to-delay deals”. Journal of Competition Law & Economics, 9(3), September 2013, 739–753. https://doi.org/10.1093/joclec/nht016
^Amazon: 280.52 billion revenue in 2019 - https://www.statista.com/statistics/273963/quarterly-revenue-of-amazoncom/
Apple: 260.17 billion revenue in 2019 - https://www.statista.com/statistics/265125/total-net-sales-of-apple-since-2004/
Google: 160.96 billion revenue in 2019 - https://www.statista.com/statistics/267606/quarterly-revenue-of-google/