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How Allergan Continues to Make Drug Prices Insane

Allergan kept a promise, but it didn’t stop abusing the patent system.

How Allergan Continues to Make Drug Prices Insane
Allergan Plc. signage is displayed on the exterior of the company’s office in Medford, Massachusetts, U.S. (Photographer: Scott Eisen/Bloomberg  )

(Bloomberg View) -- Jan. 1 isn't just a day for making New Year's resolutions and watching football. It's also become the day when the pharmaceutical industry unveils price increases, more or less en masse.

The good news, as a number of pharma and biotech analysts have noted, is that the increases for 2018 are smaller than in the past. According to Deutsche Bank's Gregg Gilbert, between 2013 and 2015 — that is, before Martin Shkreli jacked up the price of an AIDS drug from $13.50 to $750 a pill and made rising drug prices a national issue — the cost of drugs was rising more than 20 percent a year.

In recent years, however, most price hikes have been in the single digits; they averaged 7.2 percent in 2017, for instance. That's a whole lot better than a 20 percent rise. Still, even these smaller price hikes mean that many patients are being gouged.

Take, for instance, AbbVie Inc.'s rheumatoid arthritis drug Humira. According to Forbes, it can cost up to $50,000 a year per patient. It is also the best-selling prescription drug in the world, with some $12.7 billion in annual U.S. sales. For 2018, AbbVie has raised the price of Humira by 9.7 percent. But as the Wells Fargo analyst David Maris pointed out in an email to clients, not only does this latest price hike mean that Humira's price has doubled in five years, it "also represents an added $1.2 billion to the health-care system."

What makes it even worse is that Humira's patent expired in 2014, meaning that generic competition should have entered the market and brought the price way down. Instead, as the patent expiration date approached, AbbVie began filing one new patent after another until it had surrounded Humira with a thicket of over 100 patents, for everything from dosage tweaks to method of delivery. Some of those patents extend to 2034. Limiting price increases to single digits may sound great, but it's really patent gamesmanship, more than price hikes, that have caused spiraling drug prices.

Which brings me to the current poster boy for patent abuse, Allergan Inc. In 2017 it made news with its outrageous attempt to protect its dry-eye medication Restasis from generic competition by transferring its patent rights to a sovereign Native American tribe. What made Allergan's move especially offensive is that just a year earlier, the company's chief executive, Brent Saunders, had claimed to be personally angered by unwarranted price increases. In a September 2016 blog post, he laid out what he described as the industry's "social contract with patients," which he said Allergan wanted to reclaim:

Basically, in this social contract patients understood that making new medicines required significant investment. At the same time companies, doing the hard, long and risky work of bringing new medicines to market, understood that they had to price medicines in a way that made them accessible to patients while providing sufficient profit to encourage future investments.

Saunders then wrote, "Those who have taken aggressive or predatory price increases have violated this social contract!" He vowed that henceforth, Allergan would only raise prices once a year, and that the price increase would always be in the single digits.

Sure enough, on Jan. 1, Allergan raised prices by single-digit percentages on virtually its entire portfolio, 75 drugs in all. "The majority of these price increases are 9.5 percent, falling just within Allergan's self-imposed social contract limit," wrote Maris, the Wells Fargo analyst. To take a closer look at some of these Allergan drugs is to understand why Saunders's social contract isn't worth the paper it's written on.

  • Let's start with Asacol HD. The original Asacol was a 400-milligram tablet that treated two digestive-tract ailments, colitis and Crohn's disease. It had been brought to market by Warner Chilcott PLC — a company bought by Actavis PLC in 2013 — and was its biggest drug, with sales of $891 million in 2012. In the spring of 2013, just as the patent was about to expire, Warner Chilcott/Actavis discontinued Asacol and came out with Dezicol, followed by Asacol HD. They both had the same basic ingredient; the only difference was that Dezicol came in capsule form, while Asacol HD was an 800-milligram version.

    Not long thereafter, Actavis settled a patent lawsuit with generic-drugmaker Zydus Pharmaceuticals that allowed Zydus to bring an Asacol generic to market starting in July 2016. As part of the settlement, Zydus agreed to turn over 75 percent of its profits to Actavis (which changed its named to Allergan when it bought the company in 2015). This gave Zydus an incentive to keep the price of the drug as high as possible, even though it's a generic. And sure enough, both Allergan's branded drug and Zydus's generic cost about the same: about $500 for 90 capsules before the new 9.5 percent increase.

  • Linzess: Why would you raise the price of a drug 9.5 percent when it is suddenly faced with real competition? In almost any other sphere of commerce, you wouldn't. But pharma plays by a different set of rules.

    In 2017, the list price for Linzess, a constipation medicine that has been available since 2012, was $378 for 30 pills. Last March, Synergy Pharmaceuticals, a small, struggling pharma company, brought out Trulance, which treats the same problem. Its price? $378 for 30 pills.

    This year, Linzess will cost around $414, even though there has been no word of a Trulance increase. What's more, a number of analysts believe that Trulance is the better drug. But the more expensive Linzess, backed by sales muscle Synergy can't match, will probably continue to be the market leader.

  • Minastrin 24 Fe: A birth control pill that comes in a chewable tablet, Minastrin 24 Fe raises a different question about pharmaceutical pricing. In 2017, Minastrin 24 Fe cost about $547 for a five-month supply. But in early spring, an Indian generic company, Lupin Pharmaceuticals Inc., along with Israel's Teva Pharmaceutical Industries Ltd., began selling a generic version at a much lower price. Allergan's branded drug got crushed, its sales dropping from $361 million in 2016 to $11 million in 2017.

    So why would Allergan raise the price by 9.5 percent, to nearly $600 for a five-month supply? One reason is Obamacare, which reduced out-of-pocket expenses for oral contraceptives from 21.8 percent in 2011 to 3.6 percent in 2014, causing patients to be indifferent to the price. (Indeed, insurance coverage is what allows so many pharma companies to price drugs into the stratosphere — the system feels the pain, but not the patient.) 

    A second reason is that there are always some doctors who will prescribe the branded drug no matter how much cheaper the generic. Still, this is a case where the generics are doing exactly what they're supposed to do: making drugs available at lower cost.

  • Namzaric: Namenda was an Alzheimer's drug that was marketed by Forest Pharmaceuticals, which Actavis bought in 2014. That year, with the patent near expiration, Forest discontinued the drug. It replaced Namena with Namenda XR, an extended-release version with a patent that won't expire until 2025. Namzaric? It combines the now-generic ingredient in Namenda with a second commonly prescribed generic ingredient. In effect, Namzaric is a branded drug that contains two generic drugs. Its 2018 cost will be around $450.

  • Finally there's Restasis, which Allegan went to such lengths to protect in 2017. As it turns out, the only thing the Native-American-tribe maneuver got the company was a great deal of scorn.

    Restasis is Allergan's second biggest drug (after Botox), generating around $1.5 billion a year. It is also a drug whose original patents were expiring. So, of course, Allergan came up with a new series of patents that would have extended its monopoly until at least 2024. Those new patents were the ones Allergan was trying to shield from challenges by transferring them to the tribe.

    It didn't work. A judge tossed out the patents in mid-October. Restasis will almost certainly face generic competition this year. In order to protect its profit margins, Allergan has responded by laying off 1,000 employees to save $300 million to $400 million in operating costs. Meanwhile, people who suffer from dry eye will collectively save millions once they can access generics that should have been available years ago if Allergan hadn't worked so hard to keep them off the market.

I remain convinced that the way to gain control of drug costs is to stop letting pharma companies extend their monopolies past the original patent. That will help patients a lot more than single-digit price increases. Perhaps Saunders could include it in his next social contract.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg View columnist. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is the co-author of "Indentured: The Inside Story of the Rebellion Against the NCAA."

  1. Let's pause here a moment to note that Maris is referring not to shareholder value or the effect of the price hike on AbbVie's revenues, but to something that affects all Americans: health care. I can't remember the last time a securities analyst peered above the trees to see the forest.

  2. Most of the drug price information is culled from the website drugs.com

  3. In Actavis bought Allergan. Although the company is now called Allergan, it was really an Actavis takeover. Saunders had been president of Forest Laboratories, which Actavis bought in

  4. Early on, a number of patients complained that if they cracked open the capsule, they discovered the old Asacol tablet inside!

To contact the author of this story: Joe Nocera at jnocera3@bloomberg.net.

To contact the editor responsible for this story: Jonathan Landman at jlandman4@bloomberg.net.

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