The story of pyrimethamine (Daraprim) has been splashed across the news. Turing Pharmaceuticals, run by a former hedge fund manager, acquires the drug, which treats a life-threatening parasitic infection, and raises the price from $13.50 to $750.
The unfairness of a 5,000 percent price increase has received attention. And the colorful history of the hedge fund manager, Martin Shkreli, has been revealed. But the potential antitrust implications have escaped notice. This is serious conduct that could violate the competition laws, leading to an injunction and a fine of triple the damages suffered.
Legal Implications Of Anticompetitive Behavior
We believe the U.S. Department of Justice, Federal Trade Commission, state attorneys general, and private parties should review Turing’s behavior and consider bringing an antitrust case to challenge its potentially harmful effects on competition. Courts have treated companies that sacrifice profits in refusing to deal with potential rivals as monopolists that violate the antitrust laws. For starters, Turing seems to have monopoly power in the market for pyrimethamine, as demonstrated by its ability to command such an exorbitant price increase. Other types of evidence that show monopoly power are the apparent lack of alternative therapies that are as effective, and hospitals’ reported inability to obtain the medication.
In addition, Turing may have engaged in anticompetitive conduct that courts would find to be predatory. Generic competition is crucial to our health care system, dramatically lowering prices and increasing patient adherence and health outcomes. But before such competition can occur, generic manufacturers must be licensed by the Food and Drug Administration (FDA). Gaining FDA approval requires manufacturers to submit formal bioequivalence studies of their products, for which the manufacturers need samples of the comparator drug — in this case, pyrimethamine itself.
A key feature of the price hike saga is Turing’s restricted distribution system. For years, pyrimethamine was available widely through wholesalers and drugstores. But in June 2015, apparently as a condition of the sale to Turing, the drug maker Impax Laboratories switched to a controlled distribution system called Daraprim Direct—in which prescriptions could be obtained only from a single source, Walgreen’s Specialty Pharmacy—making it more difficult for generic competitors to obtain samples needed for bioequivalence testing.
It is hard to see why a restricted distribution system would suddenly become necessary in June 2015. Some drugs have restricted distribution schemes because they have potentially serious safety issues. But pyrimethamine, which was originally approved in 1953, has a well-characterized safety profile that has never required a Risk Evaluation and Mitigation Strategy (REMS) or its equivalent.
So does such a tightly controlled distribution system serve any purpose other than preventing competition? Mr. Shkreli has apparently talked about using such distribution to restrict generic entry. And a 5,000 percent price increase is more likely to stick if other manufacturers cannot enter the market because they lack access to needed samples to obtain authorization from the FDA.
Although REMS programs serve important purposes, Congress was concerned that they could also be used to delay generic entry. As a result, Congress made clear that holders of REMS-covered products would not be able to use REMS to “block or delay approval” of generic applications. In fact, in the three cases in which courts have considered antitrust liability for denying samples for REMS drugs, the judges have allowed the generics’ cases to proceed (although all settled before a final decision).
Basis For An Antitrust Claim
The Daraprim Direct restricted distribution system does not appear to be justified by the safety-related concerns present in the REMS cases. Instead, it looks like a refusal for the purpose of blocking competition. While antitrust law sets a high bar before punishing unilateral refusals to deal, two Supreme Court cases show how liability may exist here. In the first, the Court found monopolization when a company changed an existing, profitable relationship to harm a rival. In the second, the Court found an antitrust violation because the company was already providing a service to certain customers but refused to offer it to others.
Sketching the outlines of an antitrust claim, the termination of a voluntary (presumably profitable) course of dealing shows a willingness to sacrifice short-term profits. In this case, first Impax and now Turing have left sales on the table by voluntarily cutting back their distribution scheme. When Impax closed its distribution system, it had been providing samples to generics and presumably was compensated at the full retail price. Each of these factors supports an antitrust claim.
Can Turing offer any valid reasons for its restricted distribution system? If not, given the drug’s apparent monopoly power, lack of justifications, and profit sacrifice, there are significant antitrust concerns. And if that’s the case, the government agencies and private plaintiffs need to take a close look. An antitrust challenge could bring life-saving medicines to patients and deter future companies contemplating similar behavior.