Senate Report Slams Drug Makers’ “Predatory” Pricing Model

Companies pursue “monopoly business model that harms patients, taxpayers, and the U.S. health care system”

In November 2015, Chairman Susan Collins (R-Maine) and Ranking Member Claire McCaskill (D-Missouri) launched a bipartisan Senate Special Committee on Aging investigation into dramatic price increases for prescription drugs whose patents had expired. The committee’s investigation centered on Turing Pharmaceuticals, Retrophin, Inc., Valeant Pharmaceuticals International, Inc., and Rodelis Therapeutics—companies that acquired decades-old, off-patent affordable drugs and then raised the prices suddenly and astronomically.

The investigation uncovered a business model that these four companies used (with some variations) to exploit market failures at the expense of patients. The committee held three hearings; interviewed patients, doctors, hospital administrators, consumer advocates, health experts, and pharmaceutical industry executives and board members; reviewed more than one million pages of documents obtained from the four companies; and deposed or took transcribed interviews from numerous corporate witnesses.

The first hearing of the series, held on December 9, 2015, sought to identify and define the problems resulting from these price increases. The second hearing, held on March 17, 2016, looked at the monopoly business models of Turing and Retrophin, both formerly headed by Martin Shkreli—dubbed “pharmabro” by the media. The third hearing, held on April 27, 2016, investigated Valeant’s business model, its investor relationships, and the harm caused to patients and the health care system by the enormous price increases Valeant imposed on certain drugs it acquired.

In a new report, the Senate’s Special Committee on Aging examines the business model used by these companies; assesses the impacts of price hikes on patients, payers, providers, hospitals, and governments; and discusses potential policy responses.

The committee discovered that each of the four companies followed a business model that enabled them to identify and acquire off-patent sole-source drugs, over which they could exercise de facto monopoly pricing power, and then impose and protect huge price increases. The business model consists of five central elements:

  • Sole-Source Drug

The company acquired a sole-source drug for which there was only one manufacturer, and therefore faced no immediate competition, maintaining monopoly power over its pricing.

  • Gold Standard

The company ensured that the drug was considered the gold standard for the condition it treats, ensuring that physicians would continue to prescribe the drug even if the price increased.

  • Small Market

The company selected a drug that served a small market that was not attractive to competitors and that had dependent patient populations that were too small to organize effective opposition, giving the companies more latitude on pricing.

  • Closed Distribution

The company controlled access to the drug through a closed distribution system or specialty pharmacy where a drug could not be obtained through normal channels, or the company used another means to make it difficult for competitors to enter the market.

  • Price Gouging

The company engaged in price gouging, maximizing profits by jacking up prices as high as possible. All of the drugs investigated had been off-patent for decades, and none of the four companies had invested a penny in research and development to create or to significantly improve the drugs. Further, the committee found that the companies faced no meaningful increases in production or distribution costs.

The committee offered several potential policy solutions for the problem of sudden and exorbitant price increases for prescription drugs:

  • Enact the Increasing Competition in Pharmaceuticals Act of 2016 to provide solutions to regulatory uncertainty, small market size, and other factors that serve as limitations to generic entry by incentivizing competition.
  • Encourage generic competition by ensuring the right to obtain samples and by simplifying Risk Evaluation and Mitigation Strategies (REMS).
  • Allow highly targeted temporary drug importation to combat major price increases for off-patent drugs, thereby providing prompt price relief.
  • Prevent the misuse of patient assistance programs and copay coupons.
  • Reinvigorate the Federal Trade Commission’s ability to enforce action regarding drug company mergers and operations, and drug market dynamics.
  • Improve transparency in the health care system.

Source: Senate Report; December 2016.