BY INVITATION. Paying a price: industry collusion or individual misbehaviour?

Last week, the stakes got much higher in a long-running generic drug investigation in the US.

Under President Obama, the United States Food and Drug Adminsitration aggressively pursued manufacturing violations. For example, between 2013 and 2014, the FDA barred exports to the US from four Ranbaxy plants. By 2015, 46 Indian drugmakers were on FDA’s “import alert” list. FDA’s enforcement actions curtailed drug supply. Not surprisingly, drug prices jumped: between July 2013 and July 2014, the prices of more than 1,200 generic medications jumped an average of 448 per cent.

Local government health-insurance plans could track the price increases, but were not involved with nor aware of FDA’s enforcement actions. These governments thus inferred that the price rises were caused by an industry-wide agreement to fix prices. Attorneys from the state governments thus launched an investigation into drug price-fixing.

Last year, the governments formally accused six manufacturers of price-fixing. The allegations do evidence some collusion. After such an expensive and wide-ranging investigation, however, the misbehavior appears quite limited, involving perhaps ten people.

Last week, the governments tried to strengthen their case by significantly expanding their accusations. The governments now accuse 12 other manufacturers of participating in an industry-wide secret boycott.

Much of the governments’ “accusations”, however, describe behaviour that is legal. For example, the governments accuse the manufacturers of being “headquartered in close proximity to one another in New Jersey or eastern Pennsylvania, giving them additional opportunities to foster connections and meet and collude.” Industry clusters, however, do not show collusion. The US drug industry has historically been clustered in New Jersey; that does not in any way establish that those companies agreed on a secret, industry-wide boycott.

Similarly, the government notes that in 2013, the FDA had approved only one generic, nimodipine. The manufacturer understandably raised its price. The governments calls this price “artificially inflated”. Yet, a manufacturer with the good fortune to enjoy a transient monopoly is generally allowed to charge as much as the market bears.

Similarly, the government lawyers note that the first generic manufacturer to enter a particular drug market retains “more than its proportional share of the market.” This is, however, legal. Marketing textbooks urge businesses of all kinds to be the first to market for just this reason. The government lawyers here seem ignorant of basic economics.

Similarly, the governments accuse the manufacturers of monitoring and tracking competitors’ market-share. Keeping an eye on the competition, however, is legal. Indeed, public companies are legally required to do so, to fairly disclose competitive risks to investors.

Even the governments' more pointed accusations are questionable. For example, the governments allege that Mylan’s President told Emcure’s US CEO that Mylan would, for a particular drug, not bid on two large customer accounts, ostensibly allowing Emcure to win them. Assuming the governments’ allegations are true, however, they may not show anyone violated antitrust law. US antitrust law prevents industry-wide boycotts involving every possible supplier. In contrast, a unilateral decision by one manufacturer acting alone is legal.

The governments’ wide-ranging investigation uncovered individual misbehaviour. The newly-filed accusations, however, show little evidence of industry-wide collusion. Thus, some of the accused companies have asked the judge to dismiss the case. A ruling on those requests can be expected by early next year.

For Indian companies operating in the US, this case is an expensive distraction, not an existential threat. The upshot, however, is that Indian drugmakers may need to invest more heavily in US-based legal staff, to assure themselves that the individual misbehaviour uncovered here does not occur among the US-based staff.

The writer is an attorney with Pharmaceutical Patent Attorneys, LLC of New Jersey, a law firm which represents drug manufacturers. Views expressed are personal.

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