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The $3.5 Billion Reason Drugs Cost More Than They Should

By Motley Fool Staff - Feb 23, 2016 at 2:25PM

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Runaway drug prices remain a major concern; paying to delay the entry of generic-drug alternatives is a practice that's adding billions of dollars to healthcare costs.

"Pay-for-delay" deals between generic drugmakers and brand-name innovators are drawing the ire of patients, payers, and regulators. These deals may be investor-friendly in the short term, but a 2010 study by the Federal Trade Commission found that they result in American consumers spending $3.5 billion more annually than they need to on healthcare.

Are these arrangements ethical? Motley Fool experts Kristine Harjes and Todd Campbell weigh in on the subject in this clip from Industry Focus: Healthcare.

A full transcript follows the video.

This podcast was recorded on Feb. 17, 2016. 

Todd Campbell: Pay for delay is something that is ... I think you're going to see a lot more stories being written about this, because I don't think it's as well-known as drug pricing to the individual investor. Pay for delay, basically what happens is, I've got a patent, my patent's expiring on a drug. I've got a bunch of generic manufacturers who are just lining up at the door to start marketing the alternative to it. My sales are going to plummet as a result. Typically, generic drugs end up capturing 80% of the market of a branded drug once they launch, so why don't I then go ahead and approach that generic drug manufacturer and cut a deal with them where I hand them a pile of money that's less than what I can earn on the drug, and ask them to delay launching it?

Kristine Harjes: Yeah, and from a business perspective, that's a win-win. You look at who loses in this situation. Check out this stat. The FTC estimates that this practice adds $3.5 billion to drug costs every year. You have this practice that both sides of the businesses are about, and all of a sudden, it's adding so much money to these drug costs. The Supreme Court actually ruled in June 2013 that the FTC could legally pursue these agreements as potentially illegal, potentially a violation of antitrust law. We are seeing a little bit more of a conflict there between the FTC and pharmaceutical companies that are pursuing this pay for delay practice.

Campbell: Yeah. Regulators are going to pick up the pace here, and part of the reason that they're doing that is because, as you alluded to earlier, if you're delaying the entry of a generic drug, you're theoretically harming the American citizen, right? Because you're making them pay more for a drug that theoretically could save their life than necessarily was intended when the law was written. You can't just maintain a monopoly and pay to maintain a monopoly. That's not legal, right? The FTC now is going out and looking at some of these deals, and some of the money that's already being forked over by companies who are being targeted by the FTC is pretty staggering. Very recently, Teva Pharmaceutical had to pay $1.2 billion to settle a pay for delay deal that occurred at its Cephalon unit back in the 2000s.

The issue is being looked into globally. GlaxoSmithKline was recently in the news overseas because in the UK, they just settled with the UK for $54 million for delaying the entry of a generic version of an antidepressant drug that they had. Yeah, you're going to see more of these cases. Regulators are definitely going to try and prevent this kind of monopoly like behavior from occurring, and it is a problem.

Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool recommends Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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