In response to President Trump’s complaints over escalating healthcare costs in the US, Pfizer announced it will defer its previously-planned price increases for later this year. What appears to be a generous concession, however, is a warning sign that the prices for Pfizer’s branded products are about to increase sharply.

Foregoing price increases can result in sharply higher drug costs due to recently-proposed changes in the US law, changes that pose an existential threat to certain players in the Indian generics industry.

In an effort to lower drug costs in the US, its Food and Drug Administration Commissioner Scott Gottlieb recently proposed ending a long-standing competition law policy. That policy allowed pharma manufacturers to conceal pricing. The text of the proposed policy has not yet been publicly released, but it appears to upend how US government insurance plans purchase drugs.

The US government pays for approximately half of all pharmaceuticals used in the US. And it does this through US government insurance programmes like Medicare, Medicaid and TriCare. To prevent over-use of these plans, Federal law makes it a felony to pay someone to recommend a government insurance plan purchase particular pharmaceuticals.

It is thus illegal, for example, to pay a physician to prescribe a particular drug for a Medicare patient. Physicians may prescribe drugs, but based on medical judgment, not in exchange for a payment. For perhaps 30 years, however, wholesalers have enjoyed an exception to this law. This exception permits manufacturers to legally pay rebates to wholesalers who, in turn, sell drugs ultimately paid for by government insurance. Those rebates can be significant, creating a large gap between a manufacturer’s published “list” price for a drug and the actual price (net of the rebate) the wholesaler pays. Further, rebate amounts are generally confidential, known only to the manufacturer and its customer.

Gottlieb, an economist by training, believes such rebates occlude market price transparency, making the US drugs marketplace less efficient. Thus, addressing this year’s annual meeting of the Food & Drug Law Institute, Gottlieb proposed outlawing rebates.

Eliminating such rebates, however, may do nothing to reduce the price consumers pay for pharmaceuticals. Eliminating rebates will simply require wholesalers to pay full list price, rather than a rebate-discounted price, for pharmaceuticals. This will significantly increase manufacturers’ revenues, while increasing wholesalers’ costs. And increased costs will need to be passed through to patients and insurers. Thus, while Pfizer has promised to forego its planned list-price increases, it — and other branded manufacturers — are poised to nonetheless reap significantly higher revenues.

This same change in law poses a potentially-existential challenge to certain India-based generics manufacturers. Increased price transparency will increase the competitive importance of manufacturing cost.

This may be a boon for the India-based industry generally (which often enjoys a manufacturing cost advantage viz European and North American manufacturing facilities), yet may pose a challenge for specific Indian manufacturers.

Disadvantage, for some

Transparent prices tend to drive market price towards cost of goods sold. India-based manufacturers will need to achieve costs not only lower than US and European-based competitors, but also lower than other low-cost competitors in India. This could render many India-based manufacturers uncompetitive for certain products: in the sectors of the US healthcare industry that have transparent pricing, the markets generally support no more than three profitable competitors.

Increased price transparency may likely provoke a shake-out in the industry, leaving only the most cost-efficient manufacturers for each product.

Since the rule change would apply only to purchases by government insurance plans, it would not directly affect purchases by private insurance plans, which pay for about half the pharmaceuticals used in the US. The change could thus complicate the process of negotiating wholesale sales contracts, increasing manufacturers’ marketing cost somewhat.

Longer term, increased price transparency may also require Indian industry to pursue biological products more aggressively because most biological products are seen as somewhat unique and non-interchangeable, so sales are driven less by pricing than by therapeutic concerns. Biological products, however, face low-cost competition from South Korea and high-cost legal expenses in the US. FDA Commissioner Gottlieb has several initiatives to rein in biological product prices. Fully discussing those, however, will require us to take the industry’s Pulse another time.

Pharmaceutical Patent Attorneys, LLC provides legal and intellectual property counsel to pharmaceutical manufacturers selling into the US market. Views are personal

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