Imagine a group of companies forming a cartel in the generic drug market to raise the price of the products they control. No other companies were involved. What patterns do you expect in prices for drugs controlled by cartels or not controlled by cartels? Amanda Stark and Thomas G. Wolman carry out this analysis in „Is There a Collusion of Entry Remedies? Evidence from Generic Prescription Drug Cartels.“(NBER Working Paper 29886, April 2023).
bThe Lou line shows the price of generic drugs whose supply is controlled by companies within the cartel. The black line shows the price of generic drugs whose supply is not controlled by cartels. As you can see, the price changes for these two generic drug groups were closely linked to each other before 2013. However, since 2013, prices for drug groups not controlled by cartels have continued to trend downward, while prices for drug groups controlled by cartels have continued to trend downward. Cartel profits suddenly rise and then remain at a high level.
Of course, one graph alone does not prove that a cartel actually formed or was successful in raising prices. In theory, a spike in demand or a drop in supply could lead to a cartel being labeled as Teva Pharmaceuticals' employees just as they began coordinating efforts across many companies to maintain drug prices. It is possible that the prices of all medicines used in the world have skyrocketed in this way. Price is high. But circumstantial evidence suggests this may raise some eyebrows.
Some antitrust cases are resolved all at once through well-publicized court decisions or legal settlements. But in other cases, the solution spreads bit by bit over time, with a series of announcements made one company at a time. . That appears to be what's happening with ongoing antitrust litigation over the prices of many generic drugs. last summer, Teva Pharmaceuticals and Glenmark Pharmaceuticals became the sixth and seventh companies to announce consent agreements with antitrust authorities at the U.S. Department of Justice. Teva, the company at the center of this case, agreed to a $225 million criminal penalty to settle the case, along with the sale of certain cholesterol drugs and other fines.
What exactly did Teva do? It's hard to know what happened behind the scenes, and one reason companies sign consent decrees is to avoid admitting the full extent of what happened.But at least we knowHis charges unfolded in U.S. District Court in 2019.
The complaint begins by alleging that there is a longstanding pattern in the generic drug industry of companies dividing their markets and agreeing (at least tacitly) not to compete too aggressively with each other. Although I cannot speak to the truth of this allegation, the evidence above shows that generic drug prices were steadily declining until his 2013. Therefore, the core of this case is not a longstanding lack of competition allegation. We now quote the allegations in the 2013 Complaint regarding the conduct of Nisha Patel of Teva's Pharmaceuticals (starting around page 158 of the Complaint).
565. In April 2013, Teva took a major step toward implementing more significant price increases by hiring Defendant Nisha Patel as Director of Strategic Customer Marketing. Her job responsibilities in this position include, among other things: (1) Act as an interface between the marketing (pricing) department and the sales team to develop customer programs. (2) establish pricing strategies for new product launches and in-line product opportunities; (3) overseeing customer bidding processes and product pricing management at Teva;
566. Most importantly, in her own words, she was responsible for „product selection, price increase implementation, and other price optimization activities for a product portfolio of over 1,000 products.“ In that role, Patel had nine to 10 direct reports in Teva's pricing department. One of Patel's main job goals was to achieve price increases. This was an important factor in her performance evaluation and bonus calculations, and Patel was compensated handsomely by Teva for doing so, as explained in more detail below.
567. Prior to joining Teva, Defendant Patel worked for eight years at ABC, a large pharmaceutical wholesaler, rising to Director of Global Generic Sourcing. During his time at ABC, Patel interacted on a daily basis with representatives from all major generic drug manufacturers and developed and maintained relationships with the most important sales and marketing executives of many of Teva's competitors.
568. Teva specifically hired Defendant Patel to identify generic drugs for which Teva could increase prices and used her relationships to achieve those price increases. …
571. Defendant Patel's first priority when he joined Teva was to identify drugs for which Teva could effectively raise prices without competition. On May 1, 2013, Defendant Patel began creating the first spreadsheet containing a list of „price increase candidates.“ As part of her process of identifying candidates for price increases, Ms. Patel began taking a close look at Teva's relationships with competitors, as well as her own relationships with individuals at competitors. In a separate tab of the same „Range Candidates“ spreadsheet, Patel classified companies into several categories, including „strong leaders/followers,“ „laggards,“ „borderline“ and „stallers.“ We began ranking Teva's „quality of competition“ by assigning it to a category. ”
572. Mr. Patel understood, and emphasized within Teva, that „when the number of suppliers increases over a short period of time, price increases tend to become entrenched and the market quickly subsides.'' Therefore, it was critical for Patel to identify competitors willing to share information about price increases in advance so that Teva could quickly follow suit. Conversely, it was important for Patel to inform Teva's competitors of his plans to increase Teva's spending so that they could quickly follow suit. In any case, successful price increases require significant adjustments, and high-quality competitors were the ones that were more willing to make adjustments.
573. While creating the list, Defendant Patel was consulting with its competitors to determine its intention to increase prices and, therefore, where to rank those companies on the scale. …
574. It is important to note that Defendant Patel had several different methods of communicating with competitors. Throughout the complaint, there are references to various phone calls and texts she had with competitors. However, she also communicated with her competitors in various other ways, including instant messaging through social media platforms such as Linkedin and Facebook. Encrypted messaging through platforms such as WhatsApp. and face-to-face communication. Although the plaintiff states were able to obtain some of these communications, many of them were destroyed by Patel.
575. Through communications with its competitors, Defendant Patel learned more about its competitors' price increase plans and entered into a contract for Teva to comply with them. …
576. By May 6, 2013, Patel had completed the first ranking by „quality“ of 56 different manufacturers in the generic drug market. Defendant Patel defined „quality“ by assessing a competitor's „strength“ as a price increase leader or follower. Rankings were done numerically, from +3 rankings for the „highest quality“ competitors to -3 rankings for the „worst quality“ competitors. …
577. Defendant Patel weighted the numerical ratings assigned to each competitor based on its „quality“ and based the numbers on the number of competitors in the market and certain other factors, including whether Teva had a lead. I created a calculation formula that combines with the score. Following the price increase. According to her formula, the best candidates for price increases (excluding drugs where Teva has a monopoly) are drugs for which she has only one other competitor in the market and who leads the price increase; It comes down to where your competitors are. The highest quality. Conversely, his Teva price increase in a pharmaceutical market with multiple „low quality“ competitors means that the lower quality competitors will not follow his Teva price increase and will use the opportunity to increase her It is not a good candidate as it could take away market share from Teva.
578. Notably, the highest ranking companies at this time were those that had significant relationships with Patel and other executives within Teva.
The legal complaint spans hundreds of pages and documents contacts between the companies, which agreed not to raise prices or underbid the contract. Considering all this, the legal complaint alleges:
At the height of this collusive activity involving Teva, which spanned a 19-month period from July 2013 to January 2015, Teva significantly increased the prices of approximately 112 generic drugs. Of these 112 drugs, Teva colluded with „high-quality“ competitors for at least 86 (the remaining drugs were primarily in markets dominated by his Teva). The size of the price increases varied, but many were well over 1,000%.
Again, it's worth remembering that these claims are one-sided. But when it comes to communications between Teva and other generic drug companies from 2013 to 2015, much of the actual message is being conveyed to them. This does not appear to be a relatively subtle anti-competition case, such as: How Amazon charges businesses that sell on its website. It certainly looks like good old fashioned pricing.
A final obvious question is why, when the prices of one group of generic drugs have increased so dramatically, no other generic drug manufacturers outside the Teva-organized network have entered the market. In the study mentioned above, Stark and Wolman found that some kind of intrusion was indeed occurring. However, entry is not easy. For example, due to the regulatory process for bringing generic drugs to market (even though the drugs are chemically identical), it takes generic drug manufacturers two to four years to begin producing a new product. Also, as potential entrants gear up and invest in the production of new drugs, incumbent companies may drive down prices and not recover the money they spent to enter the market. Entering new markets is much easier in an economics textbook model than in the real world.