This paper – which you can find here – argues that the pharmaceutical industry in the US has managed to disable many of the regulatory mechanisms that promote competition. The paper focuses on the incentives’ structure that enables the persistence of high prices, and its goal is to identify measures that will make US pharmaceutical markets competitive again.

The author identifies three major barriers to effective competition in U.S. pharmaceutical marketsi.

I. Obstacles to entry of biosimilars

Over the past two decades, pharmaceutical innovation has shifted from chemically-synthesized small molecule drugs toward more complex, bioengineered treatments grown from living tissue that are known as biologics. While biologics carry a high price tag, many were licensed in the 1990s or early 2000s – which means that prices are high despite the relevant patents having expired.

It is held that this is a consequence of regulatory barriers to competition being higher in biologic drug markets than elsewhere, resulting in fewer competitors and allowing manufacturers in the United States to increase prices above levels observed in other parts of the developed world. These obstacles are manifold, and detailed in the paper. They include: (i) the requirements for demonstrating interchangeability of biological products, which are stricter than for chemical molecule generics; (ii) guidelines for demonstrating biosimilarity, which have taken much longer than elsewhere to be adopted; (iii) a 12-year statutory protection period for biosimilars beyond the period of patent protection, which was adopted against the FTC’s opinion; (iv) a number of rules (on naming of medicines, on orphan drugs, on reimbursement of classes of drugs) that have been used by drug-makers to increase prices and create obstacles to entry from competitors.

At the moment: “none of the biosimilars approved thus far have obtained interchangeable status, which would further promote price competition among biologics by allowing for automatic pharmacist substitution toward cheaper biologics.”  Furthermore: “the ability of biologic prices to persist beyond patent expiry contrasts greatly with the experience of small-molecule branded drugs, which typically experience drastic price declines after generic entry”.  This is particularly problematic because the: “success the U.S. has had at containing the cost of drug treatments in the past  has been largely driven by the entry of generics, vigorous competition in the generic market, and the efforts of insurers (…) to move substitute use of generics for branded products.

II. Demand side imperfections

Externalities and information asymmetries prevent consumers from optimally substituting toward cheaper equivalents by preventing customers from bearing the full cost of drug expenditures and by limiting their access to the medical expertise or reliable information necessary to identify therapeutic equivalents. As a result, this task if left to insurers, physicians, pharmacists and pharmacy benefit managers (“PBMs” i.e. a third-party administrator (TPA) of prescription drug programs), which have been gaming the system in a number of ways:

  • PBMs act as agents for final consumers, but PBMs and customers’ incentives may not be aligned. For example, if medicines benefit from large (undisclosed) rebates on a high list price, or if the rebate kicks in only after a certain volume or value has been achieved, PBMs may seek to keep part of that rebate by passing the list price to the consumer.
  • Product Hopping or evergreening, i.e. promoting the replacement of a patented product for a patented variant of the same product, before the patent of the original product has expired (and, thus, before generics that may compete with the original product has been able to enter the market). The result of this is to make market penetration more difficult, and to reduce incentives to entry by generics. This in itself is not problematic if the new product is significantly superior to the original; however, “significant fraction of U.S. pharmaceutical consumers do not switch in response to price and quality incentives, mainly due to problems of agency and information asymmetry. Taking this into account, drug manufacturers can introduce small changes to drugs that have no therapeutic benefit, thereby preventing automatic substitution and taking advantage of PBMs and other middle men that either cannot or choose not to switch consumers.
  • While insurers have some ability to control prices through formulary exclusion, they also implement contractual incentives to shift patients toward cheaper alternatives – usually by increasing co-payments. However, recent evidence shows that drug manufacturers use various techniques to make side payments to patients in order to undo the incentives described above, and thereby shift consumption toward more expensive branded drugs. These side payments can take the form of coupons, in-kind benefits provided under the guise of marketing, or charitable patient assistance programs. These techniques ultimately allow drug manufacturers to increase their profits by ensuring that (their) expensive drugs remain in use and by nullifying attempts by purchasers to switch consumers towards cheaper medication.

III. Older drug markets, where firms with small portfolios have recently instituted drastic price increases for essential drugs

The pricing of drugs is usually set out across a portfolio of drugs by insurers. Small firms with portfolios of one or two drugs are therefore more likely to set high prices for drugs because they do not take into account negative externalities of their price on the portfolio of drugs covered by insurance. Conversely, large firms are more likely to price drugs moderately due to caution about the negative effect of higher prices on demand for the rest of their portfolio.

Some of the most publicly controversial drug price increases have taken place in markets with expired patents. There are two primary causes for this trend. First, this can occur when a generic drug is present in a small, and usually diminishing market. If ultimately only one manufacturer can be sustained in that setting, this may generate a monopoly that allows the manufacturer to increase price above production cost. These price increases can be substantial for drugs that do not have substitutes. Second, there are cases of reformulation of legacy drugs which reintroduce market exclusivity and creates barriers to generic entry. [Note: I would like to point out that this observation is quite consistent with recent high-profile cases (on both sides of the Atlantic) where firms with small portfolios of old essential drugs significantly increased their prices.]


The paper ends with a number of detailed policy recommendations, which are US specific but can be valuable to other jurisdictions as well.


This paper is obviously not about competition enforcement – but it provides a good overview of the pharma market and of why focusing on competition enforcement may rather miss the point: the structure of the pharma market is such that advocacy efforts to modify the regulatory framework may yield much higher benefits. Having said that, antitrust enforcement does have its role to play – as recent initiatives by competition agencies across the world demonstrate.

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