Federal Trade Commission Oversight of the Pharmaceutical Industry

Abstract

High drug prices in the US are a serious problem for both patients and the health care system. Prices of branded drugs are driven higher by monopoly dynamics: patents and other exclusive marketing rights allow companies to increase prices and restrict supply. Firms earn extraordinary profits from exclusive rights and so have incentives to sustain or extend these rights, including in unfair and abusive ways. Firms build "thickets" of secondary patents (eg, for devices used to deliver a drug) around successful medicines to extend market control by many years, sometimes earning billions of dollars in return. In "pay-fordelay" deals, companies settle lawsuits brought by generic companies challenging patents by paying them or providing other benefits if they agree to stay out of the market. Market power comes not only from patents and regulatory barriers, but also market consolidation, which has affected the pharmaceutical industry like many others. Today, the 3 largest firms control 65% of the world market for generic drugs, and 75% of the national market for pharmacy benefit managers (PBMs), and evidence has emerged that firms in both settings are driving prices higher in ways that involve collusion or other anticompetitive practices. 1 The Federal Trade Commission (FTC) has a broad mandate to protect commercial markets from unfair methods of competition and consumers from unfair and deceptive acts and practices. Created in 1914, the agency can bring suits, conduct investigations and hearings, and interpret broad statutory restrictions on "unfair" or "deceptive" commercial practices into more precise rules that bind industry. In the pharmaceutical sector, the FTC thus has jurisdiction over critical questions. It can police patent abuses and pharmaceutical marketing to consumers (though the US Food and Drug Administration [FDA] has primary authority over labeling). It can adjudicate or sue to stop mergers and acquisitions (including acquisitions of patents) that substantially lessen competition or demand that merged firms divest certain aspects of their business or refrain from specific future anticompetitive acts.Because of its open-ended mandate, it can also act flexibly to take on new issues, such as PBMs. These actions, done well, can not only help patients and save health care dollars, but also improve innovation. For example, the FTC can prevent "killer acquisitions" (where mergers lead companies to halt research that competes with their products) and require companies to earn profits through research and development instead of gaming the patent and regulatory system. There are, of course, limits to the FTC's authority. It cannot directly set fair prices, set approval standards, or direct funding to fuel innovation or overcome supply problems. However, the FTC