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An Odd Antitrust Suit Over A Legal Monopoly

close-up of prescription medication bottles on a shelf
photo by Eric Hunsaker

The idea behind a patent is to give the owner a legalized monopoly to encourage innovation.

Patents are limited to 20 years, after which the invention enters the public domain and can be freely copied. Inventors thus have incentive to create new and better stuff, since they will profit off the monopoly long enough to make the effort worthwhile, but not so long they can rely on one invention indefinitely.

No industry takes this model more seriously than pharmaceuticals, because drugs under patent in this country often command prices many times those that can be charged for drugs with generic competition.

Now a pharmaceutical company finds itself the latest target in New York Attorney General Eric Schneiderman’s sights. Schneiderman sued Actavis Plc over its decision to remove its immediate-release version of the drug Namenda from the market. The patent for immediate-release Namenda, which is used to treat Alzheimer’s, will soon expire, and Actavis plans to discontinue the drug in favor of a new extended-release version.

Schneiderman’s theory is that it is a violation of antitrust laws for the holder of a patent nearing the end of its life to stop selling the patented invention in favor of a new product with a patent life extending far into the future. Schneiderman finds it even more outrageous that a company would withdraw its old patented drug from the market before its generic competition can legally reach pharmacy shelves, because that effectively forces users of the old medication to switch to the new, arguably improved, product at a time when anticipated cheaper substitutes are not yet available. In a statement, Schneiderman described Actavis’ actions as “gaming the system.”

In other words, Schneiderman believes the holder of a patent has a moral and legal obligation to facilitate the very competition that the patent system is designed to allow inventors to avoid.

I understand from an ethical and financial standpoint why the attorney general feels as he does. Switching medications is often a complicated prospect, and one many doctors and patients might prefer to avoid. But legally, Schneiderman’s argument doesn’t seem to make much sense. Once generic alternatives reach the market, doctors and patients are free to go back to the old formulation if they wish. Further, private companies generally have no legal obligation to continue selling products they don’t want to sell.

Actavis’ strategy is not new, nor even uncommon. Claiming that it is illegal won’t make it so. And while arguments as to whether the strategy is unethical will doubtless continue, even the attorney general cannot appropriately sue a company just because it does something he wishes it would not. For now, Actavis plans to continue the switch, according to a spokesman.

Taken to its logical conclusion, Schneiderman’s real objection is that state laws are designed to force generic substitutions unless prescribing physicians check a box under a brand name instructing the pharmacy to “dispense as written,” often abbreviated DAW. By law, then, generics nearly always win when they are available. If a physician prescribes a brand for which no generic is available, however, DAW is irrelevant. The attorney general’s real problem is with the laws that govern the substitution of generics and with doctors too uninformed or thoughtless to consider less expensive alternative treatments. This is exactly why pharmaceutical benefits in insurance programs have formularies, designed to create incentives to use more cost-effective drugs.

Apart from the publicity it generates for New York’s ambitious attorney general, this lawsuit seems misdirected. If Schneiderman wants to stop drug companies from manipulating the patent system, it makes no sense to demand that they act against their own financial self-interest. Sharks do what they do because they are sharks. It’s useless to demand that they act like goldfish.

Instead, the solution to the problem Schneiderman has identified is to change state regulations, if you can convince lawmakers, in order to encourage broader use of generics that are therapeutically comparable even when they are not clinically equivalent. Then let the marketplace, including insurers that create formularies, take care of the rest.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s most recent book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book, Looking Ahead: Life, Family, Wealth and Business After 55.

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