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Generic-drug industry is riddled with price-fixing schemes, investigators say

Generic-drug industry is riddled with price-fixing schemes, investigators say
Workers check pharmaceutical products during the production process at a Teva Pharmaceutical Industries factory in Israel. Teva has called allegations of a price-fixing conspiracy "devoid of any facts." (Ahikam Seri / Bloomberg)

Executives at more than a dozen generic-drug companies had a form of shorthand to describe how they conducted business — insider lingo worked out over steak dinners, cocktail receptions and rounds of golf.

The “sandbox,” according to investigators, was the market for generic prescription drugs, where everyone was expected to play nice.

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“Fair share” described dividing up the sales pie to ensure that each company reaped continued profits. “Trashing the market” was used when a competitor ignored these unwritten rules and sold drugs for less than agreed-upon prices.

The terminology reflected more than just the clubbiness of a powerful industry, according to authorities and several lawsuits. Officials from multiple states say these practices were central to illegal price-fixing schemes of massive proportion.

The lawsuit and related cases picked up steam last month when a federal judge ruled that more than 1 million emails, cellphone text messages and other documents cited as evidence could be shared among all plaintiffs.

What started as an antitrust lawsuit brought by states over just two drugs in 2016 has exploded into an investigation of alleged price-fixing involving at least 16 companies and 300 drugs, said Joseph Nielsen, an assistant attorney general and antitrust investigator in Connecticut who has been a leading force in the probe. His comments in an interview represent the first public disclosure of the dramatically expanded scale of the investigation.

The unfolding case is rattling an industry that is portrayed in Washington as the white knight of American healthcare.

“This is most likely the largest cartel in the history of the United States,” Nielsen said. He cited the volume of drugs in the schemes, that they took place on American soil and the “total number of companies involved, and individuals.”

The victims were American healthcare consumers and taxpayers, who foot the bills for overcharges on common antibiotics, blood-pressure medications, arthritis treatments, anxiety pills and more, authorities say. The costs flowed throughout the system, hitting hospitals, pharmacists and health insurance companies. They hit consumers who lack prescription drug coverage and even those who do have insurance, because many plans have high deductibles and gaps on prescription drug benefits.

In just one instance of extraordinary cost surges, the price of a decades-old drug to ease asthma symptoms — albuterol, sold by generic manufacturers Mylan and Sun — jumped more than 3,400%, from 13 cents a tablet to more than $4.70. The example is documented in a lawsuit brought against the generic industry by grocery chains including Kroger.

“Everyone is paying the price,” Nielsen said. He offered a single word to explain the behavior: “Greed.”

While precise estimates of alleged overcharges have not been released, generic-industry sales were about $104 billion in 2017. Excessive billings of even a small fraction of annual sales over several years would equal billions of dollars in added costs to consumers, according to investigators.

Generic manufacturers reject the accusations. They contend that officials lack evidence of a conspiracy and have failed to prove anti-competitive behavior.

Among the 16 companies accused are some of the biggest names in generic manufacturing: Mylan, Teva and Dr. Reddy's. Mylan, in an emailed statement, denied wrongdoing. Sun, Teva and Dr. Reddy's did not respond to requests for comment. In a court filing, Teva said allegations of a price-fixing conspiracy “are entirely conclusory and devoid of any facts.”

But investigators say voluminous documentation they have collected, much of it under seal and not available to the public, shows the industry to be riddled with price-fixing schemes. The plaintiffs now include 47 states, including California. The investigators expect to unveil new details and add more defendants in coming months, which would put more pressure on executives to consider settlements.

Two former executives of one company, Heritage Pharmaceuticals, have pleaded guilty to federal criminal charges and are cooperating with the Justice Department in a parallel criminal case. A Justice Department spokesman declined to comment.

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Collusion is alleged to have transformed a cutthroat, highly competitive business into one in which sudden, coordinated price jumps on identical generic drugs became almost routine. Competing executives were so chummy they had an alphabetical rotation for who picked up the tab at their regular dinners, according to a person familiar with the investigation who spoke on the condition of anonymity because the case remains under investigation.

Annual trade conferences and “girls night out” cocktail meetings were other prime opportunities to swap sensitive information about markets and prices, according to court documents.

“It's particularly ironic since the whole idea of generic drugs was we would get a lower price,” said Henry Waxman, the Democratic former California congressman who co-wrote the 1984 law establishing the Food and Drug Administration's rules for generics. “If generic versions are higher than need be through rigged systems, that undercuts the whole idea.”

Generics account for 90% of the prescriptions written in the United States but just 23% of costs, according to the industry trade group, the Assn. for Accessible Medicines.

And generic drugs do act as a check on soaring drug bills fueled by brand-name manufacturers. In the Medicare prescription-drug program, according to a government study, prices on a benchmark set of older generic drugs dropped 14% from 2010 to 2015.

But for some generic-drug manufacturers, anti-competitive agreements drove up prices on most if not all of the products they sold, according to the states.

Officials say they have documented price increases of up to 2,000%. Throughout 2013 and 2014, soaring generic prices sparked consternation at drugstores and among state and federal lawmakers.

Independent pharmacists said they were dismayed to learn of the price-fixing allegations.

“There's old, old drugs that have been around a long time, and all of a sudden their price has increased by hundreds of percent and we don't know why,” said J.D. Fain, owner of Pieratt's Pharmacy in Giddings, Texas, a small town an hour’s drive east of Austin.

Unlike companies in the brand-name drug industry, which get years of patent exclusivity for novel drugs, generic companies operate in a market that was designed to save consumers and taxpayers large sums through aggressive competition. When the FDA grants approval for a generic product, the first company in the door gets six months of exclusive rights to market the drug. The price discount from the brand-name product is relatively small — say, 10%.

Prices plunge as much as 50% once a second generic enters the market, the FDA has estimated. And by the time six or seven generic companies are competing on a particular drug, the price has declined 75%.

Rigging of the market has turned that model upside down for some drugs, state officials say.

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“It makes me angry,” said Eric Belldina, an operator of pharmacies in Masontown and Morgantown in West Virginia. “Most people think when their prices go up it's because of a raw-ingredient shortage, not thinking the companies are sitting down, saying, ‘Hey, let's do this.’”

The states' lawsuit contains particularly pointed allegations against Mylan and its president, Rajiv Malik, who is personally named as a defendant. Mylan faced public scrutiny in 2016 for raising the price of its EpiPen, to treat allergic reactions, by about 500%.

Although the EpiPen was not a generic product at the time, the outcry from physicians, patient groups and members of Congress drew negative attention to the second-largest generic manufacturer.

While traveling in the United Kingdom in 2013, Malik took a phone call from an executive of a competing firm, Heritage, the states say in their lawsuit. Heritage had won FDA approval to market a version of the antibiotic doxycycline called Doxy DR, which is used to treat acne and a long list of infections.

That would put it in direct competition with Mylan for sales of the drug.

During the transatlantic phone call, Malik and the Heritage executive, Jeff Glazer, agreed to divide up the sandbox, the U.S. market for sales of Doxy DR, according to the lawsuit by states and similar complaints by independent pharmacies and grocery-store chains.

During subsequent conversations, according to the complaints, Mylan agreed not to sell Doxy DR to CVS and the wholesaler McKesson — sales volume worth about 30% of the U.S. market for the drug. As part of the deal, the complaints say, Heritage agreed not to set a low price.

Without a reduction in price, U.S. consumers ended up the biggest losers in the alleged deal.

Mylan said it has no evidence its executives did anything wrong. “We have been investigating these allegations thoroughly and have found no evidence of price fixing on the part of Mylan or its employees,” the company said in a statement. “Mylan has deep faith in the integrity of its president, Rajiv Malik, and stands behind him fully.”

Heritage did not return repeated phone messages. Glazer and another Heritage executive, Jason Malek, pleaded guilty in 2017 to federal charges of conspiring to rig prices and stifle competition. The terms of their plea agreements said they are cooperating with a Justice Department criminal investigation.

A drug to treat bone issues related to cancer, zoledronic acid, was the subject of another alleged price-fixing scheme, this time between Heritage and Dr. Reddy's. Heritage became the first generic manufacturer of the drug in spring 2013, and Dr. Reddy's was close behind. Executives at the companies cut deals so each got a “fair share” of the market while also conspiring to fix an inflated price, the complaints said.

Dr. Reddy's, which did not respond to requests for comment, wound up with about 60% of the market and Heritage claimed 40%, according to the states' lawsuit.

Investigators cited evidence that executives knew they were acting illegally. As the discussions with Dr. Reddy's took place, according to the complaints, a Heritage executive “sent a text message to his entire sales team reminding them not to put their pricing discussions with competitors in writing.”

Mysterious price jumps continue to roil pharmacies and patient groups occasionally, though widespread price collusion was curtailed after authorities issued subpoenas in recent years, said Michael Cole, a Connecticut assistant attorney general involved in the case. But many drugs remain at inflated prices.

“There have not been rollbacks in the price increases,” he said. “We're still paying.”

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