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Average loss of the generic stock = -10%
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Average gain of the innovative stock = 3%
Hillary Clinton writes to the FDA on generics backlog
Hillary Clinton wrote to the FDA asking it to clear the generic backlog. Hillary's letter focused only on generics and used Turing as an example. In previous articles, I had written that society is fine with paying high drug prices for discovering genuinely new drugs, but not price gouging on ancient drugs. Besides, Hillary had also clarified that biotechs inventing cures for life-threatening diseases had nothing to fear. This is what Hillary Clinton wrote to the FDA:
...I am writing to urge the FDA to do everything in your power ...to bring lower cost generics to American consumers more quickly and affordably.
...Beyond the immediate case of Daraprim, the FDA should also work to reduce the generic backlog, and deserves further support from Congress to do so. Patients who rely on this treatment should not have their lives put at risk because of an unnecessarily anticompetitive market, and the FDA should act through all of its available authorities to remedy this situation as soon as feasible.
This backlog at the FDA's office of generic drugs has reached 3 years. Incredibly, getting a newly discovered drug approved for a disease can take six months on the priority review track and ten months otherwise. But if it is just copying ancient drugs, the FDA takes three years to approve it.
New York Times shines a light on shady corners of the drug industry
Andrew Pollack of the New York Times continued his fantastic reporting. He had previously written articles on Turing's and Valeant's drug price gouging. On Tuesday, he told us about the mail-order pharmacies used by Valeant and Horizon Pharma to side-step generic competition:
Insurers say co-pay assistance circumvents their efforts to encourage the use of cheaper drugs by setting lower co-pays for them, thereby driving up overall medical spending.
"Horizon has perfected an innovative program to distribute its high-priced pain medications that have been actively excluded from reimbursement by a number of large payers," Irina R. Koffler, an analyst at Mizuho Securities, wrote in a report earlier this month recommending the company's stock. The report was titled "Outrunning Payers & Not Standing Still."
Horizon said in its regulatory filing that prescriptions filled through the program "are less likely to be subject to the efforts of traditional pharmacies to switch a physician's intended prescription of our products to a generic or over-the-counter brand."
These companies hand out copay subsidy coupons that are readily downloadable on their websites (e.g. acanya.com) or distributed in doctors' offices. This practice is illegal for health insurance partly or wholly covered by the government because it is considered a form of kickback. But somehow it is legal if the patients are covered by commercial insurance.
Since these mail-order pharmacies are controlled by companies such as Valeant and Horizon Pharma, they need not substitute generics. In its Q3 earnings presentation, this is what Valeant said about its secretive, off-balance sheet mail-order pharmacy, Philidor:
We have viewed our relationship with Philidor and our other specialty pharmacies as proprietary and as one of our competitive advantages.
Unlike normal pharmacies, generic substitution for the brand needs to be explicitly asked for at Philidor, i.e. either the doctor or the patient needs to specifically ask for it. This is what Valeant said about Philidor:
Dispenses generic products as specified in patient's prescription or as requested by patient.
Could it be that Valeant's much-touted patent-free product durability is because of its mail-order pharmacies like Philidor? If doctors keep sending their patients to Philidor and similar company-owned mail-order pharmacies, can there ever be any generic substitution?
I don't have any legal knowledge, but I think this mail-order pharmacy setup seems to defeat the spirit of generic substitution. If insurers weren't aware of this setup, and start to take action now, then that would make it very difficult for companies using such mail-order pharmacies in my opinion. I wrote an article on Mallinckrodt (NYSE:MNK) recently, and the tale of Questcor's Acthar Gel shows that it can take years for insurers to act. But when one insurer acts, other insurers follow suit; perhaps there is some herd behavior there. I believe this could be something that investors in R&D-free companies using mail-order pharmacies may want to look into.