Pharma Distribution Deals Raise Concerns

A phenomenon is beginning to take hold in pharmaceutical distribution. Large pharmaceutical benefit managers (PBMs) such as Express Scripts Inc. are beginning to use their heft to strike exclusive drug deals in order to lower the cost of healthcare.

Consider Express Scripts' recent negotiations over a hepatitis C treatment with suppliers, AbbVie and Gilead Sciences. Express Scripts offered AbbVie an exclusive distribution deal in return for a lower price for their drug, Viekira Pak-the list price of which is approximately $84,000 for a 12-week regimen. Once the exclusive deal was reached, Express Scripts dropped Gilead's competing hepatitis C treatment, Harvoni, which has a list price of approximately $95,000 for a 12-week regimen, from its coverage options. Thereafter, Gilead reached an exclusive deal for Harvoni with Express Script's competitor, CVS Caremark, also reportedly at a substantial discount. If passed on, the savings achieved from these exclusive deals will help lower health plan costs and, ultimately, the costs of health insurance premiums for the average Joe.

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However, these exclusives, as many pharmaceutical manufacturers have pointed out, can also limit patient and physician choice. We must keep in mind that patients' medical history and unique body chemistry is critical when considering treatment options, and prescriptions may not be easily substituted. Indeed, if the Express Scripts-managed patient has an adverse reaction to its only contracted drug of relevance-in this case, Viekira Pak-the patient can suffer substantial harm. Moreover, if the excluded drug is more effective for particular patients, as may be the case where the drugs are not exact bioequivalents of one another, the exclusion will cause patient harm as well.

To be sure, exclusive contracts between pharmaceutical concerns and PBMs raise significant public policy issues. And while they can be procompetitive-particularly where substantial cost savings are achieved, they can potentially violate antitrust law. The following articulates the antitrust principles that govern an analysis of these arrangements.

Exclusive deals are generally procompetitive

There are many types of exclusive deals in our economy. The vast amount of them are procompetitive, inasmuch as, in most cases, neither of the parties to the deal have enough economic heft or market power to impact competition adversely. Consider an exclusive distribution deal between a local pizza parlor and a mozzarella cheese manufacturer. If the markets for pizza making and mozzarella cheese supply are competitive, as most likely is the case, the exclusive arrangement would not be able to cause the market-wide price of pizza to increase or the overall output of pizza to be reduced. Neither would these exclusive deals harm competitive mozzarella suppliers from contracting with alternative pizza parlors for distribution. The exclusive in this instance will lead to lower cost for the parlor and lower pizza prices, which benefit consumers.

Some pharmaceutical distribution exclusives may be anticompetitive

However, not all exclusive deals are procompetitive. If an exclusive arrangement prevents substantial numbers of customers from purchasing that product, particularly when certain customers prefer a product's unique characteristics, then the arrangement is anticompetitive. This can occur when one of the entities wields market power.

Express Scripts has control over the drugs that are ultimately dispensed to approximately 100 million Americans. These patients are unable to fill prescriptions for drugs that Express Scripts refuses to cover, unless, on appeal and after substantial administrative burden and delay, they are able to convince their insurance company to do so. If a patient prefers Gilead's treatment-even if the cause is medical, like less side-effects-he or she will likely not receive it without jumping through the hoops of the insurance company bureaucracy.

To determine whether the Express Scripts/AbbVie or any pharmaceutical distribution exclusive is anticompetitive on the whole, one must balance the demonstrated anticompetitive impacts of the exclusive with the cost savings that are generated by the deal. In the context of the Express Scripts/AbbVie exclusive, Express Scripts apparently saved thousands of dollars per regimen for hepatitis C treatment. If these cost savings are passed on to end consumers rather than pocketed by Express Scripts, the deal would have substantial procompetitive aspects. This suggests that these deals do not violate antitrust law.

Will antitrust enforcers scrutinize exclusive pharma distribution deals?

The trend towards pharmaceutical distribution exclusives seems to be gaining momentum. Express Scripts CEO George Paz, for example, has specifically stated that the company may seek to exclusively contract with either Regeneron Pharmaceuticals or Amgen over their new class of cholesterol-reducing biologics called proprotein convertase subtilisin kexin 9 (PCSK9) inhibitors.

The question must be raised, therefore, over how likely it will be that antitrust enforcers challenge these deals in court. In this writer's opinion, most of these deals will likely not be challenged even if PBMs such as Express Scripts are a party to them. Our antitrust authorities, particularly the Federal Trade Commission, normally pursue cases that concern practices that increase healthcare pricing, not those that decrease them.

This does not mean, however, that certain exclusive pharmaceutical deals would not be subject to meritorious attack, particularly where the exclusion causes a substantial and adverse medical impact on a large patient populace. In that scenario, even if public enforcers do not seek to enjoin the exclusive, there is a good chance that the excluded competitor, who would suffer substantial losses, may "fill the breach" of any government effort to litigate such cases.

Matthew Cantor is a partner at Constantine Cannon LLP. He can be reached at mcantor@constantinecannon.com.