Consumer Group Concerns Regarding Rebate Walls and the Proposed Divestiture

The letter expresses concerns that the proposed divestiture to AstraZeneca of Allergan’s brazikumab, a drug in development, is inadequate to address the clear anticompetitive effects of the AbbVie/Allergan merger.  The letter makes the following points:

First, the divestiture of Allergan’s IL-23 inhibitor, brazikumab, a drug in the pipeline, to AstraZeneca is unlikely to fully restore competition.  The divestiture is being proposed to resolve the horizontal overlap between AbbVie’s IL-23 inhibitor, Skyrizi, and Allergan’s brazikumab for potential biologic treatments for Crohns diseas and ulcer colitis.  The group argues that the divestiture raises a number of serious concerns because it goes against the Commission’s policy of requiring divestitures of on market drugs instead of pipeline drugs.  Indeed, the FTC has required divestitures of on market drugs in Bristol Meyers/Celgene and Amneal/Impax because the Commission generally believes that consumers should not bear the risk that a divestiture may fail.

Second, the consumer groups contend that AstraZeneca is a questionable buyer for brazikumab.  AstraZeneca is not committed to the assets because it gave up on them just three years ago and according to the parties’ press releases announcing the deal, won’t be investing in the development costs to obtain FDA approval.  In fact, Allergan is expected to pay for the development costs.  Without having a significant financial stake in the development of brazikumab, it becomes less likely that AstraZeneca will ever launch the products and compete with AbbVie’s Skyrizi in the markets for Crohn’s disease and ulcerative colitis.

Third, for any divestiture to be effective, it is crucial to impose restrictions on AbbVie’s use of rebate walls (contracts that foreclose rival drugs from getting on drug formularies) that could inhibit any buyer of the pipeline assets from being an effective competitor in the future.  AbbVie’s use of rebate walls creates substantial barriers to AstraZeneca’s commercial success in bringing brazikumab to the market and the success of competing products in these therapeutic categories. AbbVie has and is currently engaged in restrictive contracting practices that have enabled the creation of so called “rebate walls” to protect its blockbuster drugs, Humira and Skyrizi, that not only lead to higher prescription drug prices, but foreclose rival drugs from obtaining access to payors’ formularies, resulting in reduced consumer choice.

Rebate Walls Raise Serious Antitrust Concerns

Pharmaceutical manufacturers have implemented a new strategy to block and delay entry of biosimilars and other drugs from the market through a contracting practice that creates what is known as a “rebate wall” or “rebate trap”.   A rebate wall occurs when a manufacturer leverages its market-dominant position to secure preferred formulary access for its products by offering lucrative incentives to pharmacy benefit managers (“PBMs”) and health insurers in the form of volume-based rebates.  These rebates are often offered across multiple products, indications, and therapeutic specialties, the breadth of which cannot be matched by new and innovative therapies.  The Trump Administration earlier this year sought to eliminate rebates from the Medicare prescription drug program because pharmaceutical rebates raise more profound competitive problems than discounts in other industries.  In fact, the coalition notes that there is increasing evidence that rebates actually inflate prices (as opposed to decreasing them) and that these rebates, unlike typical discounts, do not ultimately benefit consumers.

FTC is Currently Investigating Rebate Walls

On July 29, 2019, Johnson & Johnson (“J&J”) disclosed that the FTC issued a civil investigative demand regarding its investigation of whether J&J’s contracting practices related to its rebates for Remicade (infliximab) amount to exclusionary conduct illegal under the antitrust laws.

In 2017, Pfizer Inc. (“Pfizer”) filed a lawsuit against J&J for its contracting practices that protect Remicade’s position in the market and deny patients access to Pfizer’s infliximab biosimilar, Inflectra.  The lawsuit is still in the discovery phase.

Biosimilar developers have been urging the FTC to weigh in on whether exclusionary contracts for brands based on aggressive rebating strategies are legal and the agency has chosen a high-profile example to investigate.

Pfizer applauded the FTC’s investigation in a statement: “We believe the [FTC’s] decision to open an investigation into the competitiveness of the biosimilar is an important step, which we hope will lead to a robust, competitive marketplace for patients and physicians to access biosimilar medicines.”

Rebate Wall Concerns Were Raised By Nine Senators in the FTC’s Investigation of Bristol-Myers/Celgene and AbbVie/Allergan

On September 19, 2019, nine senators (Klobuchar, Booker, Baldwin, Smith, Hirono, Sanders, Harris, and Warren) wrote a letter to the FTC expressing their concerns that “[p]ost-merger, the combined firm would have greater ability to condition buyers’ access to these multi-billion dollar drugs on purchases of less popular drugs in their portfolios. They could also use their increased leverage to secure favorable positions on buyers’ drug formularies by offering volume-based rebates that competitors with rival products cannot match; these “rebate traps” or “rebate walls” can have the effect of preventing alternative drugs, including more affordable biosimilars and generics, from competing.”

Thoughts

The AbbVie/Allergan merger gives the FTC an opportunity to investigate the questionable contracting practice in the pharmaceutical drug industry known as a “rebate trap”.  Payors such as PBMs and health insurers obtain rebates on prescription drugs from pharmaceutical manufacturers that have actually inflated the price of drugs and stifled the ability of rival drug manufacturers to effectively compete.  This practice is recognized by both the administration and industry players as anticompetitive.  Moreover, major drug manufacturers such as Pfizer, Shire, and Sanofi have filed antitrust suits challenging rebate walls as antitrust violations.  In theory, rebates could have a positive impact on the prescription drug market if they led to lower prices and benefitted consumers.  But, in practice, this is simply not the case. Rebate walls distort the workings of the free market, result in higher drug prices, and reduce patients’ access to affordable branded drugs.

While rebates and discounts can be procompetitive if they lead to lower prices for consumers, some drug manufacturers are structuring discounts to limit competition from rivals in an effort to protect their monopolies.  When a rebate wall is successfully erected by a market-dominant manufacturer, a payor faces strong financial disincentives to grant access to new and innovative therapies, as doing so would result in the loss of hundreds of millions in guaranteed rebate dollars for the payor.  This condition creates a “trap” for payers who would otherwise be inclined to grant formulary access to therapies that are newer and more innovative, yet lack established volume and subsequent potential for rebate revenue.  In many cases, these actions prevent patients and physicians from seriously considering new medications at competitive prices.

Given the competitive risks that rebate walls pose, the coalition has asked the FTC to investigate how the rebate wall may undermine the proposed divestiture.  Competition works when new rival drugs  are allowed open and fair access to the market and consumers have access to cost saving treatments.  And while the FTC has not publicly acknowledged examining rebate walls, the issue is now in front of the staff.

Coalition Opposing the Merger

The coalition includes Families USA, Public Citizen, U.S. PIRG Education Fund, Service Employees International Union, American Federation of State, County, and Municipal Employees, UNITE HERE, Consumer Action, American Federation of Teachers, Alliance for Retired Americans, American Family Voices, Doctors for America, End AIDS Now, Prescription Justice, Social Security Works, the Other 98, Treatment Action Group, and NextGen California.  It is asking the FTC to conduct a thorough investigation and to block the merger if the facts support it and a remedy cannot be devised to restore competition.  The coalition highlights the competitive problems arising from continued consolidation in the pharmaceutical industry and requests that the FTC include in its investigation ongoing anticompetitive conduct by the parties, such as the use of rebate walls, which will have an even more profound anticompetitive effect if this merger is consolidated, as well as past abuse of the patent system.

The letter makes three points.

First, the merger of AbbVie and Allergan will continue a tremendous trend of consolidation and the evidence shows that consumers are paying higher prices and losing out on access and choice because of less innovation by big pharma companies.  Mergers result in fewer choices for consumers, and drug companies are increasingly spending their money on acquisitions instead of research and development.

Second, the merger will reduce competition in a number of markets where the companies directly overlap with each other.  The coalition underlines an overlap between AbbVie’s blockbuster, Humira, which already treats 10 indications including Crohn’s disease and ulcerative colitis, and its new IL-23 blockbuster, Skyrizi, which is currently marketed to treat moderate to severe psoriasis but is being investigated to treat Chron’s disease and ulcerative colitis, with Allergan’s brazikumab, an IL-23 inhibitor that is currently being investigated to treat Crohn’s disease and ulcerative colitis.  The coalition further points out that the FTC’s policy is to accept divestitures of actually manufactured pharmaceutical products over pipeline products.

Third, the merger will exacerbate competitive problems that already exist in the pharmaceutical drug industry relating to rebate walls and patent abuses.  The coalition requests that the FTC not limit its investigation to direct product overlaps because the combination of AbbVie’s and Allergan’s blockbuster drugs will enable AbbVie to engage in a whole range of potentially anticompetitive conduct to hamper the ability of rivals to compete.  Indeed, both manufacturers have previously engaged in anticompetitive behavior to prolong their monopolies, suppress competition and raise prices.  The coalition points out, for example, that the merger would enable AbbVie to increase its bargaining leverage over payors to use exclusionary practices such as rebate walls to limit the ability of rivals to expand and enter.  It underscores that both AbbVie and Allergan have used rebate walls to stifle competition in the past.

Families USA, one of the groups that signed onto the letter, said, “The proposed acquisition of Allergen by AbbVie will combine two companies that independently engage in anticompetitive practices that make prescription drugs unaffordable for families into one mega corporation.  We urge the FTC to carefully consider the impact of this proposed drug company merger on competition and prices and protect access to critical medicines for consumers.”  And Peter Maybarduk, Access to Medicines Director for Public Citizen, said, “Two leading price gouging patent manipulators unite.  AbbVie is notorious for manipulating its patent power over the blockbuster medication Humira and AIDS drugs like ritonavir, keeping affordable generics off the market and even slowing innovation.  Allergan is notorious for hiding its patents behind the sovereign immunity of a Mohawk tribe.  Unless the FTC steps in, we can look forward to new efforts to destroy competitive markets by the pharma giant that emerges from this deal, in an industry increasingly focused on monopolizing yesterday’s inventions instead of creating new ones.”

Rebate Walls

Pharmaceutical manufacturers have implemented a new strategy to block and delay entry of biosimilars and other drugs from the market through a contracting practice that creates what is known as a “rebate wall” or “rebate trap”.   A rebate wall occurs when a manufacturer leverages its market-dominant position to secure preferred formulary access for its products by offering lucrative incentives to pharmacy benefit managers (“PBMs”) and health insurers in the form of volume-based rebates.  These rebates are often offered across multiple products, indications, and therapeutic specialties, the breadth of which cannot be matched by new and innovative therapies.  The Trump Administration earlier this year sought to eliminate rebates from the Medicare prescription drug program because pharmaceutical rebates raise more profound competitive problems than discounts in other industries.  In fact, the coalition notes that there is increasing evidence that rebates actually inflate prices (as opposed to decreasing them) and that these rebates, unlike typical discounts, do not ultimately benefit consumers.

FTC is Currently Investigating Rebate Walls

On July 29, 2019, Johnson & Johnson (“J&J”) disclosed that the FTC issued a civil investigative demand regarding its investigation of whether J&J’s contracting practices related to its rebates for Remicade (infliximab) amount to exclusionary conduct illegal under the antitrust laws.

In 2017, Pfizer Inc. (“Pfizer”) filed a lawsuit against J&J for its contracting practices that protect Remicade’s position in the market and deny patients access to Pfizer’s infliximab biosimilar, Inflectra.  The lawsuit is still in the discovery phase.

Biosimilar developers have been urging the FTC to weigh in on whether exclusionary contracts for brands based on aggressive rebating strategies are legal and the agency has chosen a high-profile example to investigate.

Pfizer applauded the FTC’s investigation in a statement: “We believe the [FTC’s] decision to open an investigation into the competitiveness of the biosimilar is an important step, which we hope will lead to a robust, competitive marketplace for patients and physicians to access biosimilar medicines.”

Rebate Wall Concerns Were Raised in the FTC’s Investigation of Bristol-Myers/Celgene

On January 11, 2019, Rep. Peter Welch (D-VT) and Rep. Francis Rooney (R-FL) wrote a letter to the FTC, urging the agency to investigate Bristol-Myers Squibb Company’s (“Bristol-Myers”) acquisition of Celgene Corporation (“Celgene”).  The letter asked the FTC to examine how the acquisition allows Bristol-Myers to increase its drug portfolio and leverage over PBMs when negotiating preferred drug placement on formularies.  The letter argued that the larger the firm, the more it can use rebate walls to block more affordable and, in some cases, more efficacious products’ access to formularies.

Thoughts

The AbbVie/Allergan merger gives the FTC an opportunity to investigate the questionable contracting practice in the pharmaceutical drug industry known as a “rebate wall”.  Payors such as PBMs and health insurers obtain rebates on prescription drugs from pharmaceutical manufacturers that have actually inflated the price of drugs and stifled the ability of rival drug manufacturers to effectively compete.  This practice is recognized by both the administration and industry players as anticompetitive.  Department of Health and Human Services Secretary Alex Azar has noted that rebate walls can prevent competition and new entrants into the system.  Moreover, major drug manufacturers such as Pfizer, Shire, and Sanofi have filed antitrust suits challenging rebate walls as antitrust violations.  In theory, rebates could have a positive impact on the prescription drug market if they led to lower prices and benefitted consumers.  But, in practice, this is simply not the case.  Rebate walls distort the workings of the free market, result in higher drug prices, and reduce patients’ access to affordable branded drugs.

While rebates and discounts can be procompetitive if they lead to lower prices for consumers, some drug manufacturers are structuring discounts to limit competition from rivals in an effort to protect their monopolies.  The FTC understands that when a rebate wall is successfully erected by a market-dominant manufacturer, a payor faces strong financial disincentives to grant access to new and innovative therapies, as doing so would result in the loss of hundreds of millions in guaranteed rebate dollars for the payor.  This condition creates a “trap” for payers who would otherwise be inclined to grant formulary access to therapies that are newer and more innovative, yet lack established volume and subsequent potential for rebate revenue.  In many cases, these actions prevent patients and physicians from seriously considering new medications at competitive prices.

Given the competitive risks that rebate walls pose, the coalition has asked the FTC to investigate how this transaction may make the situation related to this suspect contracting practice worse.  Competition works when new rival drugs (biosimilars, branded drugs or generics) are allowed open and fair access to the market and consumers have access to cost saving treatments.  And while the FTC has not publicly acknowledged examining mergers between drug manufacturers under this type of theory before, the issue is now in front of the staff.

Background

On October 2, 2017, Shire sued Allergan for its bundling and exclusive dealing arrangements with Medicare Part D plans that deny patients access to Xiidra® – Shire’s best-in-class, breakthrough drug to treat DED.

DED occurs when the eye does not produce enough tears or when tears are not of the correct consistency. The disease is evidenced by inflammation and damage to the ocular surface, resulting in blurry or fluctuating vision and eye fatigue. About one million Americans receive prescription drug treatment for DED. Shire’s Xiidra® and Allergan’s Restasis® are the only FDA-approved prescription drugs on the market for treatment of DED. There are no reasonable over-the-counter substitutes for treating DED. The FDA approved Shire’s Xiidra for treatment of both the symptoms and signs of DED. Restasis® was approved only for treatment of a specific symptom of DED—reduced tear fluid volume—which affects only 10 percent of those with DED.

Shire alleged that Allergan economically coerced Medicare Part D prescription drug plans to exclude Xiidra and maintain Restasis on a preferred formulary tier through financial incentives including rebates bundled across several Allergan Glaucoma drugs including Lumigan, Combigan, and Alphagan P.  These drugs have FDA approval for the treatment of high eye pressure in patients with glaucoma or ocular tension.

Medicare Part D is a prescription drug program for senior citizens. Participants in Part D can choose from a variety of health insurance plans. The list of drugs covered by a Medicare Part D plan is called the plan’s “formulary.” Formularies offer drugs in tiers that dictate the patient’s copayment. Drug manufacturers routinely provide rebates to obtain a preferred position on a plan’s formulary.  If a drug is not listed on a formulary, then it is considered “not covered” under the Medicare Part D plan.

Xiidra is approved to treat more signs and symptoms of dry eye disease than Allergan’s Restasis and also does not need to be used in conjunction with a topical steroid, which Allergan’s Restasis often does.  Shire also alleged that many patients using Restasis had adverse reactions or did not improve.

Despite the advantages of Xiidra, Shire alleged that payors did not have the economic incentive to switch to the new drug because they would lose rebates not just on Restasis, but on the rest of Allergan’s bundled drug portfolio that included glaucoma drugs.  As one plan told Shire, “You could give [Xiidra] to us for free, and the numbers still wouldn’t work.”

Shire also alleged that Allergan engaged in an exclusive dealing contract with another plan which barred the plan from offering Shire’s DED drug on its formulary. These contracting practices allowed Allergan’s Restasis to maintain a roughly 90% market share despite the entry of a new and improved drug. In a nutshell, the conditional rebates gave Allergan’s Restasis protection from competition and allowed Allergan to maintain its monopoly.

District Court Dismisses Shire’s Lawsuit

The federal district court, however, dismissed Shire’s lawsuit for two reasons. First, the district court held that Shire failed to plead a proper relevant market because the Medicare Part D dry eye disease market is “unduly narrow because it excludes others, notably commercial payers, to whom Plaintiff can sell Xiidra”. Second, Shire’s allegations that Allergan had agreements where it bundled its DED medication with other drugs and entered into exclusive agreements were insufficient to make out a case of anticompetitive conduct. Shire failed to allege that Allergan has “monopoly power over the” glaucoma drugs it allegedly bundled with Restasis or that Shire “did not have other available products that it could offer … as part of a bundled rebate” to Medicare Part D plans. As a result, Shire’s Sherman Act claims were dismissed.

 Thoughts:

Rebates offered across multiple prescription drugs to obtain preferred or exclusive position on a drug formulary can create a barrier to competition known as a rebate wall or trap.  Rebate walls block competition by coupling volume-based discounts across multiple products with punitive measures.  Contracts between drug manufacturers and payors that include bundling can be extremely effective at blocking competition and limiting formulary access to newer and more innovative therapies. However, as the district court put it, a fact sensitive analysis is required because “neither bundled rebates nor exclusive dealing contracts are inherently anticompetitive. In fact, both can be procompetitive.”  The judge is correct that the general rule is that bundled discounts are procompetitive, but the product in question relates to prescription drugs where patient choice is paramount.  Any threat to withhold rebates on the condition that Part D plans exclude Xiidra entirely from formularies would appear to be unlawful exclusionary conduct.  There is no procompetitive justification for the payment of rebates by a first-tier drug manufacturer for the complete exclusion of a competing drug from the formulary.

Prohibiting rebate walls is critical to providing seniors with access to more affordable medication that may be more efficacious.  Ultimately, patients lose access to choices of superior and more effective prescription drugs and, in some cases, are being delayed or denied the opportunity to obtain the most effective treatments for their individualized needs.  In addition, the district court judge was not impressed with the relevant product market.  But certainly, the sale of DED drugs to Medicare Part D plans is an important market to protect.  Competition in the Part D market is critically important as it serves a vulnerable population, our nation’s seniors, many of whom are on fixed incomes.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com