Brand-drugcompanies say authorized generics increase competition even ifthey’re not an independent product.

When PDL BioPharma’s $40 million blood-pressure medicine facedthe threat of a generic rival this year, the company pulled out alittle-known strategy that critics say helps keep drugs expensiveand competition weak.

It launched its own generic version of Tekturna, a pill takendaily by thousands. PDL’s “authorized” copycat hit the market inMarch, stealing momentum from the new rival and protecting saleseven though Tekturna’s patent ran out last year.

PDL’s version sold for $187 a month versus $166 for thecompeting generic, made by Anchen Pharmaceuticals, according toConnecture, an information technology firm. PDL’s brand-nameTekturna runs about $208 a month.

Related: California AG takes on ‘pay for delay’ generic drugdeals

The plan is “to maximize profit at this point,” DominiqueMonnet, PDL’s CEO, told stock analysts in March. With the boost ofPDL’s house generic, “the economics would still be very favorableto us” even against the generic rival and even if prescriptionsplunged for the brand, he said.

Lawmakers who created the modern generic-drug industry in the1980s never imagined anything like this — brand-pharma companiesmaximizing profits by appearing to compete with themselves.

But it goes on all the time. In fact, there are now nearly1,200 authorized generics approved in the U.S., according tothe Food and Drug Administration. While these might look likeproducts that would push prices down, authorized generics can be asprofitable as, if not more profitable than, brand-name drugs.

“Authorized generics are not generic drugs,” Dr. Sumit Dutta,chief medical officer for drug-benefit manager OptumRx, toldCongress in April. “The marketing and production of authorizedgenerics is exclusively controlled and directed by brand-drugmanufacturers. They do nothing to promote competition.”

Last year, authorized generics appeared at the rate of aboutonce a week. High-profile examples in recent years includedMylan’s generic version of the EpiPen anti-allergy injector,introduced to soothe public outrage after the company raised thebrand price 400 percent. In March, Eli Lilly said it wouldlaunch a less expensive generic of its Humalog insulin, whose branded list price hasalso soared.

Of all the ways drug companies try to protect sales as patentsexpire — changing doses, adding ingredients, seeking approval totreat new diseases — authorized generics are by far the mostprofitable, returning $50 for every dollar invested, research firmCutting Edge Information calculated in 2015.

Brand-drug companies say authorized generics increasecompetition even if they’re not an independent product.

This “reduces prices and results in significant cost savings,”said Holly Campbell, spokeswoman for the Pharmaceutical Researchand Manufacturers of America, or PhRMA, the brand-drug lobby.“Congress should reject attempts to delay, restrict or prohibitauthorized generics.”

But critics say authorized generics hurt long-term competitionand often perversely increase costs, even in the short term.

Authorized generics don’t just steal sales from existing genericrivals. Critics say they erode incentives to make generic drugs,partly by thwarting the intent of Congress to let one companytemporarily have generic business to itself after a brand patentexpires.

Tactics like this can “stave off generic competition and makesure that generics can’t get much of a foothold when they do get tomarket,” said Robin Feldman, a professor at the University ofCalifornia Hastings College of the Law, who studies pharma policy.“That’s the game. And drug companies have become masters atthis.”

Authorized copycats may help explain why relatively few true generics are reaching the market despite asurge in approvals, analysts say.

The 1984 Hatch-Waxman Act founded the modern generic business byestablishing rules for safety and competition, including grantingsix months of market exclusivity to the first generic rival to eachbrand. The idea was to give the first mover a profitable head startto attack the established pill.

Few realized the law left room for brand companies to launchtheir own generics at the same time as or even earlier than rivals,often slightly lower in cost and nearly indistinguishable topatients and doctors from the brand as well as any independentgenerics.

PDL acquired Tekturna from Novartis via an affiliate in2016 and soon learned that Anchen was planning a generic. Itmoved quickly to fight back.

PDL’s authorized generic version of Tekturna “was timed tosecure us the benefit of being first to market,” before Anchen’sversion was even on the shelves, PDL’s CEO, Monnet, told analysts.“We believe this provides [PDL] with a distinctive competitiveadvantage.”

PDL was so confident the authorized generic, called aliskiren,would produce substantial revenue without much effort that it gotrid of its Tekturna salesforce of 60 people.

“There’s a lot of parts of the system that just automaticallyswitch” to generics, whatever the source, said Maxim Jacobs, whofollows PDL’s stock for Edison Investment Research. So even if theauthorized generic isn’t much cheaper than the brand, “it’s almostlike a no-brainer” to roll one out, he said.

Monnet was unavailable for an interview, a spokesperson said.Anchen did not respond to requests for comment.

Oddly enough, authorized generics can be more profitable thanthe brand-name drug even if their list prices are much lower,OptumRX’s Dutta told Congress. That’s because they usually aren’tsubject to rebates that flow from the drugmaker to middlemen suchas OptumRX and effectively lower a brand’s revenue.

“These authorized generics often result in net prices higherthan the brand drugs they replace,” he told Congress. “Authorizedgenerics are just another tactic for drug manufacturers to improveprofitability.”

The list price for the authorized generic of Humalog insulin ishalf the brand’s — $137 versus $275. That apparent discountoffered limited relief to uninsured patients paying cash andgenerated spirited headlines saying Lilly had lowered the pricesignificantly.

But the move won’t cost Lilly any money, said another seniorpharmacy benefits executive who asked for anonymity to speakcandidly about a vendor. After rebates, $137 is about what the druggiant nets for Humalog now, the executive said. And it’s still farhigher than what insulin costs in other countries.

“It’s a parlor trick,” the executive said. “They’re bending topolitical pressure, but are they taking any money out of thesystem? They’re not.”

Lilly’s Humalog generic, called insulin lispro, and Mylan’sEpiPen copycat departed from the traditional playbook by launchingwell before patents for those brands expired. The companies weretrying to calm outrage over rising prices rather than fend offgeneric rivals, analysts said.

Generic Humalog “was made available to help people paying fullretail price for their insulin” because of coverage gaps or lack ofinsurance, said Lilly spokesman Greg Kueterman.

The mere threat of an authorized generic can also smothercompetition.

A 2013 Supreme Court ruling challenged deals in which brandsblatantly paid rivals to keep generics off the market. So pharmafirms came up with an alternative: They could would hold fire on anauthorized clone if generic firms agreed to delay launching theirproducts or gave some other concession, according to the Federal Trade Commission.

Both sides win. The brand stretches its monopoly beyond the lifeof the patent, while the generic firm avoids facing an authorizedrival later on.

Authorized generics can generate outsize profits in yet anotherway: as a method to game Medicaid contracts that costs taxpayershundreds of millions of dollars a year, according to investigatorsfor the Health and Human Services Department.

Brand-pharma companies routinely “sell” authorized generics to acorporate affiliate at a sharp discount, establishing an artificialwholesale price, said Edwin Park, a research professor who studiesMedicaid at the Georgetown University Center for Children andFamilies.

Because of complex discounting formulas, this strategy minimizesrebates the drugmakers owe to Medicaid, found HHS’sOffice of Inspector General.

Congress is eyeing bipartisan legislation to close that loophole, which the Congressional Budget Office estimates would save the federalgovernment $3.15 billion over 10 years.

The next frontier in authorized generics involves harder-to-makebiologic drugs, such as generic Humalog, which are made fromcomponents of living organisms, analysts say.

Such products tend to be expensive and highly profitable,producing especially strong incentives for brand companies topreserve their franchises.

Makers of valuable biologics such as arthritis drug Humirahave avoided the kind of competition from generic-like“biosimilars” that exists in Europe, partly due to patentextensions andlitigation settlements.

But once patents do expire, authorized biosimilars are likely tobe an integral part of their profit-preservation tactics, analystssay. In February, Lilly askedregulators to clarify their stance on “branded biosimilars” — aclear indication of its interest.

The query is “part of a number of questions Lilly and othershave posed” about shifting FDA treatment of biologics, said Lillyspokesman Kueterman.

Kaiser Health News isa nonprofit news service covering health issues. It is aneditorially independent program of the Kaiser Family Foundation,which is not affiliated with Kaiser Permanente.

Read more: 

• Mylan’s presence in generic drug market grows withPfizer deal
• Health systems’ generic-drug venture gaining steam(and new members)
• Drugmaker ‘shenanigans’ blamed for lag in genericdrug development