Drug Pricing: Transcript of Section 5 Enforcement Conference Call with Harry First

September 8, 2016 –  On September 1, The Capitol Forum hosted a conference call with antitrust thought leader and NYU School of Law Professor Harry First to explore his policy paper, Unfair Drug Prices and Section 5, which calls for FTC enforcement against drug pricing under Section 5 of the FTC Act. The full transcript, which has been edited slightly for clarity, is below, or click here to access our library.

OPERATOR:  Welcome to the Capitol Forum Drug Pricing conference call.  And with that, I’ll turn it over to the moderator, Mr. Teddy Downey.  Please go ahead.

MR. TEDDY DOWNEY:  Thank you. Good morning, everyone.  And thanks for joining the Capitol Forum’s Conference Call on Drug Pricing and Section 5 Enforcement.  I’m Teddy Downey, Executive Editor at the Capitol Forum.  And I’m joined today by NY School of Law Professor Harry First. 

As a brief introduction, Professor First is the author of a recent policy paper titled “Unfair Drug Prices and Section 5”.  And he also served as Chief of the Antitrust Bureau for the NY AG’s office from 1991 2001. 

Before we get underway, a couple of things to note.  For the first 15-20 minutes or so of the call, I’ll interview Harry.  And then we’ll move into Q&A format where we’ll entertain questions from the audience.  If you have a question, please email it to editorial@thecapitolforum.com.  

And with that, let’s get the discussion underway.  Harry, thanks again for joining us. 


MR. TEDDY DOWNEY:  So I think maybe the best way to jump in here is maybe you could give us some of the key takeaways from your recent paper. 

MR. HARRY FIRST:  Okay.  Glad to do it.  So, first of all, thank you Teddy for setting up this call.  Always glad to talk about something I’ve written, of course, but also maybe not so much by chance.  I mean, it’s certainly very hot in the news with the EpiPen episode and Mylan’s price raising.  So this, as we know, is not a limited phenomenon.  This is not the first case we’ve seen of this very high drug pricing and this may not be the last.  And it seems to me we ought to be able to do something about it.  And that's something that I focused on deals with competition policy.  And to a large degree, I think what we’re witnessing is a competition problem.  And both the lack of competition that certain drugs face and then the willingness of those drug makers to exploit their position.

So let me just step back for a second just to say generally what antitrust law and the competition laws are worried about.  So there are really three things.  One is collusion.  That's companies getting together and agreeing not to compete.  The second is exclusion.  Those are agreements that exclude rivals, sometimes joint agreements, sometimes individual behavior that is aimed really at doing in a rival rather than competing on the merits.  And the third is exploitation.  By that I mean raising prices in a way that exploits consumers and allows the producer to obtain shall we say monopoly rents, monopoly profits. 

So the pharmaceutical industry has been involved with all of these issues.  Collusion, the Supreme Court decided a case involving the pay for delay where branded pharmaceutical companies agree with generics to delay entry.  That's the activist case in 2013.  Lots of examples of exclusionary behavior, including behavior by Mylan actually in the 1990s where they were trying to exclude their generic competitors.  And we can go into talking about those things.  I think that there are maybe more examples of exclusionary agreements than meets the eye and which could look for some investigation.  Even with the EpiPen, there seems to be some exclusive agreements that Mylan or distributors have used to fence out competitors. 

But the focus of my paper and what I think is particularly interesting is exploitation and raising price.  So as a general matter, in the U.S., the Sherman Act, Section 2, which deals with monopolization, the courts have said while we don’t like high monopoly prices and we certainly don’t like them when competitors agree on them, when a single firm sets it, that's not a violation of Section 2 of the Sherman Act.  And that's been the view in the United States for a while.  It is not the view of competition law generally around the world actually that feels that something can be done about exploitative high prices. 

And there are some good reasons to be concerned about government intervention with pricing.  It puts the government in a difficult position.  Industries like pharmaceuticals where you want some degree of monopoly profits to incentivize innovation.  You'd be concerned about that.  You'd be concerned about what prices the government set. 

So we’re cautious about interference with pricing.  But we’re also becoming increasingly skeptical about just simply relying on private decision making.  So we certainly see it in the EpiPen case.  And we’ve seen it in some other cases last year, Daraprim, there are a number of pharmaceutical drugs where there was an acquisition of the drug by one company that didn’t develop it, even drugs that were out of patent.  And then a huge price increase that really exploited consumers.  And there are lots of other structural things that are going on in the industry, consolidations, large mergers.  There’s a lot of barriers to competition, particularly in the pharmaceutical industry.

So although we might in general be concerned about intervening, the pharmaceutical industry might be an area where there is some good reason.  And obviously, there’s a good reason.  These are drugs people need, often to live.  And this is not like making hula hoops or tennis balls or who knows what.  There’s something different about pharmaceutical drugs and we recognize it all over the world. 

So in this paper, I had maybe a more focused argument.  And it’s an argument actually that comes from what I think is an analogous area where the Federal Trade Commission has intervened actually because it’s afraid of high prices.  And this is the area that involves smart phones, for example, computers and so forth, where standard setting organizations agree on certain standards for making particular products, like a smart phone.  So the components can – manufacturers can have a choice of components.  Smart phones can communicate with each other.  All the interoperability aspects you need requires some standardization of products. 

The issue has been that those standards often involve practicing patents.  So if you adopt a standard that includes a patent, the patent holder, now being a standard for let’s say all smart phones, could insist on a very high royalty rate, hold up buyers, basically manufacturers of products, let’s say manufacturers of smart phone handsets. 

So standard setting organizations for patents that are considered essential to standards have said if you want to be licensed, you have to agree to license your technology on fair, reasonable and non discriminatory terms, what industry calls FRAND, fair, reasonable and non discriminatory terms.  But interestingly enough, the standard setting organizations never specify exactly what price is fair, leaving it to the parties to hash out later.

And in a series of decisions that the Federal Trade Commission of the United States has made, and that actually enforcement around the world have made, they’ve tried in various way to force holders of standard, essential patents to stick to the bargain, to not charge excessive prices, but to charge fair prices, and have tried to work out what those fair prices might be. 

So if we can do this for smart phones, why can’t we do it for pharmaceutical drugs?  I mean, smart phones are important.  I love my smart phone.  But pharmaceutical drugs are life important. 

So the main difference, is in a technical sense, pharmaceutical manufacturers haven’t agreed to a contract that says we’ll do this.  But what I think they’ve agreed to is a social compact, a social contract, with all the taxpayers in the United States who in some way or another have supported the pharmaceutical industry, and with users of their products, not to engage in profiteering and price gouging.  And I think based on that sort of analog and there are, as I said, cases at the Federal Trade Commission that has done, cases that have been done elsewhere, I think we should hold them to some sort of a bargain where we can do something.  And this involves Section 5 of the Federal Trade Commission Act which prohibits unfair methods of competition.  We can talk a little more about that.  But I think this gives the Federal Trade Commission in particular the legal tool to become involved, just as they’ve become involved with standard essential patents in high-technology industries. So that's my quick wrap.

MR. TEDDY DOWNEY:  And you specifically mentioned Section 5 related to acquisitions where a company is acquiring a drug and subsequently raising prices aggressively.


MR. TEDDY DOWNEY:  Why do you use Section 5?  What is it about Section 5 that you think is a useful tool?  And given that Section 5 has been there, why hasn’t the FTC used that authority, especially since these price increases have been occurring fairly regularly for the past few years?   And also they're pretty well documented in the press. I mean, there are tons of articles in the New York Times and elsewhere about these price increases like why is the FTC effectively sitting on its hands?   And why is Section 5 so good? 

MR. HARRY FIRST:  Two questions really. Why did I take this tack?  And why hasn’t the FTC done anything?  So I took the tack of going to Section 5 of the Federal Trade Commission Act because even though I think Section 2 of the Sherman Act ought to extend to exploitative high pricing, that that should be a violation, the courts have not agreed with this.

So I said, well, do we have maybe a more conservative approach that the courts might accept? So Section 5 prohibits unfair methods of competition. And Congress, when it enacted the statute in 1914, did not define what it meant by that. They left that for the FTC to develop.

So over time, there's been agreement that that includes at least violations of the Sherman Act. So that makes the FTC look just like the Justice Department enforcing the Sherman Act. On the other hand, there is a case that the Federal Trade Commission did bring, was decided by the Supreme Court in 1972, the S&H Green Stamps case, which said that the FTC actually has authority broader than that just the antitrust laws. And it has a broader mandate to decide what's “unfair”.

Now since the decision in S&H, the Commission has had a devil of a time trying to figure out what the bounds of that might be, and to give some indication of what the at least, you know, how far they might see that extending. And they've done that in the context of Congressional concern that the FTC might go too far.

So there's been a long history of disputes with Congress and trying to figure it out. And the net result at this point is a statement of principles that the FTC issued last year setting out a very modest expansion over what would otherwise be a violation of the antitrust was, too modest in my way, but also fairly vague. And the Commission has, although preceding cases and some of the cases that I mentioned actually dealing with this FRAND issue, has been willing to push the envelope a little bit. At the present time, it doesn't seem to be willing to do that.

I think there's room. I think there's room in the law to do this. I think there’s room in past practice. I think that the Commission's current statement is vague enough that there is some room. And I think the Commission could very well indicate in this particular area how it views exploitative prices. 

Now, the paper I wrote, you mentioned acquisitions, was in the context of a number of cases in which and this particularly was the case involving Martin Shkreli and the acquisition of Daraprim, a drug called Daraprim. So it involved post-acquisition behavior and then raising the price. So that's the transaction, maybe a little more of a lever for the FTC. So it could certainly start by looking at those cases.  But I don't think it's just bound by transactions. I think this is a little broader and would look at something like Mylan, which is not based on acquiring a product and then raising the price, but raising a price gradually over time, but didn't really depend on an acquisition I don't think. So I think it's a little broader than acquisition, but it certainly would apply to it.

MR. TEDDY DOWNEY:  And so a change in political leadership, a change in political will, to actually use this broad authority could result in a dramatic shift in this industry. I mean, that's interesting on its own. But can you also explain the functionally procedurally? Let's assume the next administration actually is interested in doing something and using its authority in this way, procedurally what happens? And which of these drug price increases is at the most risk? Or in other words, what's the easiest case for them to bring? Would it be one with an acquisition of a drug that, for example, has been around for a long time and requires no R&D whatsoever? What's the best case to bring?

MR. HARRY FIRST:  Well, you're talking like a good enforcement person. So the first thing you have a broad principle, but you look for a case with the best facts. So post-acquisition behavior, buy it, raise the price, that sounds like a good one, particularly if it's an off patent drug. And this Daraprim, for example, that Turing acquired in 2015 was an off patent drug. So you're not concerned -- this is a case where all the returns for the innovation have been taken.  We do give some ability to raise price as an incentive to innovate, but that's done. So you might start with something that's off-patent where there’s been a large increase. And then you might also look at, and this is to some extent unexamined because, you know, when I look at this, I read the newspaper.   I don't have investigative subpoena power.

So in a lot of these cases, I think one might find out, in addition to the price rise, that there's more explanation for why the pharmaceutical company is actually able successfully to raise this price and it may have to do with the way the drug’s distributed. It may have to do with business strategy. There may be lots of things. So I think that that's sort of a trigger and that the Commission with its investigative powers can look a little more deeply for an explanation of why this company all of a sudden, let's say it's an out of patent drug, is able to exploit consumers. There's nothing good about what they're doing. And so the economic question is why are they able to get away with it? That can help you frame what might be the remedy in the case, rather than if you think there's some other agreements, you might be able to avoid completely setting the price but telling them to reduce the price and get rid of these other agreements.

So there's more that might be able to be done.  Your instincts are great. You would look for maybe let's say a low hanging fruit case. Now whether let's say EpiPen is a case like that.  It sounds like a case where the inputs are very inexpensive. I’m not clear exactly on whether the injector, you know, how much innovation is involved in there and sort of the patent situation. And these cases can get a little complicated. There are generics around. Why aren't they thriving? This is a complicated area. But I would start with something not on patent but off-patent and perhaps as a result of an acquisition.

MR. TEDDY DOWNEY:  And if you really wanted to bring cases, you would most likely repeal that unusual letter that was written? 

MR. HARRY FIRST:  Yeah, this is a good -- this is -- it's always a question when a new administration comes in what to do with what the old administration has left you with? And I’m going to be agnostic as to who the new administration is.  So when the Obama administration came in, they repealed Section 2 guidelines that had been put in in the Bush administration. Gave a very strong statement as to how they're going to be more aggressive in Section 2.   I will put to the side what the reality has been. But that's one approach.

So there are now two openings in the Federal Trade Commission which means that the new administration will have the ability to appoint basically one Democrat and one Republican. And presumably in a new administration, there will be a new chair and that's been the history.  It may not be the case. Here I have no idea. But it's a new administration. It's a time to look at what's been done. 

Changing a statement of principles that you made two years ago can be a little dicey. And one way of dealing with it is you just say, well, you take some of the vague language and say this is consistent. I would frankly prefer sort of a longer -- I mean, I’m not a great fan of these principles and particularly for Section 5.  So I might prefer not issuing a new one but saying this whole idea of guidelines is a bad idea. We're going to develop it case by case like we've always done. So there are a number of different techniques you can do. I don't think a new administration is bound for this kind of case and say, oh, we can't do it. In fact, the dissenting Republican commissioner who descended to the issuance said, God, how would you handle -- and listed a bunch of cases. I can't see how this exactly -- the principles would affect could you bring these cases are not. So I think there's a lot of wiggle room actually left to a new commission and a new chair. 

MR. TEDDY DOWNEY:  But they're actually not bound at all by that memo.

MR. HARRY FIRST:  Well, technically no prosecutor -- and this is true of the Justice Department, the Federal Trade Commission -- is legally bound by any guidelines that they've issued. They always say at the beginning we're not bound by these. Now, as a practical matter, you don't want to get too far away from them because that's why you've issued them. But these have -- they're not all that specific frankly. There's a tone to them which can be pushed one way or the other.  The tone could be we're not going to do very much. And I think that's the way they may have been presented to some critics of the FTC on the Hill. But there's room within these. And there's also room to say this is a new Federal Trade Commission. We want to reconsider this. So we're pulling the principles and stand by.  We’ll let you know.

MR. TEDDY DOWNEY:  And just to reiterate, before we get into questions from the audience, what would be the general rule of thumb if you're at the FTC and you're looking to bring a number of these cases to address drug pricing, you'd focus on off patent -- just to be clear, you’d focus probably first on off-patent drugs.


MR. TEDDY DOWNEY:  And what is it about off patent drugs that makes it more appealing? Is it just because you've already gotten your monopoly opportunity with the patent. And now that it's off patent, there's no real logical explanation for why you would have a lot of pricing power if the law, Hatch-Waxman or what-have-you, is working as intended?

MR. HARRY FIRST:  Well, I think part of it is you don't have that patent protection that helps to explain why you are able to exploit the drug that you have. So that is one part. It’s an explanatory part.  But I think maybe even a little stronger is the normative part. Because one of the things you’re concerned about is you want innovation, and certainly the FTC does and the antitrust forces do. And to some extent, we have said, and this is particularly true for pharmaceuticals and pharmaceutical patents, that you need some degree of protection from competition so as to incentivize firms to invest all the money they need to invest to come up with these new drugs.

But we don't give them all the money they can get forever and ever. We limit it.  So patents are limited to twenty years.  So if it's off patent, the policy assumption we've made is that was enough. That was enough to incentivize you.  You really don't need more. Now that it's off patent, we're not worried about incentives for innovation. And you have no more reason to exploit consumers than if you made chewing gum.  We're just not worried about that issue anymore. So that's the policy reason why.  I’d start there.  You take away the argument from the defendant that, my God, we need this money to invest in innovation.  They'll still make that argument, of course, as Martin Shkreli did. But it has way less force if the product now costs very little to produce and the patent returns have been obtained by the innovator. 

MR. TEDDY DOWNEY:  Okay.  I find this endlessly an interesting topic, but I want to open up the floor for questions. Again, if you have questions, please email us at editorial@thecapitolforum.com. That’s editorial@thecapitolforum.com.  And mentioned that when it comes to standard essential patents -- and I’ll throw another question at you as we wait for calls from the audience. You mentioned that in the standard essential patents issue, they have these fair and reasonable prices. 


MR. TEDDY DOWNEY:  How do those get a resolved? How did the FTC and the courts and the companies involved, how did they arrive at what's a reasonable price?

MR. HARRY FIRST:  Yeah, this a great question. So the FTC hasn't come directly at these companies for not charging a fair price. What they've done is they've looked at certain other behavior which they say has allowed them to charge the higher than usual price and exploit consumers.

So, for example, a lot of times the licensors, the holders of these standard essential patents, will try to get an injunction against a party they think is infringing who may have been unwilling to pay the high price and stop them from producing, as a way of coercing them to pay a high price. So the FTC has gone after firms for seeking injunctions rather than damages. So they go after sort of the conduct that allows them to keep the price high. And that avoids a direct confrontation with the principle that we don't – that antitrust doesn't deal directly with high prices. So the FCC hasn't confronted that directly.

Now, patent holders and licensees, where there's a patent that has been FRAND committed, have litigated the issue of what would be a fair royalty rate in court. So there's litigation like that actually where the holder of the patent sues for royalties. And the other side says you're only entitled to fair royalties and they litigate what that means. So courts have tried to hammer out how you figure that out. I think the FTC could try to hammer that out with its own and processes. So that's been one way.

Another way has been through arbitration actually. So parties have put these matters to arbitrators to figure out at the time that these patents were committed to the standard, what would have been a reasonable royalty? So it's not perfect. It's not pure science. It's judgment call to some extent. But, you know, this really is around the world, parties have been trying to sort of grapple with it. In China, the Chinese Competition Authority went after Qualcomm and Qualcomm just agreed to a lower royalty rate and the Chinese authorities said, yeah, that's good.   We like that.  So that's another possibility that it sort of gets negotiated out. So again, there are ways to do.  It's something that enforcement agencies, U.S. antitrust enforcement agencies, have been cautious about doing, but it's not it's not impossible actually.

MR. TEDDY DOWNEY:  And we've got a question from the audience. Could you map out the case against Mylan for its price increases? And specifically, how would the FTC determine whether a price increase is unreasonable?

MR. HARRY FIRST:  Well, we however asked that in the audience asked the question. I thought I could talk fast enough and long enough that no one would ask me that one. So that's hard because you don't have the sort of direct acquisition hook that I've talked about in the paper. I think that if I were investigating the EpiPen episode, I'd look both to the price to see the extent of the price increase and the profitability, the incentives, internal incentives, that Mylan has setup for pushing the envelope, the sort of subsidiary agreements that may have fenced out certain competitors. There is I think, I’ve seen a copy of this, I don't know for how long they’ve had this, but there was an agreement on the schools’ program for a twelve-month exclusivity if they had to use the Mylan EpiPen. There are generic competitors. So I would look to see what the behavior has been with regard to that.

How to figure out what a reasonable price is is a hard problem. And I think to some extent I would call on parties who do licensing deals and see what, in sort of an industry judgment, a reasonable royalty might be for the technology involved in the EpiPen dispenser which is I think still under patent. So those would be ways, you know, as I said the high price is exploitative. But it's never the case that -- I don't think -- that a firm just is able to set a high price and is successful. There's something else that goes on around it. And antitrust enforcement authorities can try to examine that as well as the high price, and then to get some expertise as to what might be a reasonable royalty from people who do these kinds of deals.

MR. TEDDY DOWNEY:  And just a quick follow-up here.  Why isn’t the assumption that, okay, it’s off patent and we have all these rules that are supposed to ensure generic entry and competition. Let's just assume that this should be a competitive market.  What’s a reasonable profit margin for a product in a competitive market? A

MR. HARRY FIRST:  That maybe one approach.  As to what a fair return is I think that would look at cost and what a reasonable profit might be and add something to it and say if you price above this, that's a violation of Section 5.  Yes, that's another methodology you could try to think of doing.

I think one of the tricks is for the Federal Trade Commission they don't want to be the regulator of drug prices in the end and regulate all drug prices. And so I don't want to I don't want to minimize the risks and the difficulties of this. I think that this needs more consideration as to the costs and benefits of different kinds of approaches. But my main point is that these things can and should be worked out.  You can try to think these things through. And so that's really more of what I’m arguing rather than for picking a specific way to set what might be a reasonable price. 

MR. TEDDY DOWNEY:  Now we've got I think some other questions in the queue here.  I guess I have a couple of questions here in terms of the Mylan case.  We hear a lot of it from the FTC. And certainly this FTC is absolutely not likely to use this authority I think.  We've written about the FTC being hands off when it comes to pharmaceutical consolidation, even generic analysis is clearly not predictively useful in terms of preventing, you know, making sure that these markets are competitive and there is generic entry.  So there's been massive consolidation in both branded and generic where the FTC's done little other than occasionally require divestitures of specific overlapping products.

But the FTC does talk a lot about litigation risk. And given the broad authority of Section 5 and given the just incredibly unsympathetic company that is raising prices, in this case Mylan, which has previously been litigated against for antitrust violations. Obviously, kids in school rely on these drugs. The price increase is pretty astronomical. How little of an issue is litigation risk in a case like this, given the broadness of the authority and given the sort of like lack of sympathy for the company that you're going after? R

MR. HARRY FIRST:  So I think you're really asking two questions. So one is the assessment of what the litigation risk is.  And as you point out, the target is a really unsympathetic target.  And the chance of drawing a judge when you get to the court of appeals who has had experience with EpiPens and relies on them may be fairly strong. So yes, it's probably an unsympathetic defendant.

That said, there is litigation risk because even though this looks terrible, courts of appeals have somewhat conservative case law to work with. So the case that I mentioned in the paper, which was an acquisition by a drug called Indocin IV, which sounds like huge price increases, the Commission actually lost in the court of appeals even though they had, I thought, really sympathetic facts. So there's litigation risk.

But the reason why I say there’s two questions is government enforces ought to take a little more litigation risk. So private parties are just interested in their own results and that's what they do. But the government is litigating on behalf of all of us. There are public benefits. There are spillover effects to winning a case that sets an important principle. And so if all you're doing is staying comfortably within the law, then, well, that's something. But better to push a little bit on the boundaries. Take that risk if you've got a case that you're convinced is really good as a policy matter. So yeah, they should think about risk. But yeah, they should think about running it.

MR. TEDDY DOWNEY:  And what's your view on an explanation for why the markets, the generic markets in particular, are breaking down and there's no entry? Because it just seems that it's odd that the FTC is allowing for all this consolidation and you don't seem to have nearly as much robust generic entry and generic competition.  What’s the role of consolidation? And is that playing a role in not having these competitive forces to actually push prices down once drugs go off patent?

MR. HARRY FIRST:  That's a very good question. And I’m actually not 100 percent certain of the answer to the exact role of consolidation.  There was just this Teva Allergan merger. There are a lot of generic companies. So it's not like there are only three. I think the branded pharmaceutical part of the market is more concentrated. But there is concentration going on.  And if you have fewer generics, then you have fewer multiple generic entries once patents expire or are found to be invalid. So that's certainly an issue.

I’m not sure that that's an issue in the Mylan EpiPen episode. And I think that there may be other things at play. So certain generic markets may be harder to enter because of strong brand identification.  I've heard of EpiPens, but I didn't realize that EpiPen is a trademark. I mean, I don't use them. But there's very strong brand identification and it’s a prescription drug.  So you have that as an entry barrier if you are a generic and you've got to somehow get distribution. You have a very complicated set of state substitution laws that vary from state to state as to when pharmacists are permitted to substitute a generic and you have to get approval as a generic.  So there's a whole regulatory process that is problematic and does create entry barriers.

You also may have a problem – I’m not sure, but it could be the case here -- where the party, even post patent, when the patent expires, the cost of producing a drug might be very small. So if you're looking to invest a lot, you're an outside generic, to come into the market and the current seller could simply drop the price dramatically and still make money and you won't make money, you might think twice about entering. So I think that might be the Daraprim.  This was the case from last year.  The Daraprim example of why they were able to raise the price and not attract entry because they could lower it again. And that's an entry deterring strategy. Or they could come out with their own generic, which Mylan just did, of course, with the EpiPen, basically saying you want to enter? We’ll kill you.

So there are lots of issues. And this is exactly what the Federal Trade Commission should be looking at. This is their expertise to understand markets better. So these markets can get complicated, both legally and factually. And you want to look at a particular case for what's the source of this power? It may be that EpiPen is a trademark. Maybe you require them to license the trademark to others.  They did that with Cheerios at one point.  It didn't go well. But that was then. This isn't Cheerios. This is a life-saving drug. 

MR. TEDDY DOWNEY:  Let me ask you another question.  Why was it that five, ten years ago, you didn't have nearly as many of these problems? And what was different about the market then other than that there were just a lot more generic companies? And then second, I thought AAI actually there was a paper written about how the issue is it's not just the number of competitors in the generic market. You have to really look at capacity and expertise and that would require --

MR. HARRY FIRST:  I mean, there are lots of things to describe a market. It is not just the number of firms.  That's quite true.  The capacity to actually enter and produce, particular business strategies.  There are all sorts of things in assessing how competitive particular industries are. So I don't dispute that.  A rule-of-thumb assessment is if there aren't very many players, it's less competitive.  So we don't have that rule of thumb so much to rely on in general, but for specific products, specific drugs, it may look different. So I think we need more mapping of this.

Now, why is it this happening now? I’m not certain of the answer. The generic industry got a big boost with the Hatch-Waxman Act. And it's become, you know, these generic companies have become really quite large and successful. And they have because the profits on the branded drug are so high that it's inviting some kind of entry. So I don't know.  Part of it may just be the growth of different kinds of pharmaceuticals, the growth of Medicare and Medicaid. Lots of reasons for Epinephrine, the passage of that statute in 2013 which incentivized lots of schools, airlines and so forth to have epinephrine dispensing things and gave EpiPen a big boost.

MR. TEDDY DOWNEY:  And it's a very interesting area because it just seems like Hatch Waxman for a while worked as intended. You had a drug came out.  You had a bunch of generics fighting to enter. The price came down dramatically.  The cost of generic drugs were low. And now generic prices are being raised in a way that looks like they have a patent.  So from a layperson, it just looks like Hatch Waxman is actually not working as intended. But it sounds like it's a complex enough thing that's not as simple as just saying consolidation is a driver there. 

MR. HARRY FIRST:  Yes, I think it's not just a consolidation.  You’re right.  There are lots of issues.  Never look for private companies to always be the heroes.  They’re after maximizing their profits like the branded pharmaceuticals are after maximizing theirs.  So markets don't always produce, as we know, the best social result. And when it comes to pharmaceuticals, those social results are really, really important and I think calls for more intervention.

MR. TEDDY DOWNEY:  And out of curiosity, there are other companies and there are other players in the healthcare market that are supposed to be checking sort of these prices.  You've got PBMs. You've got health insurers.  You've got these other actors that ostensibly are supposed to be playing a positive role in sort of lowering prices. But it doesn't seem that that's actually working either.  Have you thought at all about FTC looking into the role of the other actors in the supply chain to see if they’re benefiting from these price increases?

MR. HARRY FIRST:  Right.  I think that's a good question. I noticed that Mylan tried to blame intermediaries for the high prices, which struck me as bizarre. They're charging the prices. But certainly there could be issues, particularly with PBMs and how they compose with formularies and the deals they have. This is a whole, I don't want to say can of worms. That makes it sound bad. But there are many cans in this.  I don't specialize in healthcare. So I don't pretend to know every nook and cranny, but it's a very complicated system.

So yes, there’s probably some room to look at how these firms are operating. The FTC has had that opportunity some extent when there’s been some consolidation in the industry and people have been critical of the view they've taken there.  So yes, a broader look at competition issues would look at other aspects of the industry that deals with pharmaceuticals. You know, the FTC has been very involved in healthcare generally in some ways and particularly with hospital mergers, been fairly aggressive when it looked like they could never ever win a hospital merger case. This is in a sense of what I meant by taking antitrust risk. For many years, they just didn't want any cases. And they haven't won every case, but they’ve won some very important cases. So the FTC's capable and they just have to turn to the task a little more I think.

MR. TEDDY DOWNEY:  And last question here. What should we watch for in the coming weeks, months, to see if the next president is preparing to put in place people who would be willing to use Section 5? Or once the new administration is in place, are there any things to watch for that will give us a hint that they’ll be interested in this type of idea? And let’s assume that that does happen, how long would it take before we would start to see our first Section 5 case in the drug industry.

MR. HARRY FIRST:  Well, I can't hold my breath that long, but I don't have great breath holding capacity.  I assume look and see what transition teams are doing, if anything, in this area. I don't know what sort of reporting is being done about them in terms of gearing up. There's so many things that a new administration has to look at it and gets to look at.  So it's hard to know where antitrust enforcement generally and enforcement related to pharmaceutical drugs specifically ranks there.

So I don’t know the answer. For the FTC, certainly at the beginning there's just a ramping up question of a new leadership, both at the Justice Department and at the Federal Trade Commission. So it's going to take them a little. I think there's just a period where they have to gather their people and gather their strengthen and appoint people who are interested in this area. So I’m not sure exactly which tea leaves I’d look to, but I wouldn't expect the first hundred days there's going to be a case. But this has been a hot issue. EpiPen won't be the last.

MR. TEDDY DOWNEY:  And how long would it take to develop a case? I mean, you were at the New York AG’s office.  Would it take roughly the same amount of time that it takes to do an antitrust review, like a complicated antitrust review, like a year or so?

MR. HARRY FIRST:  I think one of these cases would take a while. Yeah, I think it would take a while. I think there's a -- you know, this comes at a number of different levels. So let's say the new head of the Antitrust Division, the new chair of the Federal Trade Commission, were really interested in this, you start by giving policy speeches. You know, you signal the industry that it's a problem. You open investigations. But to have a case that you're ready to file a complaint on, you know, you don't want to do it before you're ready. You're taking on – you’re going to take on big interests. You want to be ready. So I think it's a while. You try to achieve some sort of deterrence of these price increases by giving talks and saying we are looking at this. So watch it. But a real case is probably a while.

MR. TEDDY DOWNEY:  And then would the FTC issue – would they issue subpoenas or CIDs? How would they go about getting the information?

MR. HARRY FIRST:  Yes, the FTC would issue subpoenas if they didn't get some sort of voluntary compliance. But I think they’d issue subpoenas in this area. You know, there have been – I mean, there are subpoenas out for some of these drugs for various different kinds of things. The U.S. Attorney has subpoenas out, I assume, for anti kickback issues. The New York AG's office had subpoenas out in Daraprim, but I don't know what happened to that. So yes, the issue process, the Justice Department has its own process, civil investigative demands. And you want to start getting information. And you want to get your economics team onboard that understands these markets and this industry.

MR. TEDDY DOWNEY:  Well, it looks like we are out of questions here. But this has been extremely interesting.  I really want to thank you for your work and for taking the time to speak with us today and look forward to seeing if these ideas get picked up.

MR. HARRY FIRST:  Great. Thank you. I appreciate the chance to talk about it.

MR. TEDDY DOWNEY:  All right. Thanks everyone for joining us today and that concludes the call.

MR. HARRY FIRST:  Thank you.  Bye-bye.