Defiant, Generic Drug Maker Continues to Raise Prices

Congressional hearings. Federal investigations. Consumer outrage.

In the wake of developments like these, many drug company executives are laying low. Their favored business models, based on raising drug prices indiscriminately, are now seen as a liability; many pharmaceutical companies are curbing increases on their products and accepting that this once-lucrative jig may be up.

Not Arthur P. Bedrosian, chief executive of Lannett Company. A generic drug maker with roughly $600 million in net sales in fiscal 2016, Lannett continues to push prices skyward on some of its offerings. And those moves are noteworthy on two accounts: First, its drugs are all off patent, meaning they are no longer proprietary formulations and should sell at deep discounts. The other: Lannett is raising prices even as it faces an antitrust inquiry from the Justice Department and a drug-pricing investigation by Connecticut’s attorney general.

Lannett, based in Philadelphia, sells drugs for thyroid conditions, gastrointestinal diseases and congestive heart failure, among other ailments. Its most recent price rise on dicyclomine, a treatment for irritable bowel syndrome, is scheduled to go into effect on May 2. A bottle of 100 10-milligram capsules will cost $19.95, up from $5.90, its price since 2001.

But that is a relatively tiny bump compared with recent price increases on its other drugs. Last year, Lannett more than tripled the price of terbutaline, a treatment for asthma and emphysema, propelling it to $435 for 100 tablets of 2.5 milligrams each, up from $136 for the bottle.

Also last year, Lannett raised the price of fluphenazine, an anti-psychotic drug, to $870 for 100 10-milligram capsules, from $43.50, its price since 2012. Fluphenazine, which treats schizophrenia, was approved in 1959 and has been off patent for years. It is on the World Health Organization’s list of essential medicines.

Many elderly patients take fluphenazine. Data from QuintilesIMS shows that in January, Medicare and Medicaid together covered 65 percent of prescriptions for Lannett’s version of the drug. This puts taxpayers squarely on the hook for Lannett’s price increases.

While Lannett’s customers and American taxpayers may be hurt by the company’s pricing practices, Wall Street loves them. Among the six analysts who cover the company, five rate it a “buy” and one a “perform,” or hold. Lannett’s stock was up 7.6 percent over the past week and 15 percent this year to date.

Elliot Wilbur, an analyst for Raymond James, is among the bulls. He recently wrote a research report commending Lannett’s management for being able to “squeeze dollars” from its base; he called the company the “last of the pricing Mohicans.”

Lannett is not new to the aggressive pricing game. In 2014, The New York Times cited the soaring price of digoxin, the company’s congestive heart failure drug. Many patients on digoxin are older, as is the case with fluphenazine.

Both investigations into Lannett, by the Justice Department and the Connecticut attorney general, remain ongoing. The company says it complies with all regulations and is cooperating.

Mr. Bedrosian, through a spokesman, declined to talk to me about his company’s pricing practices. But he has spoken about it with others.

Three people who attended an investor conference in Laguna Niguel, Calif., on March 14, 2017, said Mr. Bedrosian boasted in meetings about his ability to keep pushing up prices on products. The investors spoke on condition of anonymity, fearful of retaliation if they were identified.

According to the investors, Mr. Bedrosian was asked if the price-hike business model in the drug industry was over. He chuckled and said no, adding that he had tripled the price of one of Lannett’s drugs that very morning. He did not identify which one, the investors said.

When I asked Robert Jaffe, a spokesman for Lannett, to explain the rationale for these steep price increases, he said the company does not discuss its strategy. Instead, he suggested I speak with analysts, singling out Mr. Wilbur of Raymond James. In his recent report, Mr. Wilbur wrote that Lannett’s shares are attractive because the company can “find obscure, infrequently trafficked products where market dynamics facilitate or require substantial price movement.”

I asked Mr. Wilbur whether he was concerned that Lannett might face heightened scrutiny because of this practice. In a series of emails, he questioned why I would write about the company’s price increases, since they affected only a small number of people. “Convince me there is a real story here, and I can be helpful,” he said.

It’s true that some of Lannett’s price increases have been on niche drugs not used by millions of patients. Still, Dr. Aaron Kesselheim, associate professor of medicine at Brigham and Women’s Hospital in Boston and at Harvard Medical School, said, “The people who do use them maybe haven’t responded to other medications, so the rise in price for those patients would be problematic.”

The market dynamics that allow a generic drug manufacturer to hike up prices have to do mostly with competition. The problem, pharmaceutical experts say, definitely needs fixing. Generics come to market after the branded manufacturers’ exclusivity periods on their drugs expire. Prices of these drugs are a fraction of what the offerings were when they were branded.

And yet, prices on many generic products have risen significantly in recent years. A 2016 study by the United States Government Accountability Office found that from early 2010 to mid-2015, more than 20 percent of generic drugs had undergone price increases of over 100 percent.

These jumps are a concern to Dr. Scott Gottlieb, President Trump’s nominee to head the Food and Drug Administration. In testimony earlier this month before the Senate committee on Health, Education, Labor and Pensions, Dr. Gottlieb said he intended to solve the problem of rapid escalations in generic drug prices.

Price surges among generics are especially worrisome because these drugs account for 90 percent of all prescriptions and are crucial to reducing health care costs.

Dr. Kesselheim said that generic drug increases often come about when there is a lack of intense competition in the marketplace. He pointed to studies showing that when three or fewer manufacturers sell a generic drug, prices are far higher than when four or five makers compete.

A recent study done by Dr. Kesselheim and four other academics found that one third of generic drugs had three or fewer manufacturers. The drugs that Lannett has recently re-priced fall into that category.

“People expect a generic to be inexpensive, but the reason it is inexpensive is that there is reasonable competition,” Dr. Kesselheim said. “When you take that away, there is nothing to stop generic companies from trying to extract the maximum they can.”

The benefits to companies can be significant. Mr. Wilbur of Raymond James estimated that Lannett’s increase on dicylomine could propel that drug’s sales at the company from under $100,000 a year to as much as $15 million. And according to Lannett’s quarterly results in December, the almost 2,000 percent price increase it levied on its anti-psychosis drugs resulted in a $14.6 million increase in sales — or 54 percent — from the same period a year earlier.

In a world of billion-dollar drugmakers, this may not sound like much. But the price increase in the anti-psychosis category alone accounted for 8.5 percent of Lannett’s total net sales in the December quarter. Overall net sales were up 35 percent.

“Generics are essential in the care of certain patients,” Dr. Kesselheim said. “We need to make sure that the marketplace is functioning efficiently to be able to continue to get these essential benefits from generic drugs.”

Wouldn’t it be nice if drug companies thought better of leaving their patients in the lurch, so that they can laugh all the way to the bank?

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