How Product Hopping By Drug Makers Keeps Rx Prices High

Stack of money and pills.
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Anyone who takes prescription drugs for a chronic condition has felt the sting of high drug prices. Prices for any particular drug should fall as the brand name version of the drug faces generic competition when the drug-maker’s patents expire or the period of market exclusivity granted by the Food and Drug Administration expires.

However, this fall in prices due to generic competition means a decrease in profits for the manufacturer of the brand name drug.

So, rather than sit back and watch profits fall, drug manufacturers have several tricks up their sleeves to protect their profits by keeping prices high for their brand name prescription drugs. Product hopping is one of those tricks.

What Is Product Hopping?

In its most basic form, product hopping involves creating a new version of the brand name drug and switching (or hopping) patients over to that new version.

In order to product hop, a drug maker can alter its drug in such a way that the altered product qualifies for a new patent or for a period of exclusivity itself. By extending the term of protection from competition, the drug maker will stave off the loss of profits.

Changes to a drug that may be considered new innovations or enhancements and might qualify for a new patent or an extension of the period of exclusivity include:

  • Making an extended release form of an existing drug,
  • Making a tablet or liquid form of a drug that was previously only approved in the other form,
  • Introducing an inhaled version of an injectable drug,
  • Adding a protective coating to an existing oral drug to decrease the incidence of stomach upset.

The drug manufacturer then tries to get users of the original formulation of the drug to switch (or hop) to the new formulation of the drug. Once physicians have gotten used to prescribing the new version of the drug and patients have gotten used to taking the new version of the drug, the drug maker has successfully completed the product hopping.

Although the old version of the drug may face generic competition, high drug prices are still possible for the new version of the drug. The bulk of customers have already hopped to the new version of the drug; the new version is protected by its own period of exclusivity.

How Product Hopping Works—an Example

Let’s say a mythical drug maker, Pharmaco, has a mythical blockbuster drug, Curea. Curea’s period of exclusivity is due to expire in 2 years. Sales of Curea represent 40% of the Pharmaco’s profits, so Pharmaco’s management team is very interested in maintaining protection against generic competition so it can maintain Curea’s high drug price.

Pharmaco’s research and development scientists have come up with an innovation to the original version of Curea. While Curea must be taken three times a day to be effective, the R&D team has developed an extended release version of Curea that, when taken once daily, Pharmaco’s clinical trials show is just as effective as the original three-times-per-day version is. They call this new version Curea XR. Pharmaco is successful in getting approval for a 3-year period of exclusivity for Curea XR.

Somewhat before Curea’s period of exclusivity expires, Pharmaco brings Curea XR to market.

It prices Curea XR at the same price as original Curea. It markets Curea XR heavily to physicians. It advertises directly to consumers via television commercials, pointing out the more convenient once-daily dosing schedule. It holds meetings with big health insurers and pharmaceutical benefits managers to make sure Curea XR gets on their drug formularies. Many patients switch to Curea XR.

A few months before original Curea’s exclusivity expires, Pharmaco raises the price of original Curea above the price of Curea XR. It sends sales reps to the offices of the physicians who are still writing the most prescriptions for original Curea.

It sends coupons for Curea XR to patients it believes are still being prescribed original Curea. More patients abandon original Curea and switch to Curea XR.

When the first competitor brings a generic version of original Curea to market, Pharmaco has 90% of its Curea customers safely switched over to Curea XR. While some of the most cost conscious among them may switch to the generic version of original Curea, most are happy with the extended release version and prefer taking their pill once daily. In fact, they like the once-daily dosing schedule of the XR version so much better than the three-times-daily dosing schedule that they’re willing to pay a somewhat higher copay to fill their Curea XR prescription. Pharmaco loses some sales to generics, but, through product hopping to Curea XR, protected the majority of its Curea-related profits for years.

Is Product Hopping Anti-Competitive?

It’s up to the Federal Trade Commission and the courts to decide whether any single episode of product hopping is anti-competitive. The inherent difficulty is to provide enough incentive through market exclusivity to encourage innovation that benefits consumers while, at the same time, limiting that period of exclusivity so that consumers don’t face monopolistic prices over the long term. Ultimately, whether a drug manufacturer’s product hopping qualifies as an anti-competitive practice may depend partially on the nature of the product’s change and partially on the techniques the manufacturer used to get consumers to hop to the new product.

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