The DOJ Domino Effect: Forecasting the Growth of the Generic-Drug Probe

By Bill Dillon and Gillian Fishman

ABA Cartel & Criminal Practice Spring 2017 Newsletter

When corruption pervades a $75 billion industry that accounts for 88% of prescriptions written in the United States, antitrust violations spawn real-life impacts on countless Americans.  Such is the case with the recent discovery of price fixing in the generic drug industry.

Investigation Background

In the U.S., brand-name drugs enjoy the benefits of various combinations of patents and exclusivity rights that can range anywhere from three to twenty years.[1]  Generic drugs typically save consumers billions of dollars annually by introducing competition into the market when these patents or exclusivity rights expire.

Starting in 2012, however, prices for generic drugs began rising at an unusual rate.  The state of Connecticut began investigating this rise in July of 2014, culminating in Connecticut filing suit in December of 2016 against six major pharmaceutical companies: Aurobindo Pharma, Citron Pharma, Mayne Pharma, Mylan, Teva Pharmaceuticals, and—at the center of the investigation—Heritage Pharmaceuticals.[2]

The suit focuses on two drugs: a delayed-release form of Doxycycline Hyclate (Doxy)—an antibiotic used to treat a variety of infections—and Glyburide, a diabetes medication.[3]  The complaint alleges that the defendant-companies engaged in “schemes to fix and maintain prices, allocate markets, and otherwise thwart competition.”[4]  Specifically, Count 1 accuses Heritage of orchestrating a horizontal market-allocation scheme to divide the Doxy market with Mylan and Mayne,[5] and Count 2 accuses Heritage of orchestrating a horizontal price-fixing scheme to raise Glyburide prices with Teva, Aurobindo, and Citron.[6]  According to one congressional report, a 500-count bottle of Doxy went from an average price of $20 per bottle to an average price of $1,849 per bottle—in a span of six months.[7]

Shortly following Connecticut’s suit, a group of plaintiffs filed a class action suit in the District Court of Massachusetts against three additional pharmaceutical companies: Sanofi, Novo Nordisk, and Eli Lilly.[8]  The fifty-nine count complaint alleges that the companies intentionally and simultaneously raised insulin list prices to engender themselves with pharmacy benefit managers (PBMs), the wholesalers who sell to health insurers.[9]  Essentially, by raising the price paid by the public, the companies lined the PBMs’ pockets in exchange for a preferable formulary position—which results in securing the health insurers’ business.[10]

Domino 1: The Yates Memo

In a parallel action to the Connecticut suit, former Heritage CEO Jeffrey Glazer and former Heritage president Jason Malek pled guilty to individual criminal charges for the same conduct.[11]  The two executives were convicted in the Eastern District of Pennsylvania in January of 2017.[12]  Their sentencings are scheduled for this April.[13]

 
 

The prosecutions of Glazer and Malek evidence the Department of Justice’s (DOJ) continued adherence to the so-called “Yates Memo,” Assistant Attorney General Sally Yates’ memo prioritizing the DOJ’s focus on the individuals affecting corporate crimes, rather than the corporations themselves.  This individualized prosecution encourages executives to inculpate other conspirators to receive sentence reductions.  In this case, Glazer and Malek are believed to be cooperating with federal investigators—and prosecutors have already referenced the involvement of their superiors and subordinates.[14]

 
 

Domino 2: Leniency Plus

Just as individuals are encouraged to inculpate others, the Antitrust Division’s “leniency-plus” policy results in a parallel effect on corporations.  A corporation receives "leniency”—and thus does not get charged—if it is the first to come forward in revealing the details of an antitrust conspiracy to the Antitrust Division.[15]  There are two types of leniency: (1) Type A, which offers leniency before an investigation has begun, and (2) Type B—or “alternative leniency”—which offers leniency after an investigation has begun.[16]  To receive Type A leniency, the Division cannot have received information about the violation from any other source.[17]  To receive Type B leniency, the investigation must not yet have produced evidence likely to result in a conviction.[18]

Even if it is too late for a corporation to receive leniency for an antitrust conspiracy, it may still receive “leniency-plus” for bringing the DOJ evidence of a second antitrust conspiracy.[19]  In that case, the corporation receives leniency for the second conspiracy, plus the DOJ recommends a substantial discount on the corporation’s fine for the first conspiracy.[20]  The amount of a leniency-plus discount depends on the strength of the evidence provided by the cooperating company, the potential significance of the violation, and the likelihood that the DOJ would have discovered the evidence on its own.[21]  In this regard, companies are incentivized to provide detailed and extensive information about the activities of other co-conspirators in every relevant market or sector.

The DOJ’s auto-parts investigation is one of tne of the best examples of the effects of the leniency-plus policy.  In the auto-parts investigation, numerous companies were implicated in an international price-fixing and bid-rigging conspiracy.  The domino effect began with the 2011 charging of Furukawa Electric Co. for its involvement in price-fixing and bid-rigging in the automotive wire harness industry.[22]  Through a string of leniency-plus applications, the DOJ has since charged forty-three other companies and sixty-four individuals—the most recent of which occurred in November of 2016.[23]  The corporate fines in the U.S. alone have totaled over $2.8 billion, making it the largest investigation in antitrust history.[24]

The auto-parts investigation has received much attention, in part because of the number of consumers impacted by these conspiracies.  When the auto-parts companies agreed to allocate their supply of parts and coordinate price adjustments, they caused auto manufacturers to pay higher prices;  these price increases were, in turn, passed along to consumers.  The generic drug conspiracy involves a product that reaches consumers without integration, making the potential for fines even greater. 

Growth in Store for Generic Drug Probe

Even at this early stage, the generic drug investigation is poised to reach similar magnitude to the auto-parts scandal.  Apart from Doxy, Glyburide, and various insulin medications, the Aurobindo complaint cited a report concerning prices of over 1,200 generic drugs,[25] and the aforementioned congressional report has cited price increases of over 4,000%.[26]  Several other pharmaceutical companies have already received subpoenas.[27]  Experts expect the case to grow exponentially in 2017, and perhaps to reveal additional conspiracies to the allegations that have already come to light.[28]  Indeed, in addition to the pharmaceutical companies themselves, states have begun seeking pricing and promotional information from wholesalers and pharmacies.[29]  Though not yet charged, the insulin class action suggests improper conduct by PBMs CVS Caremark, Express Scripts, and OptumRx.[30]

Media coverage will also continue to fuel the fire, as the public’s outrage against the pharmaceutical industry has already been sparked.  The price rise of the EpiPen went viral in 2016, causing several prominent figures—including Hillary Clinton and Bermie Sanders—to publically call on Mylan to lower prices.[31]  Mylan is now under investigation by the FTC for conduct relating to the EpiPen price spikes.[32] 

Court-documented references to emails, telephone calls, and text messages suggest that individuals will continue to be implicated as well.  This comes as no surprise, as top-level officials in the incoming administration have suggested that the Department of Justice will continue to “follow the Yates Memo’s mandate to pursue individuals in corporate cases.”[33]  The DOJ and the FBI also have taken a strong stance on individuals’ involvement in these conspiracies, as evidenced by official statements on Glazer’s and Malek’s cases.  “[T]hese two executives sought to enrich themselves at the expense of sick and vulnerable individuals,” said Brent Snyder, a Deputy Assistant Attorney General in the DOJ’s Antitrust Division.[34]

Conclusion

The Department of Justice has only begun to uncover the reaches of corruption in the generic drug industry.  The potential impact of these schemes is succinctly illustrated in a text message exchange between Glazer and Malek: upon learning that the conspirators had earned nearly half a million dollars in profit in one day, Malek responded, “That’s it?”[35]  And the DOJ dominos are fully in place—“We are fully cooperating with all aspects of the Department of Justice’s continuing investigation,” said Heritage.[36]



[1]  Renu Lal, Patents and Exclusivity, FDA/CDER SBIA Chronicles, May 19, 2015, http://www.fda.gov/downloads/drugs/developmentapprovalprocess/smallbusinessassistance/ucm447307.pdf.

[2]  Connecticut et. al. v. Aurobindo Pharma USA, Inc. et. al., 3:201-CV-02056 (D.C. Conn., December 15, 2016) (Compl. ¶ 1).  Nineteen other states joined the suit as plaintiffs: Delaware, Florida, Hawaii, Idaho, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Nevada, New York, North Dakota, Ohio, Pennsylvania, Virginia, and Washington.  Id.

[3]  Id.

[4]  Id. at ¶ 8.

[5]  Id. at ¶¶ 135-40.

[6] Aurobindo Pharma et. al., 3:201-CV-02056 (Compl. ¶¶ 141-47).

[7]  Kate Thomas, 20 States Accuse Generic Drug Companies of Price Fixing, New York Times (December 15, 2016), available at http://nyti.ms/2hKFyVm.

[8]  Chaires et. al. v. Sanofi U.S. et. al., 1:17-CV-10158 (D.C. Mass., January 30, 2017) (Compl.).

[9]  Id. at ¶¶ 3-4.

[10]  Id. at ¶ 11.

[11]  See U.S. v. Malek, 2:16-CR-00508 (E.D. Pa.); U.S. v. Glazer, 2:16-CR-00506 (E.D. Pa.).

[12]  Jeremy Roebuck, Ex-N.J. Pharma Execs Admit to Fixing Generic Drug Prices, The Philadelphia Inquirer (January 9, 2017), available at http://www.philly.com/philly/news/new_jersey/20170110_Ex-N_J__pharma_execs_admit_to_fixing_generic_drug_

prices.html.

[13]  See Malek, 2:16-CR-00508 (E.D. Pa.); Glazer, 2:16-CR-00506 (E.D. Pa.).

[14] Roebuck, supra.

[15]  United States Department of Justice, Antitrust Division., Frequently Asked Questions Regarding the Antitrust Division’s Leniency Program and Model Leniency Letters (Jan. 26, 2017), available at http://www.justice.gov/atr/page/file/926521/download.

[16]  Id.

[17]  Id.

[18] Id.

[19] Id.

[20]  Id.

[21]  Id.

[22]  See U.S. v. Furukawa Electric Co., Ltd., 2:11-CR-20612 (E.D. Mich. 2011), available at https://www.justice.gov/atr/case-document/information-211.

[23]  DOJ Auto Parts Cartel Investigation Chart (Thomson Reuters 2017), available via Practical Law, http://us.practicallaw.com (the chart is updated quarterly).

[24]  Id.

[25]  Aurobindo Pharma et. al., 3:201-CV-02056 (Compl. ¶ 64).

[26]  Cummings and Sanders, supra.

[27]  Thomas, supra.

[28]  See David McLaughlin and Caroline Chen, U.S. Charges in Generic Drug Probe to be Filed by Year-End, Bloomberg (November 4, 2016), available at https://www.bloomberg.com/news/articles/2016-11-03/u-s-charges-in-generic-drug-probe-said-to-be-filed-by-year-end.

[29]  Eric Kroh, Generic Drug Price-Fixing Suits Just Tip of the Iceberg, Law 360 (January 6, 2017), available at https://www.law360.com/articles/877707/generic-drug-price-fixing-suits-just-tip-of-the-iceberg.

[30]  See, e.g., Chaires et. al., 1:17-CV-10158 (Compl. ¶ 169).

[31]  Tara Parker-Pope, How Parents Harnessed the Power of Social Media to Challenge EpiPen Prices, New York Times (August 25, 2016), available at http://well.blogs.nytimes.com/2016/08/25/how-parents-harnessed-the-power-of-social-media-to-challenge-epipen-prices.

[32]  David McLaughlin et. al., Mylan Faces U.S. Antitrust Investigation on EpiPen, Bloomberg (January 30, 2017), available at https://www.bloomberg.com/news/articles/2017-01-30/mylan-faces-u-s-antitrust-investigation-on-epipen-practices.

[33]  Jody Godoy, Sessions Hints Yates Memo, Fraud to Stay on DOJ Radar, Law 360 (January 11, 2017), available at https://www.law360.com/articles/879816/sessions-hints-yates-memo-fraud-to-stay-on-doj-radar.

[34]  Press Release, U.S. Department of Justice, Former Top Generic Pharmaceutical Executives Charged with Price-Fixing, Bid-Rigging, and Customer Allocation Conspiracies (December 14, 2016), available at https://www.justice.gov/opa/pr/former-top-generic-pharmaceutical-executives-charged-price-fixing-bid-rigging-and-customer.

[35]  Tom Schoenberg et. al., U.S. Generic Drug Probe Seen Expanding After Guilty Pleas, Bloomberg (December 14, 2016), available at https://www.bloomberg.com/news/articles/2016-12-14/u-s-files-first-charges-in-generic-drug-price-fixing-probe.

[36]  Id.