Amid intense pressure to lower drug prices, policymakers in the pharmaceutical industry have leveraged regulations to increase product competition and lower prices by creating an expedited approval process for generic drugs.
But new research from the University of Notre Dame, Indiana University and the University of Minnesota shows such competition-inducing regulations may encourage companies to relax quality standards during the manufacturing process, which may put more patients at serious health risk due to lower-quality products and more product recalls. It also suggests generic drug makers may be underreporting discretionary recalls due to competitive pressures.
“Product competition, managerial discretion and manufacturing recalls in the U.S. pharmaceutical industry” is forthcoming in the Journal of Operations Management from Kaitlin Wowak, assistant professor of information technology, analytics and operations at Notre Dame’s Mendoza College of Business, along with George Ball from Indiana University’s Kelley School of Business and Rachna Shah from the University of Minnesota’s Carlson School of Management.
The team examined 939 pharmaceutical recalls across 64 firms from 2002 to 2014. Their research is the first to measure product competition in the pharmaceutical industry using data from the FDA’s Orange Book, published annually since passage of the Drug Price Competition and Patent Term Restoration Act of 1984. Commonly referred to as the Hatch-Waxman Act, it is a prime example of competition-inducing regulation intended to lower drug prices by fast-tracking the approval process for generic drugs. The Orange Book contains all approved pharmaceutical products for sale in the U.S. categorized by whether the drug gained approval using the original (or “pioneer”) drug pathway or the Abbreviated New Drug Application, which is an expedited drug approval process reserved only for generic drugs.
For the expedited process, manufacturers only have to show that the generic drug is bioequivalent to the original, pioneer drug instead of having to conduct expensive clinical tests and trials themselves. In other words, manufacturers of generic drugs are not allowed to change the composition of the drug — that is, what is being made — but have discretion about how the drug is made as long as they adhere to Current Good Manufacturing Practices (CGMP), which are general manufacturing guidelines. CGMPs mandate, for example, that firms train their employees, but not which training techniques to use or how rigorously employees should be trained — these decisions are made by a firm’s management.
The researchers show that when more generic drugs enter the market and product competition increases, not only does product quality suffer, but managers may also be tempted to look the other way when less severe, more subjective product quality issues arise.
“We find that product competition is not only associated with more product recalls, but this relationship is contingent on the amount of managerial discretion surrounding the recall decision,” Wowak says. “Specifically, we find that product competition is positively associated with high-severity, low-discretion recalls — such as Class 1 and Class 2 recalls, which can cause death or medically reversible harm to consumers — and negatively associated with low-severity, high-discretion recalls — such as Class 3 recalls, which include minor mislabeling issues.”
The intense attention to reducing drug prices by increasing product competition may have bred a culture of reduced attention to quality standards in manufacturing, which has resulted in lower-quality pharmaceutical products. Although drug prices have decreased significantly over the last few years, the U.S. government continues to seek ways to increase drug competition in its goal to drive down prices even further. However, Wowak says, “Federal regulators seem to be unaware of product quality risks that accompany high product competition enabled by the generic drug approval process.”
Wowak says her team’s study suggests what is being made may be equally important as how it is being made. They outline three practical, regulatory implications.
“First, the FDA may need to require that firms include more detailed and precise documentation to demonstrate how each generic drug will be made and ensure it is comparable to how the related original (or ‘pioneer’) drug is made,” she says. “Second, the FDA may consider more frequent and rigorous plant inspections for firms that have a significant percentage of generic products in their portfolio. Finally, for firms that face high product competition, the FDA may need to more closely scrutinize its customer-reported complaints database.”
Contact: Kaitlin Wowak, katie.wowak@nd.edu