Asymmetrical Information - Megan McArdle

05.17.13

Those Generic Drugs May Not Have Been What You Thought They Were

Years of abuses at Ranbaxy raise worries about the FDA's oversight of the generics market.

This is the week for arguments I have previously dismissed coming back to bite me. I've already admitted that I dismissed Tea Party complaints about extra IRS scrutiny because really, who would do that? Now along comes another story that is causing me to reassess my priors: it turns out that Indian generic giant Ranbaxy has been selling generic “drugs” that didn't actually work.

Complaining that generic drugs from abroad are nothing but cheap fakes has long been a staple of free-trade opponents, and of course, pharmaceutical manufacturers trying to protect their products from foreign competition. While it's long been clear that there was some truth to the horror stories—don't buy drugs on the Internet, OK?—I've been pretty dismissive of complaints about Indian generics giants like Ranbaxy and Cipla. These guys are huge companies with brands to protect. Moreover, they're inspected by the FDA. Why would they risk it all by adulterating their product?

Well, the fact is they did, and the answer is presumably “to save money.” 

In the late 1980s several generic-drug companies were caught fabricating data and bribing FDA officials to gain approval. In the scandal's wake, the FDA tightened regulations. It required that a company make three large "exhibit" batches to demonstrate that it could dramatically scale up its manufacturing, undergo inspection, and use an independent company to perform bioequivalence tests before an ANDA was approved. The purpose, says David Nelson, who exposed the 1980s scandal as a senior investigator for the House Energy and Commerce Committee, from which he retired in 2009, was to "prevent the systematic submission of false information" to get FDA approval.

The ANDA offered a lucrative reward for the company that risked almost certain litigation by first challenging a patent. If successful, the company got six months of exclusive sales after the patent lapsed, allowing the generics company to charge up to 80% of the brand-name price during that period. After that, other generics companies could jump in, and the price would drop to about 5% of the original price. Being first was the real jackpot. Consequently, first-to-file status became such an obsession that generic-drug company executives camped out in the FDA parking lot to file their paperwork first.

Ranbaxy learned how to game this system, according to former employees. To hasten the pace of its applications, Ranbaxy sometimes skipped a crucial intermediate step. Instead of making three medium-size exhibit batches and testing those for bioequivalence and stability, as required, Ranbaxy tested earlier and much smaller research-and-development batches that were easier to control and less costly to make. In some FDA applications, it represented these as much larger exhibit batches and presented the data as proof. And then there was the ultimate shortcut: using brand-name drugs as stand-ins for its own in bioequivalence studies.

These deceptions greatly accelerated the pace of the company's FDA applications. They were also a grave public-health breach. Once Ranbaxy got FDA approval, it leaped straight into making commercial-size batches without any meaningful dry runs. The test results on file with the FDA were meaningless, and the drugs Ranbaxy was actually selling on the U.S. market were an unknown quantity, having never been comprehensively tested before.

The worst abuses, however, were in emerging markets, where regulatory supervision was weak. But the article raises questions about how good our regulatory supervision is of these companies. It's simply not possible to provide the kind of oversight that the FDA does to companies in the US.  

Now, in the case of European pharmaceutical manufacturers, who are already under the supervision of their own quite strict regulatory agencies, that doesn't really matter. But when it comes to drugs from countries with weaker regulatory regimes, it seems clear that it does. Yes, Ranbaxy eventually got caught.  But for years, they sold drugs of uncertain quality. It's hard to say how many people they killed, but it's unlikely that the number is zero, or even near-zero.  

It's possible that we should rethink our willingness to approve drugs from companies who can't be inspected the way rich-world firms are. Yes, I have my problems with the FDA approval process, but even many libertarians are fine with this basic part of the FDA job: making sure that the drugs people are selling contain the ingredients they claim, at the concentrations written on the package. It seems that they have a hard time doing this job with firms in foreign countries. And it took a very long time for the FDA to get tough with Ranbaxy, despite evidence of repeated violations.

It's also possible that it's time for a broader rethink: why are the companies, rather than the FDA itself, conducting the clinical trials required to approve a drug? The answer seems to be that clinical trials are very expensive. But the clinical trials get paid for anyway, by all the taxpayers who take drugs at some point in their lives--which is to say, most taxpayers. The tradeoff hardly seems worth the obvious problems with effectively asking industry to conduct their own inspections.  

Ranbaxy has pled guilty and says it is reformed. But I'm not sure I'm willing to take their word for it. Nor, I hope, will our regulators.