Discover more from BIG by Matt Stoller
Monopolies Make It Harder to Have a Baby
Fertility drug clomiphene citrate is in shortage. It's also been monopolized by a private equity-owned pharmaceutical firm. Why are there Martin Shkreli's everywhere?
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Today’s piece is about how monopolization facilitates private equity looting. I look at this problem through the lens of a shortage in an infertility drug called clomiphene citrate.
The Asian tiger mosquito, an aggressive biter that loves feeding on people and is linked to more than 20 different diseases, is as its namesake suggests from Asia. But like a lot of invasive species, the tiger mosquito has become increasingly prevalent in all sorts of new areas, like southern Europe, because of the intercontinental trade in used tires that carries these bugs with them. Ragweed, which triggers hayfever, is another immigrant to Europe, having come in bins of grain intended as bird feed.
There are at least 10,000 invasive species in Europe, and the rate of growth is accelerating every year. Why? Well, a key reason is the natural ecosystem has been weakened by pollution and climate change. It’s not that the Asian tiger mosquito may not have come anyway, but it probably wouldn’t have had as easy time doing it.
And that brings me to private equity and medical shortages. I just learned that pharmacists are complaining that they can’t get their hands on a generic drug named clomiphene citrate, which is used to treat infertility, specifically to increase the hormones that support the growth and release of a mature egg in women. Clomiphene citrate was discovered in 1967, so it’s been a cheap widely available generic since the 1990s. It’s also a relatively small scale drug, just $10 million or so is sold annually.
But late last year, the generic version, made by Endo International’s Par Pharmaceuticals subsidiary, discontinued production. Endo went bankrupt in an opioid settlement, and sold its clomiphene citrate business line to Cosette Pharmaceuticals, which is owned by private equity firm Avista Capital Partners. Michael A. Kaminski, a clinical research pharmacist, described what happened next as “both a drug shortage and an evolving affordability battle.” The generic had been covered by insurance and cost less than $15 for a thirty day supply. The new brand, Clomid, is often not covered at all, and can cost between $90-$160 for a consumer. (The price pharmacists pay is about 10 times what it was, I’m told by a reliable source.)
Basically, this small drug got Martin Shkreli-fied, meaning that a hedge fund masquerading as a pharmaceutical firm bought an off-patent drug and then raised prices by a massive amount. It’s a bit like an invasive species displacing a native plant or animal. In this case, the invasive species is Avista Capital Partners, and it used its financial muscle to take over this small drug class and jack up prices massively.
About 20% of Americans have trouble conceiving children, and treating that condition is one of the more wonderful advances in medical science over the last fifty years. So a shortage like this does suck for people who need the drug. The new branded version Clomid will go from $10 million too $100 million in revenue, and anything in the health care sector with millions of waste instead of billions isn’t a big macro problem. So it’s not going to get a lot of notice. There are also alternatives to Clomid, so no one’s going to frame this as some sort of emergency.
But this kind of shortage/price hike is pervasive, with hundreds of drugs and supplies unavailable or much more expensive. And slowly, quietly, health care in America gets degraded with every one of them. Why is this happening? Well, I could point at the predation of the financiers, like an invasive species. But why did Par Pharmaceuticals have to sell its generic line of business? After all, it was a monopolist as a generic producer. Couldn’t it have just raised prices on its own? What in the environment so weakened the firm that it had to sell its line of business?
I called Par Pharmaceuticals to ask about this situation, but no one picked up the phone. And generally speaking relatively few people within generic pharmaceutical firms know anything about how pricing works, and those who know don’t like to talk.
However, there is an answer, and it is right in Endo’s investor documents. The market power of its dominant customers, which are known as power buyers, suppresses prices among generics below the point where it is profitable to make them. In 2022, Endo told investors that “our current customer group reflects significant consolidation in recent years, marked by mergers and acquisitions and other alliances.” AmerisourceBergen, McKesson, and Cardinal Health comprised 90% of the firm’s customer base - 36%, 32%, and 22% of the firm’s revenue, respectively.
And this concentration hurts. “Consolidations of our customer base described above under the heading ‘Major Customers’ have resulted in increased pricing and other competitive pressures on pharmaceutical companies, including us,” Endo wrote. The net result is that these power buyers can “extract various demands, including without limitation price discounts, rebates and other restrictive pricing terms.” (Part of the problem is Medicaid, which demands big rebates on generics, but the larger problem - 90% of it - are the wholesalers.)
Endo also mentioned that it was forced into distribution service contracts with “some wholesalers and distributors” to give them all information about the entire marketplace. And that it had to pay chargebacks, rebates, service fees, sales incentives, and returns and allowances. Basically, Endo is like a third-party seller on Amazon, forced to pay endless fees to the entity controlling its access to the market. So how much did that affect the firm?
In 2021, the firm’s revenue was about $3 billion a year, with its generics business at roughly $800 million. Its total set of payments/rebates/chargebacks to these power buyers was $600 million. It didn’t break down the amount of these fees in the generics business, but the picture was pretty clear. It was so bad that Endo has been selling off its generics businesses for the past few years. Indeed, the firm auctioned off its Chestnut Ridge, New York and Irvine, California manufacturing facilities in 2021.
Endo couldn’t raise prices, because the power buyers who control 90% of its purchases would have simply taken that money back through extractive fees. And had Endo refused to sell the product, it wouldn’t have mattered. Clomiphene citrate is a relatively small drug by revenue, so the big wholesalers would barely have noticed it’s in shortage, though they might have retaliated against Endo in other ways.
And here the size of the wholesalers is what matters. If the customers of those wholesalers can’t get clomiphene citrate, so what? Their customers - pharmacists- have nowhere else to go, and are usually locked into exclusive contracts with a dominant wholesaler. It’s like Amazon, which doesn’t care if you refuse to sell your alarm clock on its site, it isn’t going to alter its sales policies even if it’s the only alarm clock on the market.
In other words, being the only producer of a generic pharmaceutical doesn’t really give you pricing power if you have other generic drugs you have to sell to the same intermediaries. There is no market at this point for most generics, there is price-setting by a centralized power buyer that manages thousands of products. (Indeed, this dynamic, where power buyers see the world in terms of portfolios of drugs, but enforcers have traditionally only looked at a single drug class as a market, is at the heart of the conflict in the Federal Trade Commission’s Amgen-Horizon merger challenge.)
Then, like an invasive species coming into a weakened ecosystem, a private equity firm swooped in and changed the medicine’s category from generic to branded, which puts the medicine in a different distribution system. Since Clomid is no longer a generic, it isn’t subject to many of the fees that the wholesalers impose on its generic suppliers. The new firm raised the medicine’s price by 10x, instead of what should happen, which was a more modest price increase of the generic.
Normally, this kind of predation would be disciplined by a generic producer coming into the market. But because of the fees from wholesalers, it’s just not worth it for any generic producer to come into the market. The Martin Shkreli-fication of this medicine, as bad as it sounds, is actually the solution to the shortage, because our market structures make price gouging the only profitable model to make treatments.
Taking a step back, the monopolization creates further social problems. For instance, one other dynamic worth mentioning, put right in the investor docs once again, is that offshoring of generic production is caused by power buyer consolidation. Endo sold three of its domestic factories in 2021 due to financial pressure, and as a result, it is now wholly dependent on foreign third party manufacturers.
Certain of our manufacturers currently constitute the sole source of our products. For example, Teikoku Seiyaku Co., Ltd. is our sole source of LIDODERM. As a result of the sale of our manufacturing facilities and related assets in Chestnut Ridge, New York and Irvine, California, our reliance on third party manufacturers has increased and we are working with new third party manufacturers that we have not worked with before. Because of contractual restraints and the lead-time necessary to obtain FDA approval and/or DEA registration of a new manufacturer, there are no readily accessible alternatives to these manufacturers and replacement of any of these manufacturers may be expensive and time consuming and may cause interruptions in our supply of products to customers.
Power buyers are the reason for shortages in everything from baby formula to hospital drugs and supplies to generic prescription drugs dispensed outside of hospitals. And it’s for the same reason that we had an opioid crisis, and why Americans can’t get the attention deficit disorder treatment Adderall - the power of dominant wholesalers AmerisourceBergen, McKesson, and Cardinal Health has caused a shortage, because they are simply too big to notice their monopolistic pricing practices are crushing the market. In fact, being a generic manufacturer is very much like being a third party business that sells through Amazon, or any other power buyer.
The specific buyer might be different, but the basic problem is consolidation that drives prices below the level where it is profitable to make things. All of these dynamics are fixable, if our policymakers start recognizing the source of the problem. So this shortage, very minor but similar to many others, is why anti-monopoly should be at the heart of both political parties.