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The American Journal of Managed Care April 2018
Delivering on the Value Proposition of Precision Medicine: The View From Healthcare Payers
Jane Null Kogan, PhD; Philip Empey, PharmD, PhD; Justin Kanter, MA; Donna J. Keyser, PhD, MBA; and William H. Shrank, MD, MSHS
Care Coordination for Children With Special Needs in Medicaid: Lessons From Medicare
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Jason D. Buxbaum, MHSA; Michael E. Chernew, PhD; Machaon Bonafede, PhD; Anna Vlahiotis, MA; Deborah Walter, MPA; Lisa Mucha, PhD; and A. Mark Fendrick, MD
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Jeffrey Sullivan, MS; Julia Thornton Snider, PhD; Emma van Eijndhoven, MS, MA; Tony Okoro, PharmD, MPH; Katharine Batt, MD, MSc; and Thomas DeLeire, PhD
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Justin Kindy, FSA, MAAA; David Roer, MD; Robert Wanovich, PharmD; and Stephen McMurray, MD
Financial Burden of Healthcare Utilization in Consumer-Directed Health Plans
Xinke Zhang, PhD; Erin Trish, PhD; and Neeraj Sood, PhD
Progress of Diabetes Severity Associated With Severe Hypoglycemia in Taiwan
Edy Kornelius, MD; Yi-Sun Yang, MD; Shih-Chang Lo, MD; Chiung-Huei Peng, DDS, PhD; Yung-Rung Lai, PharmD; Jeng-Yuan Chiou, PhD; and Chien-Ning Huang, MD, PhD
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Thomas D. Sequist, MD, MPH; Alison M. Holliday, MPH; E. John Orav, PhD; David W. Bates, MD, MSc; and Bradley M. Denker, MD
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Limited Distribution Networks Stifle Competition in the Generic and Biosimilar Drug Industries
Laura Karas, MD, MPH; Kenneth M. Shermock, PharmD, PhD; Celia Proctor, PharmD, MBA; Mariana Socal, MD, PhD; and Gerard F. Anderson, PhD

Limited Distribution Networks Stifle Competition in the Generic and Biosimilar Drug Industries

Laura Karas, MD, MPH; Kenneth M. Shermock, PharmD, PhD; Celia Proctor, PharmD, MBA; Mariana Socal, MD, PhD; and Gerard F. Anderson, PhD
A limited distribution network is a pharmaceutical distribution strategy that some drug companies have capitalized upon to obstruct generic and biosimilar competition.
ABSTRACT

A limited distribution network (LDN) restricts the distribution channel for a pharmaceutical drug to 1 or a very small number of distributors. This strategy may allow for more effective allocation of drugs in shortage and is purported to help ensure the safe distribution of high-risk drugs to small patient populations. However, in recent years, some drug companies, including Turing Pharmaceuticals, have used LDNs to prevent generic and biosimilar companies from accessing samples of drug products necessary to perform testing required by the FDA for generic and biosimilar drug applications. LDNs also hamper provider access to pharmaceuticals and facilitate price gouging. This paper synthesizes existing knowledge on the misuse of LDNs to thwart competition, clarifies the relationship between limited distribution and the FDA Risk Evaluation and Mitigation Strategies, discusses proposed federal legislation under consideration to address this issue, and offers several policy options to remedy this anticompetitive practice, including authorizing the FDA to require the sale of approved drug products to generic and biosimilar drug developers.

Am J Manag Care. 2018;24(4):e122-e127
Takeaway Points

Drug companies employ limited distribution networks (LDNs) to obstruct access to drug samples sought by competitor companies in order to conduct testing necessary to submit a generic or biosimilar drug application to the FDA. 
  • The resulting delays in generic and biosimilar market entry translate to sizable lost savings for US payers and patients. 
  • A common misconception is that LDNs are required as part of FDA Risk Evaluation and Mitigation Strategies (REMS); in fact, they are not. Some drug companies nonetheless use REMS to justify access restrictions via LDNs. 
  • The FDA currently has no authority to compel drug companies to sell samples of drugs in LDNs to competitor companies. 
  • There are 2 bills currently under consideration in Congress to remedy the misuse of LDNs and REMS for anticompetitive purposes: the CREATES Act of 2017 and the FAST Generics Act of 2017.
Limited distribution networks (LDNs) are established when a drug manufacturer contracts with 1 or a limited number of drug distributors. LDNs can facilitate effective allocation of a drug by allowing the pharmaceutical company to more tightly manage the supply chain, minimize the impact of drug shortages, and reduce the amount of unused product in the supply chain. Manufacturers and some specialty pharmacies assert that restricting the number of drug distributors in a limited distribution model enables safe and effective drug delivery to small patient populations and allows for “high-touch care” that may include patient education, counseling, or instruction on administration techniques; data collection and reporting; and patient monitoring for adherence and adverse effects. Drug companies also benefit financially from savings on inventory management and distribution fees.1 The traditional pharmaceutical supply chain is an open network in which a pharmaceutical company makes a drug broadly accessible through a distribution channel that usually includes 1 of the major wholesalers—AmerisourceBergen Corporation; Cardinal Health, Inc; or McKesson Corporation—and various dispensing pharmacies, including but not limited to retail, clinic, nursing home, hospital, mail order, and specialty pharmacies. LDNs, also referred to as limited distribution chains, closed distribution systems, controlled distribution systems, or restricted distribution systems, limit a drug’s distributors to 1 or a small number of select pharmacies or specialty wholesale distributors, often entirely circumventing the major pharmaceutical wholesalers.1 We broadly define pharmaceutical distributor to include all parties that handle a drug between the manufacturer and the patient end user. LDNs composed of just 1 distributor are referred to as exclusive distribution networks (EDNs)2; this distribution strategy has the greatest anticompetitive impact because it accords the drug company the highest degree of control over distribution and sales. 

Members of Congress became aware of LDNs when they investigated why some drug companies were able to raise prices on off-patent drugs and no competitors materialized. The US Senate Special Committee on Aging found evidence from internal documents revealing the intentional use of LDNs by Turing Pharmaceuticals to thwart competition and accomplish price gouging: “Restricted distribution…was a deliberate part of Turing’s plan to defend its shocking price increase and subsequent increased revenue against potential competition.”3 The director of patient access at Turing Pharmaceuticals has commented that if a generic drug maker had sought to purchase Daraprim, the antiparasitic drug now well-known after its large price increase from $13.50 to $750 per pill, he would not have approved the purchase on the grounds that his company did not want to facilitate competition that could undercut the price of Turing’s drug.4 The former general counsel of Turing Pharmaceuticals testified before the US Senate Special Committee on Aging that “in the case of Daraprim, retention of a new specialty pharmacy distributor to carry on a closed distribution system was considered an integral part of the company’s desire to block a generic entrant for at least 3 years.”5 The Senate Aging Committee report found that other companies have used LDNs with a similar intent: to obstruct access to drug samples that are sought by competitor companies in order to conduct testing necessary to submit a generic or biosimilar drug application to the FDA.

LDNs and REMS 

Some drug companies point to the FDA Risk Evaluation and Mitigation Strategies (REMS) as their primary rationale for creating an LDN or EDN. However, this ignores the facts that LDNs are not required as part of REMS and that many of the drugs with LDNs are not considered a great enough safety risk by the FDA to warrant REMS.

The Food and Drug Administration Amendments Act (FDAAA) of 2007 authorized the FDA to require a REMS for any drug or drug class that poses a serious safety risk. REMS are essentially risk management plans that help ensure that the benefits of high-risk drugs to patients outweigh their risks.6 REMS may contain 1 or more of several elements: a medication guide, a communication plan, elements to assure safe use (ETASU), and an implementation system. ETASU establish requirements for the drug’s safe distribution and dispensation, such as permissible locations for drug administration, prescriber training and certification, pharmacy training and certification, patient monitoring, and documentation of conditions for safe use.6 REMS may include an implementation system that places responsibility on the drug manufacturer to oversee the operation of ETASU and ensure their execution.

The manufacturer is obligated to construct and implement REMS in accordance with FDA requirements. Although REMS may require the sale of drug products only to named patients with a valid prescription and may prohibit a product’s sale in retail pharmacies, the FDA neither recommends nor mandates a restriction on the number of pharmacy distributors as a means to achieve drug safety. As of March 2018, the FDA database of approved REMS contained 74 drugs,7 but our preliminary research of limited distribution drug lists made publicly available by specialty pharmacies suggests that more than 100 drugs have been placed in manufacturer-imposed LDNs. The number can change rapidly as drugs are included in LDNs.

When the FDAAA was enacted in 2007, Congress foresaw that REMS could be used to justify access restrictions. To address this potential problem, a provision of the FDAAA specifies that “no holder of an approved covered application shall use any element to assure safe use required by the Secretary [of HHS] under this subsection to block or delay approval” of abbreviated new drug applications (ANDAs) by drug developers.8 Despite the existence of this provision in the law, LDNs are being used to deter generic and biosimilar development and market entry.



 
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