Biden Antitrust Enforcers Should Look at Pharmaceutical Distributors

COMMENTARY

Interest in antitrust enforcement has gained considerable steam in recent years, primarily driven by the rise of enormous tech-centric companies like Google, Amazon and Facebook. President Biden’s appointment of aggressive enforcers like Lina Khan at the Federal Trade Commission and Jonathan Kanter at the Department of Justice has given hope to those who believe that the concentration of power in the hands of a few corporations is harmful to American consumers and our country as a whole.

But, while it may be more intellectually stimulating to debate how to shape a new antitrust enforcement regime to fit today’s digital-centric economy, President Biden — and the country — would be far better served by breathing new life into traditional antitrust enforcement in sectors that impact Americans’ pocketbooks on a daily basis. And they should start with the pharmaceutical supply chain. 

Prescription drugs are literally a matter of life or death in many cases. And in the last few decades, the price of prescription drugs has skyrocketed beyond any reasonable inflationary metric. 

One problem, beyond the reach of antitrust enforcement in its current state, is that the government grants and, through the judiciary, enforces literal monopolies for pharmaceutical manufacturers. There are myriad problems with that statutory and regulatory regime, but they are largely of Congress’ making and are up to Congress to solve.

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But, when one looks one step further down the supply chain, there are three absolutely enormous companies that stand between the manufacturers of medicines and the pharmacies that distribute medicines to consumers. The Big Three are all in the top 15 companies on the Fortune 500 and, combined, account for more than $500 billion in annual revenue. 

These companies play an important role in the distribution of medicine from manufacturer to pharmacy but, in recent decades, they have consolidated to a degree that is unhealthy for the country and does real harm to consumers. In 1975, there were approximately 200 wholesalers in the United States; today, the Big Three control 95% of the wholesale pharmaceutical market in this country.

How does that significant degree of consolidation manifest itself? It is primarily in the generic drug market, which accounts for about 90% of the prescriptions filled in this country. Brand-name drugs have a single seller for a given drug, but in the generic industry there are literally hundreds of manufacturers, all of whom could theoretically manufacture a given drug. As a result, there is a monopsony situation, the inverse of a monopoly, where there is a single seller.

The monopsony means that the many manufacturers are competing to sell to just three buyers of their products. That enables the buyers to use their market power to drive down the price that they pay for a drug. As a result of that imbalance, the consolidated wholesalers are able to capture 19 times the gross profit margin on a generic drug than they do on a brand-name drug.

The appointment of aggressive enforcers like the FTC’s Khan and the DOJ’s Kanter has heartened many advocates of more a robust use of antitrust powers to protect consumers. While pharmaceutical wholesalers are certainly less of a headline-grabbing target for antitrust enforcement than a case against a tech giant would be, the real-world impact on average Americans would be far greater. 

Not only would an investigation of the pharmaceutical supply chain by antitrust enforcers send a signal that the Biden administration is unafraid to take on some of the world’s biggest companies, it would also make a difference in one of the most salient political issues of the day: drug prices.

Cesar Chavez is an Arizona state representative representing the 29th Legislative District. He immigrated to the United States at the age of three. Cesar is also the vice president for membership for the National Hispanic Caucus of State Legislators and he serves on the House Appropriations and Commerce Committees at the Arizona State Legislature. Follow him on Twitter @CesarChavezAZ