On October 12, 2015, the Antitrust Bureau of New York Attorney General’s Office sent a letter of inquiry to Turing Pharmaceuticals asking about its 5000 percent increase in the price of its recently acquired AIDS drug Daraprim.  Among other things, the letter suggests Turing is limiting distribution of the drug only through a small number of specialty pharmacies rather than a broader distribution.  This distribution, the letter suggests, is preventing generic manufacturers from acquiring sufficient amounts of the drug in order to do the bioequivalency studies required for the drug to enter the generic market. The letter said that this may be an antitrust violation.

Daraprim is apparently not expensive to manufacture and is needed to save the lives of immunosurpressed patients.  Turing isn’t exactly a model corporate citizen.  But are the price increase and limited distribution antitrust violations? Probably not.

Monopolists are generally free to charge the most they can for their products.  They are also generally free to sell their products to whom they wish.  And they are not under a duty to select a distribution system that creates or enhances intrabrand competition.  There are cases, however, that hold that if a company does in fact create downstream or adjacent market competition, it can illegally monopolize that market if it pretextually changes course of dealing.  In Kodak, Kodak refused to sell aftermarket parts to independent service providers.  The Supreme Court held that that activity could state a cause of action under Section 2 of the Sherman Act.  Under a Kodak theory, the previous owner of Daraprim created intrabrand competition by widely distributing the product and pricing it at an affordable price.  Turing destroyed that distribution system, limiting intrabrand competition and raising entry barriers, for the sole purposes of sustaining its price increase.

Kodak is nearly dead as a doctrine, however.  And it’s not clear that the new distribution system will in fact foreclose generics from obtaining product.  They may very well be able to acquire it from the specialty pharmacists.  And lastly, the State may not be able to show that the inability of generics to enter is causally connected to the distribution channel as opposed to, say, the costs of entry themselves.  The New York Times estimates that between 8,000 and 12,000 Daraprim prescriptions get filled a year.  Even at $750 a pill those sales may not be enough to support generic entry.  And given the low cost of producing Daraprim, Turing could easily drop the price of Daraprim and destroy a generic’s investment thesis.  That prospect will certainly deter entry.  It seems like this case will be a bit of a tough slog for New York.