Welcome to Realbusiness 101.

Earlier today, we learned that when faced with a regulatory deadline to test your products for lead, a good course of action is to lobby to delay or reverse the requirement. This afternoon, we learn the best course of action when your highly-profitable drug is about to lose patent protection. We’re all familiar with the tactic of simply making little changes to a drug and declaring the new version marginally better. Jonathan Rockoff explains that the minor improvement strategy can be combined with pricing tactic to steer consumers and insurers away from generics:

Twice this year, Cephalon Inc. has sharply raised the price of its narcolepsy drug Provigil. The drug is now 28% more expensive than it was in March and 74% more expensive than four years ago, according to DestinationRx, a pharmaceutical software and data provider. The Frazer, Pa., company has said in investor presentations that it plans to continue to raise the price.

The Provigil price increases — the drug’s average wholesale price is now $8.71 a tablet — are an extreme example of a common tactic pharmaceutical companies employ in the U.S. to boost profits and steer patients away from cheaper generics.

It works like this: Knowing that Provigil will face generic competition in 2012 as its patent nears expiration, Cephalon is planning to launch a longer-acting version of the drug called Nuvigil next year. To convert patients from Provigil to Nuvigil, Cephalon has suggested in investor presentations it will price Nuvigil lower than the sharply increased price of Provigil.

By the time copycat versions of Provigil hit the market the company is banking that most Provigil users will have switched to the less-expensive Nuvigil, which is patent-protected until 2023. In the meantime, Cephalon will have maximized its Provigil revenue with the repeated price hikes.

“You should expect that we will likely raise Provigil prices to try to create an incentive for the reimbursers to preferentially move to Nuvigil,” Chip Merritt, Cephalon’s vice president of investor relations, told a Sept. 5 health-care conference, according to a transcript of the meeting.


During his campaign, Mr. Obama promised to lower drug costs by, among other things, allowing the importation of cheaper medicines from other developed countries and increasing the use of generic drugs in public programs like Medicare.

One approach often threatened by Democrats — allowing Medicare to negotiate prices with drug makers — would help control rising costs, drug-pricing specialists said. But fully preventing tactics like Cephalon’s would be difficult short of outright regulation of drug prices. Many other countries control drug prices, but most U.S. regulators and legislators have opposed such moves.