Despite a history of bumpy service levels, false-start product launches, unpredictable pricing and stifling competition from far more powerful branded drug companies, the generic drug industry has remained one of the bulwarks of chain pharmacy’s eroding profit structure over the past decade. And although generic substitution rates have been flat for much of that time–averaging about 40 percent to 45 percent of all prescriptions dispensed for most pharmacy retailers–multi-source drugs continue to shore up a bottom line under constant assault from managed care contractors, government health plans and rising drug prices.
Now, for the first time in years, the outlook for generics may be brightening.
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EXECUTIVE SUMMARY
Behind the improving outlook: a new focus on cutting prescription costs by government and private health plan sponsors and a growing backlash over the spiraling costs of new brand-name drugs. That backlash is being fueled both by third party payers and by consumers themselves, who are suddenly being hit with higher co-pays at the prescription counter by their insurers if they opt for some of the newer, high-ticket medicines.
“All of a sudden, people are going to be penalized on a three-tiered co-pay if they don’t opt for a less expensive generic,” noted Clay O’Dell, a spokesman for the Generic Pharmaceutical Association.
The biggest force for change in the generic utilization picture, however, is coming from the branded drug industry itself.
Consider this: eight of the 20 biggest-selling prescription drugs–with total sales of more than $16 billion–are due to lose their patent protection over the next four years (see chart at right). Add the nearly two dozen other big-selling branded products facing patent expiration in that same time frame, and the figure swells to more than $32 billion, according to IMS Health and other sources. Besides block-busters like AstraZeneca’s Prilosec, Eli Lilly’s Prozac and Schering-Plough’s Claritin, the list also includes plenty of drugs that didn’t make the top 20 list, but still generate hundreds of millions of dollars in annual revenue. Among them: Abbott Labs’ Biaxin, Pfizer’s Diflucan and Glaxo’s Flonase and Zofran.
Said Mark Doerr, divisional vice president of pharmacy for Phar-Mor: “Last year was a very bad year for service levels of generic products. I think we’ll continue to see that, which negatively impacts substitution rates. But on the flip side, I think our substitution rate will grow because of these blockbusters like Prozac and Glucophage that are coming off patent. There’s just way too many units, too many prescriptions, not to increase substitution rates overall. And, obviously, there’s more to come next year.”
Overcoming pediatric exclusivity
Mike Krensavage, a drug industry analyst with Raymond James & Associates, agreed with that assessment. “I think we will be seeing increasing use of generics, just by virtue of the size of the drugs coming off patent.” What’s more, several major medicines have recently come off patent but have successfully kept “me-too” versions of their products off the market by gaining additional marketing exclusivity with new patent applications, often for pediatric use. Among the drugs with extended patent protection are Merck’s Mevacor and Vasotec. Generic drug makers are poised to hit the market with generic versions of those products at the earliest opportunity.
“The [Food and Drug Administration] had approved our [abbreviated new drug application] for lovastatin, the generic equivalent to Merck’s cholesterol-lowering agent Mevacor,” noted a recent report from Mylan Pharmaceuticals. “Unfortunately, this approval was stayed on June 18, when the FDA reversed itself and granted pediatric exclusivity. We will launch lovastatin upon the expiration of this exclusivity.”
The impact of a loss of patent protection on major drug products could be huge for generic makers, GPhA’s O’Dell argued. He pointed to the market for Prozac, which was finally opened to generic competition in August after a lengthy patent extension campaign by its maker.
“What’s happened with Prozac in just a month has really been amazing,” O’Dell said enthusiastically. “Eighty percent of Merck-Medco’s mail-order Prozac users switched over to the generic, and that’s an unprecedented figure. It’s much, much higher than expected.”
Cautious optimism
Results for generic fluoxetine aside, however, some pharmacy watchers predict the path to higher sales and profits in generics will be a winding and difficult one. altace. Doug Long, vice president of industry relations for IMS Health, was among those expressing a more cautious outlook for generic switch rates. “There’s too many unknowns,” he told Drug Store News. “One is knowing what drugs are going to lose their patents and when. There’s also the issue of what new therapy classes come in, which could impact the generic business negatively. Potentially [2002] could be a good year, but there are just too many unknowns to predict what it will look like yet.”