Generic tsunami eases, but leaves transformed Rx landscape in its wake

The generic drug tidal wave became a tsunami in 2012, with some of the world's top-selling pharmaceuticals swamped by generic competition, and health plan payers scrambling to reap billions of dollars in financial savings.

Pharmaceutical industry insiders commonly termed last year's market a patent cliff for Big Pharma, and the description fits. Close on the heels of Lipitor's loss of patent protection in late 2011, makers of blockbuster drugs like Bristol-Myers Squibb and Sanofi (Plavix), AstraZeneca (Seroquel), Merck (Singulair), Forest Labs (Lexapro) and Takeda (Actos) joined a cascade of expiring patents and the loss of market exclusivity for their biggest-selling products.

What followed was inevitable: plummeting sales that dropped as much as 90% for some branded drugs, and a massive shift of business in some therapeutic classes like statins to the steeply discounted "me-too" side of the drug sales spectrum. With more than 80% of a branded drug's prescription volume "replaced by generics within six months of patent loss," according to IMS Health, the impact on retail pharmacy's top-line sales and bottom-line profitability — and to consumers' and health plan payers' pocketbooks — also was clear.

The contributions made by generics — both in terms of firming profit margins, and as a cost-saving boon to patients and pharmacy customers — aren't lost on drug retailers large and small, including regional chains like Kerr Drug. "Generics continue to be extremely important to Kerr," said Ted Lingerfeldt, senior director of pharmacy procurement and analysis for the 80-store, Raleigh, N.C.-based drug chain. Kerr, he told DSN, "has recently constructed a new and expanded pharmacy room within our distribution center to handle an increased number of generic pharmaceuticals, including Schedule III to V controlled substances."

Recent financial results at Walgreens, the nation's top pharmacy retailer, illustrate the dual-edged impact that generics typically have on a pharmacy retailer's sales and bottom line. Walgreens has "the best generic dispensing rates in the industry," according to Jeff Berkowitz, Walgreens SVP pharmaceutical development and market access, and in fiscal 2012, generics grew as a percentage of the company's overall prescription sales as big-selling branded drugs like Pfizer's Lipitor fell victim to generic competition.

"The effect of generic drugs, which have a lower retail price, replacing brand-name drugs, reduced prescription sales by 3.5% for 2012, 2.4% for 2011 and 2.2% for 2010," Walgreens reported. However, added the company, "the positive effect of generic drug sales" helped bolster pharmacy margins.

Doug Long, IMS' VP industry relations, concurs. Pharmacy retailers, he agreed, "generally make more margin for a generic product than they do for a branded product, particularly during the exclusivity period."

"Right now, there's plentiful generic opportunities," Long toldDSN."It's almost a who's who list of patent expiries."

That flood of patent expirations will ease somewhat this year, but at least two blockbuster products — Pfizer's groundbreaking erectile dysfunction treatment Viagra and Purdue Pharma's $3 billion pain reliever OxyContin — will face generic competition for the first time. The patent-loss tide will surge again in 2014, with AstraZeneca's $6 billion heartburn treatment Nexium for gastroesophageal reflux disease, Eli Lilly's $3.7 billion NSAID pain reliever Cymbalta and Pfizer's NSAID arthritis treatment Celebrex all joining the post-patent market fray. Add the multiple sclerosis drug Copaxone from Teva to the patent cliff in 2015, followed in 2016 by the blockbuster statin Crestor from IPR Pharmaceuticals and AstraZeneca.

"The number of impactful generic launches anticipated for 2013 will be less than what we experienced in 2012,"noted Kerr's Lingerfeldt. "But we will see a continuation of new generic launches throughout the year, with third quarter seeing several significant launches."

All told, IMS predicts, drugs generating more than $102 billion in combined annual sales will reach the end of their patent life over the next five years.

"Overall, patent expiries in developed markets will yield a five-year 'patent dividend' of $106 billion, reflecting reduced brand spending of $127 billion offset by $21 billion in higher generics spending," IMS predicted in a 2012 report on global pharmaceutical trends.

For pioneer drug manufacturers, IMS researchers foresee "minimal growth in their branded products through 2016," with "flat to 3% annual growth through 2016 to $615 billion to $645 billion, up from $596 billion in 2011." And in the major developed markets, "branded medicine growth will be severely constrained at only $10 billion over the five-year period due to patent expiries, increased cost-containment actions by payers and modest spending on newly launched products," IMS reported. "The impact of patent expiries primarily will be felt in the United States. In Europe, limited savings from expiring patents are prompting policy shifts to encourage greater use of generics and lower reimbursement for these products."

At the same time, "manufacturers of small molecule generics will experience accelerating growth," noted the report. "Global generic spending is expected to increase from $242 billion in 2011 to $400 billion to $430 billion by 2016, fueled by volume growth in 'pharmerging' markets and the ongoing transition to generics in developed nations."

Already, "some 80% of all retail prescriptions filled in the United States are filled with generic drugs," said Margaret Hamburg, commissioner of the Food and Drug Administration.

The most powerful fuel igniting the accelerating boom in "me-too" substitutions, of course, is the obvious and wide cost differential between brands and generics. "The unprecedented savings generated by market competition from generic pharmaceuticals" is now saving U.S. consumers and public and private health plan payers "more than $1 billion in savings every other day," the IMS Institute for Healthcare Informatics reported. That adds up to $1 trillion in savings over the past decade, according to IMS and the Generic Pharmaceutical Association.

"The use of lower-cost generic prescription drugs is a vital component to holding down the growth rate of healthcare spending," IMS noted in its most recent report on generic drug savings. "Generic drug use has saved the U.S. healthcare system approximately $1.1 trillion over the past decade, with $192.8 billion in savings achieved in 2011 alone."

More than half those annual savings — 57% — occur through generic switching of drugs to treat central nervous system disorders — like antidepressants and anticonvulsants — and cardiovascular treatments, according to IMS.

Federal and state health administrators and strategists should do more to capitalize on generics' cost-saving potential, the research firm asserted. "Considering that the government's share of healthcare spending will soon exceed 30% as the oldest baby boomers become eligible for Medicare, the money saved by using generic medicines is critical to bending the cost curve and providing sustainability to our healthcare system," warned IMS.

Given recent federal efforts to create a pathway for FDA approval of biosimilar versions of biologically engineered drugs, that "proven track record of savings for consumers using traditional drugs can be duplicated in the biopharmaceutical market," added the research report, to "inject competition needed in the biologic market to lower costs and provide significant savings for patients in need of these lifesaving treatments."

GPhA president Ralph Neas touted IMS' findings. "The Generic Drug Savings study shows conclusively that, as Congress and the White House gear up for the fiscal challenges facing them in the coming year, generic and biosimilar utilization are the best places to go for the 'offsets' that everyone will be desperately seeking," Neas said. "The sustainability of the healthcare system and the national economy depend in significant measure on the availability of affordable medicines."

Also driving the explosive growth of "me-too" medicines: the growing gap between what patients pay out-of-pocket for branded vs. generic medicines. A recent survey of 424 U.S. employers by the Pharmacy Benefit Management Institute found that retail co-pays for 3.7 million members covered by those employers' health plans are rising for all tiers of prescription drugs, with out-of-pocket costs rising 10% for generics, 13% for branded drugs and 26% for specialty medications. But the cost gap between tiers continues to widen, researchers found, with the differential between generic and preferred brand co-pays now averaging $19, compared with $7 in 2007.

For its part, the branded drug industry appears to have recovered its balance after being staggered by the wave of patent expirations. The industry marked something of a milestone in 2012 in its efforts to regain its momentum, as the FDA approved a total of 39 new drug applications, including eight in the final month of 2012. That wave of approvals — the most NDAs to pass FDA muster in 16 years — could position Big Pharma for a new growth surge, albeit at a more modest pace, as the industry adjusts to a new era of fewer blockbusters and a profound shift of its resources and research efforts into more targeted, patient-specific medicines, biopharmaceuticals and genetic engineering.

The pickup in new drug development (see related story on p. 24) bodes well for the generic industry, as well, since its future viability depends on a steady stream of newly hatched molecular entities and breakthrough products that will eventually succumb to "me-too" competition.