Generics will benefit as 75 drugs lose their patent protections

Once a bit player but now an indispensable part of the U.S. health care market, the generic drug industry is about to hit an unprecedented growth spurt.

Over the next two years, patents are set to expire on 75 brand-name drugs launched during the 1990s drug innovation boom, according to Bain & Co., an international consulting firm.

That means cheaper, generic versions of blockbuster medications such as Zocor, Ambien, Zoloft and Pravachol will begin hitting U.S. pharmacy shelves in the near future.

Consumers, government health programs and private insurers will reap billions of dollars in savings that will help hold down monthly insurance premiums, out-of-pocket drug costs and drug spending for Medicare and Medicaid.

The sales boost should help the overall generic market grow 10 to 12 percent each year for the next five years, said Tim van Biesen, a New York-based partner in Bain’s global health practice.

Generic drug makers should be giddy. But some experts say the rush to produce cheaper copycat drugs is being threatened by a loophole that allows mainstream drug companies to market low-cost copies of their own brand-name medications when generic competition is imminent.

These so-called authorized generics help consumers and health plans in the short run because the increased competition from two alternative medications makes for even lower drug prices. A new analysis by the U.S. Food and Drug Administration found that, on average, the appearance of a second generic product reduces the average price of both versions to about half the cost of the brand-name drug.

“Authorized generics benefit consumers by putting a downward pressure on drug prices,” said Lori Reilly, the vice president of policy and research at Pharmaceutical Research and Manufacturers of America.

But opponents, led by the Generic Pharmaceutical Association, say authorized generics are anti-competitive and will hurt consumers over time by eroding profits for generic drug makers, which kills their incentive to try to speed cheaper copycat drugs to market.

That lost profit potential could eventually cause investment in research and development to falter along with the market value of generic firms. This could lead to massive industry consolidation and fewer overall generic companies, said Dr. Fred Cohen, president of Pharma Growth Strategies, a drug-industry consulting firm in Langhorne, Pa.

While several court decisions have upheld the legality of authorized generics and the FDA has denied petitions to address the matter, many maintain that such drugs should be restricted. And Congress is listening.

At the urging of Sens. Charles Grassley, R-Iowa, Patrick Leahy, D-Vt., and John Rockefeller, D-W.Va., the Federal Trade Commission recently agreed to do a yearlong study on the short- and long-term effects of authorized generics.

The study will examine, among other things, the business reasons for launching the drugs and their effect on overall drug pricing.

The findings could either help diffuse the controversy or fuel additional calls for legislative action.

The debate has focused rare attention on the $27 billion generic drug industry, which has become an important force in curbing rising health care costs. Generics made up 56 percent of all prescriptions filled in 2005, but only 13 percent of total prescription drug spending, according to IMS Health, a drug industry research firm.

That’s because generics typically cost 30 to 80 percent less than brand-name drugs.

Under the federal Hatch-Waxman Act of 1984, the first company to market a generic version of a brand-name drug is typically granted 180 days of exclusive sales - a lucrative period when profits are highest.

But that expected windfall has been diminished in recent years because authorized generics are allowed to be sold at the same time the actual generic version hits the market. That means sales in the supposedly exclusive 180-day period are now split between two competitors.

“The whole authorized generic scheme is antithetical to the spirit of Hatch-Waxman,” said Cohen, the Pennsylvania consultant.

While the provision allowing authorized generics has been around for many years, it was seldom used until 2004. Since then, authorized generic versions have appeared for nearly all drugs with expiring U.S. patents.

The practice likely increased because of a federal crackdown on questionable tactics that drug companies were using to extend drugs’ patents and to keep generic competition off the market, said David Balto, an antitrust attorney and former policy director of the Federal Trade Commission’s Bureau of Competition.

Despite strong opposition from the Generic Pharmaceutical Association, some generic firms enter agreements to distribute a brand-name drug company’s authorized generic product.

Andrea Hofelich, a spokeswoman for the association, said some of the group’s member companies help market authorized generics because “they have a fiduciary responsibility to their stockholders.”

Some generic drugs come to market only after a brand-name drug’s patent expires. Others result from successful legal challenges against the validity of a branded drug’s patent.

Generic companies that win drug patent challenges typically market their version well before the patent expiration date, allowing consumers faster access to cheaper drugs. But because these companies also risk patent infringement lawsuits, Congress, through the 1984 Hatch-Waxman Act, established the six-month exclusivity period as an incentive and reward for generic firms to continue challenging drug patents.

“What authorized generics really do is destroy that rewards system,” said Balto.

The six-month exclusivity period is the most profitable time for a generic entrant.

The profits are used to recoup money spent on legal costs and research and development. Experts estimate that without an authorized generic, a generic firm with the six-month exclusivity period could expect a 1,000 percent return on investment. That return falls to about 50 percent when it competes with an authorized generic.

For instance, the Apotex Corp., a Canadian generic manufacturer, had six months’ exclusivity for a generic version of the anti-depressant Paxil in 2003. The company expected sales of up to $575 million in the first six months. But the maker of Paxil, GlaxoSmithKline, introduced an authorized generic version and Apotex’s six-month sales topped out at between $150 million and $200 million.

In a 2004 filing with the U.S. Food and Drug Administration, Apotex attorneys wrote, “There can be no doubt that the authorized generic crippled Apotex’s 180-day exclusivity - it reduced Apotex’s entitlement by two-thirds - to the tune of approximately $400 million.”

After two other generic firms asked the FDA to limit authorized generic deals, the agency declined in July 2004, saying it lacked the regulatory authority. The FDA also refuted claims that authorized generics siphoned profits from companies that earned a six-month exclusivity period.

“Any such adverse economic effect is insufficient to justify the action requested here, even if the FDA had the authority to grant the request,” wrote William Hubbard, a former agency associate commissioner.

Van Biesen of Bain & Co. agreed. He said when two lower-priced alternative drugs enter the market simultaneously, the total market for the product grows. “So the pot (of sales) they split is bigger,” he said. “And the impact is less than folks would have imagined.”

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