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As Drug
Patents End, Costs for Generics Surge
By MILT FREUDENHEIM, NY Times December
27, 2002
Chris Maynard Pharmacies, like this one in Times Square, have found that they can make higher profits on generic drugs than on brand-name medicines. Prices of generic drugs are rising almost twice as rapidly as prices of brand-name drugs, even as many insurers and the Bush administration are pressing Americans to switch in the name of saving money. The trend is expected to continue over the next few years as a number of enormously popular brand-name drugs lose their patent protection and drug makers introduce generic versions at high initial prices. Prices of generic drugs are rising faster for several reasons. First, a large number of patents on popular brand-name drugs expired this year, allowing makers of generics to enter the market. Makers of generic drugs typically charge higher prices when the first generic versions of expensive medicines reach pharmacy shelves. In addition, the generic-drug industry is consolidating, leaving fewer companies to compete on the prices of older generic drugs. And wholesalers, drug plan managers and pharmacies have all found they can make higher profits on generic drugs than on brand-name medicines and still offer prices that are typically well below those of brand-name drugs. The trend concerns those who saw in generic drugs a way to hold down medical costs for Americans without depriving them of necessary treatments. "Generic drugs provide a considerable economic benefit to consumers," said Ronald F. Pollack, executive director of Families U.S.A., a national consumers' organization. But he added, "The benefit often turns out to be considerably less than it could be." The rapid price increases come on the heels of a proposal by President Bush to help generic drugs reach the market faster, a plan that is vehemently opposed by makers of brand-name drugs. The proposal would limit a brand-name drug maker to one automatic patent extension on any drug while it disputes the patent rights. Generic drugs, chemical replicas of brand-name medicines, almost always cost less than the patented drugs they mimic, and until last year their prices were rising more slowly than prices of brand-name drugs. But last year, generic prices rose nearly twice as fast as prices on all brand-name drugs. And in the first 10 months of this year, the pattern has continued. The average price of a generic prescription drug rose 15 percent, to $14.70 from $12.79, from the corresponding period last year, according to IMS Health, a pharmaceutical information company. Prices of all brand-name drugs, including those with no generic competition, rose 8.8 percent, on average, to $77.02 from $70.79, IMS said. The average prices represent total spending on generic drugs divided by the number of prescriptions written. The price of one new generic drug, which replicates the ulcer drug Prilosec, one of the best-selling drugs ever, is so close to the price of the brand-name medicine that at least one large insurer is not even trying to switch patients to the generic. At the same time, manufacturers have raised the prices of some older
generic drugs as much as 1,000 percent recently, albeit from low starting
points.
Late last month, Watson Pharmaceuticals, a large manufacturer of generic drugs, raised the price of the tranquilizer meprobamate 725 percent. The drug is a generic version of Miltown, which lost patent protection more than 20 years ago. The cost rose to 99 cents each from 12 cents. Watson says its product is still a bargain. "Meprobamate still costs only 25 percent of the brand price" of Miltown, said Patty Eisenhauer, a Watson spokeswoman. Geneva Pharmaceuticals has raised the price of promethazine, the generic version of the antihistamine Phenergan, more than 900 percent, to $309 for a thousand pills, or 31 cents a dose. Earlier this year, the price was $30 per thousand pills, or 3 cents a dose, according to John Rector, senior vice president of the National Community Pharmacists Association, a trade group for independent pharmacies. The new price is 55 percent of the wholesale price of Phenergan. Sandra MacTavish, a spokeswoman for Geneva, which is owned by the Swiss drug maker Novartis, said it had raised prices on a number of drugs "to offset the losses we were incurring on these products." Teva Pharmaceuticals, based in Israel, recently raised the United States wholesale price of cephalosporin, the equivalent of the antibiotic Keflex, to 24 cents a pill from 10 cents. George S. Barrett, president of Teva Pharmaceuticals U.S.A., said cephalosporin at 24 cents was still a bargain compared with $1.73 for Keflex. Virtually all the companies along the distribution chain, from wholesalers to managed care drug distributors and pharmacies, are profiting handsomely before generic medicines reach patients. "Consumers get only a fraction of the benefit," said Viren Mehta of Mehta Partners, a drug investment consulting firm. Spending on generic drugs is much smaller, in dollars, than spending on brand-name drugs. Consumers spent $19.4 billion on generic drugs from Jan. 1 to Nov. 1 this year, compared with $98.6 billion on brand-name drugs. But almost half of all prescriptions filled this year were for generics, and health policy experts say that share will grow to two-thirds over the next two years, even as generic prices rise rapidly. When a brand-name drug first loses its patent, a single generic manufacturer typically obtains exclusive rights to sell the equivalent medicine, usually for six months, and the price of both drugs stays relatively high. Selling a generic during those first months is like "printing money," said David Balto, a Washington health care lawyer who is a former Federal Trade Commission official. A generic version of Prilosec, the popular ulcer drug made by AstraZeneca, reached stores late last week. Industry executives say that sales of that drug, called omeprazole, could reach $800 million to $1 billion next year. The initial price of a one-day dose of omeprazole is $2.88 to $2.95, a discount from the $3.86 price of a Prilosec pill but a much smaller difference than is typical for generics. At the current price, some insurers have been reluctant to encourage members to switch to omeprazole by charging the $5 to $10 co-payment typical for generic drugs. David Olson, a spokesman for Health Net, a big California-based health insurer, said that its members were typically charged $30 or $40 for a month's supply of Prilosec, and that for most Health Net members the same co-payment would apply to omeprazole for now. Generic prices typically drop after a generic drug maker loses an exclusive franchise and many companies jump into the market. In February, after the antidepressant Prozac, made by Eli Lilly, was opened to competition, the price of the generic, fluoxetine, dropped to as low as 10 cents a pill for quantity buyers like Kaiser Permanente and to 25 cents at retail pharmacies, compared with $2.50 for Prozac. Over time, however, as low prices put pressure on profits, some manufacturers typically drop out. Then a generic drug's price starts to rise. Like the brand-name drug companies, the generic manufacturers often raise prices as high as the market will bear. Watson, which makes 140 generic drugs, raises prices "based on market dynamics," Ms. Eisenhauer, the spokeswoman said. When prices drop sharply, "our options are either to exit the market or raise prices to make it worth our while." In fact, Wall Street analysts said large manufacturers of generic drugs make a profit before taxes of more than 20 cents on every dollar of sales when they obtain exclusive rights to a newly available drug. That surpasses the profits of many of the big brand-name companies. Mylan Laboratories, one of the most profitable generic companies, recently said its pretax profit was more than 30 cents for every dollar of sales. The profit margins of generic companies often dip below 20 cents per dollar of sales, however, when they lose exclusive rights to make a generic medicine. Companies with weak profits are disappearing as the generic industry consolidates. The five largest makers of generic drugs — Teva, Geneva, Watson, Mylan and Ivax — now account for more than 50 percent of generic drug sales. "The companies are bigger and there are fewer of them," said David F. Saks, who runs the Saks Med- science Fund at Ladenburg Thalmann. "They don't play the same kind of game they did 10 years ago when there were more small firms desperate to gain market share." The companies that distribute generic drugs also find them more lucrative than brand-name drugs. Lawrence Marsh, a health care securities analyst at Lehman Brothers, said the three largest wholesalers often mark up generic drugs 10 percent to 15 percent, compared with a typical 5 percent markup on brand-name drugs. Maintaining an inventory of generics also ties up less of the wholesalers' working capital. R. David Yost, chief executive of AmerisourceBergen, one of the top three wholesalers, told analysts recently that his company was "making more gross profit dollars" from generic drugs than from brand-name drugs. Officials of McKesson and Cardinal Health, the other two top wholesalers, have made similar comments. The pharmacy benefit managers, the companies that manage drug benefits for large companies, are also "singing off their generic hymn books," Mr. Marsh said. Dr. Glen Stettin, a vice president at Medco Health Solutions, and Barrett Toan, chief executive of Express Scripts, said in separate interviews that their profit margins were higher for lower-priced generics than for brand-name drugs. And David D. Halbert, chief executive of AdvancePCS, the other big pharmacy benefit manager, told investors at a Merrill Lynch conference a few weeks ago that generic drugs were "the most significant contributor" to the latest increases in Advance's operating profits per prescription. The pharmacy benefit managers can pocket sizable markups on orders for generic drugs at their mail service pharmacies, said B. Kemp Dolliver, an analyst at SG Cowen Securities. On expensive brands, insurance companies and employer groups demand that they pass along the manufacturers' discounts. Pharmacists also say they rely on higher markups on generics because they are allowed so little profit on brand-name drugs under managed care. "The markup for pharmacies is better, and consumers get a more affordable product, approved by the Food and Drug Administration as bio-equivalent to the brand-name drugs," said Mr. Rector of the pharmacists' association. Mr. Marsh, the Lehman Brothers analyst, said, "There are opportunities for lots of participants along the distribution channel to make a healthy margin off of generics" and still keep the price "well below branded drugs." Copyright
© 2002 Global Action on Aging
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