A Pause in the Growth of Generics?
Big Pharma goes on the defensive as blockbuster patents expire.
By Tom Branna
Editorial Director
The fantastic growth spurt for generic drugs may be over for the time being. Only a few months ago, industry analysts were predicting that generic manufacturers such as Teva, Sandoz and others would rewrite the pharmaceutical landscape, putting Big Pharma companies such as Pfizer and Merck on notice that the rules had changed now that blockbusters such as Zocor (Merck) and Lipitor (Pfizer) were beginning to come off patent.
In 2005, U.S. brand pharmaceutical sales reached $229.5 billion and U.S. generic pharmaceutical sales topped $22 billion, according to IMS Health. Moreover, generic medicines account for 56% of all prescriptions dispensed in the U.S., according to the Generic Pharmaceutical Association (GPhA).
The generic industry is expected to grow 13% in 2006, that’s well ahead of the growth rate that Big Pharma is expected to post this year. Much of that gain can be attributed to the growing number of blockbuster drugs that are coming off-patent. According to a recent study by Bain & Company, blockbusters coming off patent are valued at $22 billion in 2006, $27 billion in 2007, and $29 billion in 2008.
But something happened on the way to new levels of profitability for generics. Big Pharma started fighting back, and in a big way. Leading the charge is embattled Merck, the Whitehouse, NJ-based drug maker that is fighting for its very life due to a dearth of new drugs, a multibillion dollar Vioxx lawsuit and the growing might of generics.
But in June, Merck unveiled a new strategy that is intended to blunt the blow of generic competition. Just as its Zocor cholesterol-lowering drug came off patent, Merck announced that it would sharply cut the price of its Zocor brand cholesterol treatment as the blockbuster medicine lost patent protection.
Merck’s move sparked fears that Teva would not benefit as much from the 180-day period during which Teva would be the lone seller of most dosages of generic Zocor.
That 180-day exclusivity period provides generic companies with a key cash injection. Merck’s aggressive move has led some financial analysts to trim their growth outlooks for the generic drug industry.
These defensive moves are by no means limited to the U.S. as Big Pharma is taking the fight to generics all around the world. in June, Pfizer announced that the UK’s Court of Appeal had upheld the exclusivity of the main patent covering atorvastatin, the active ingredient in Lipitor.
According to Pfizer, the appellate court ruling affirmed a lower court decision in October 2005 that found a proposed Ranbaxy generic would infringe Pfizer’s basic Lipitor patent (EP 247,633). The appellate court’s decision prohibits Ranbaxy from introducing a generic version of atorvastatin in the UK before the expiration of the basic patent in November 2011, subject to a possible further appeal to the House of Lords.
“We are pleased with the appellate court decision, which affirms the lower court ruling on our basic patent for Lipitor,” said Jeffrey B. Kindler, Pfizer’s vice chairman and general counsel. “This decision is consistent with the fundamental principle that patents exist to support the work of medical innovators pursuing discoveries that benefit current and future generations of patients around the world.”
More Protection Plans
In addition to legal wrangling, Big Pharma is hard at work to revamp its pipelines and develop combination products that should limit at least some of the financial damage caused by the flood of generics on the market.
For example, Merck, through its partnership with Schering-Plough, is reporting good success with Zetia and Vytorin, its combination cholesterol treatments. Second quarter results won’t be made public until July 24, but earlier this year, Merck announced that global sales of Zetia and Vytorin in the aggregate reached $793 million for the first quarter and combined new prescriptions reached approximately 15% of the U.S. lipid-lowering market, according to the most recent monthly IMS Health data.
Global sales by the Merck/Schering-Plough cholesterol partnership of Zetia, the cholesterol-absorption inhibitor also marketed as Ezetrol outside the U.S., reached $415 million in the first quarter, an increase of 25% compared with the first quarter of 2005.
Global sales of Vytorin, also developed and marketed by the Merck/Schering-Plough partnership, reached $378 million in the first quarter. Vytorin, marketed outside the U.S. as Inegy, is the first single cholesterol treatment to provide LDL cholesterol lowering through dual inhibition of cholesterol production and absorption.
Generics Fight Back
When Big Pharma rolls out combination drugs such as Zetia, there is little that the generic manufacturers can do to stop them. But the generic industry is seething over what it calls unfair practices regarding the growing use of authorized generics by the pharmaceutical industry.
Last month, the GPhA issued a statement branding authorized generics as nothing more than brand pharmaceutical products masquerading as generics. Authorized generics, when the brand company introduces or licenses a “generic” version of its product, compete with the true generic during the 180-day exclusivity period, following a successful patent challenge by a generic manufacturer.
According to GPhA, the only intent of authorized generics is to manipulate the market in a manner that interferes with competition from the true generic product following a successful patent challenge.
The association noted that the patent challenge provisions of the Hatch-Waxman Act provide generic companies with 180 days of marketing exclusivity if they are successful in bringing a patent challenge for a weak or questionable patent that unnecessarily prevents competition. However, according to GPhA, authorized generics devalue this 180-day exclusivity incentive. They represent an anti-competitive response designed to deter generic companies from pursuing patent challenges, by significantly diminishing the potential incentive that enables generic companies to recoup their investment of millions of dollars necessary to bring future patent challenges.
The association also pointed out that patent challenges have already saved consumers tens of billions of dollars by enabling the introduction of generic competition earlier than would have been possible without the patent challenge. Authorized generics, if allowed to remain unchecked by Congress, could severely curtail future patent challenges, allowing brand companies once again to evergreen patents and substantially delay consumer access to affordable medicine, according to GPhA.
The association is urging the U.S. Congress to close this loophole in the Hatch/Waxman Act and restore the careful balance achieved by the act. Preserving the 180-day exclusivity period by preventing the introduction of authorized generics during the exclusivity period will ensure that the generic patent challenge process, which has saved billions of dollars, is preserved.
Who Will Prosper in the Future?
As Big Pharma and their generic competitors jostle for position in this increasingly competitive environment, generic companies are making major moves to solidify their positions. Merger mania has taken over the generic sector with Teva, Sandoz and other major players all making key acquisitions during the past year. However, these purchases are not without complications.
On July 10, for example, Watson Pharmaceuticals Inc. and Andrx Corp. said they have extended the deadline for their merger agreement to allow more time for the Federal Trade Commission to review the acquisition.
In May, the FTC requested more information on their proposed merger. Watson agreed to acquire Andrx for $25 per share, or about $1.9 billion, in March.
Still, industry analysts applaud the moves being made. They note that generic companies must have size, low costs or a combination of both in order to survive in the future.
In a recent interview with Reuters, John Farrall, a health care analyst with National City Private Client Group, said Teva and India’s Dr. Reddy’s Laboratories Ltd. are both well-positioned for growth.
Mr. Farrall said he is encouraged by Teva’s broad pipeline, and that analysts are undervaluing the company’s new branded drug for Parkinson’s disease. He applauds Dr. Reddy’s low cost-base and its recent move into Latin America.
But Mr. Farrall, like many other industry observers, notes that generic pharmaceutical companies must ride out choppy waters over the next six months or so before smooth sailing resumes in 2007.
