The pharmaceutical industry is growing dynamically on both the branded and generic fronts. The Food and Drug Administration has sped up its approvals of new branded drugs, which experts view as a much-welcomed agency approach--especially since so many established drugs are coming off patent in the years 2000 to 2002, creating massive business opportunities for generic drug makers.
Generics suppliers will soon be able to sell a new slew of drugs. Equally important, generics suppliers are also beginning to slow their price erosion as part of "a long overdue market correction," said Sue Capps, senior manager-pricing studies, IMS Health, a major compiler and analyzer of healthcare data. "Generic prices are already as low as they could go. Manufacturers have been dropping prices for so long, but the declines now hover around 6 percent annually, compared to 12 percent a few years ago. We'd view price rises as a natural event."
Indeed, Pittsburgh-based Mylan Laboratories imposed dramatic price increases on a few products from among its broad offerings--and the Federal Trade Commission charged that those hikes came as Mylan tried to corner the raw materials market for anti-anxiety drugs clorazepate and lorazepam. According to an FTC lawsuit filed against Mylan in U.S. District Court Dec. 22, Mylan allegedly raised the wholesale price on clorazepate from $11.36 to approximately $377 per 500-tablet bottle in January 1998, and on lorazepam from $7.30 to about $190 per 500-tablet bottle the following March.
Meanwhile, Mylan has denied all charges of restraint of trade, monopolization and conspiracy to monopolize markets in response to the FTC suit.
Whatever the outcome of these FTC charges, the Mylan situation may be symbolic of new thinking by generics manufacturers, who need to employ new tactics in order to survive and thrive. Mylan is certainly not alone in seeking price hikes and niche profit opportunities to subsidize intense competitive battles. Other companies have merged in recent years to broaden offerings and operate more efficiently.
The generics industry has been so beset by managed care pricing pressures that "stronger prices are a matter of survival for the generic companies," observed Capps. "People are becoming smarter about what the market will bear. Pricing hinges on the product and sourcing for molecules.
"Generic companies claim their expenses are going up to fight branded suppliers in court," she added. "They also face greater science challenges because branded drug makers are making it more difficult for generics to copy their formulas. More barriers are up, and if generic suppliers have to hire R&D teams they didn't have before, it impacts their cost structure and what they need to charge."
Pricing is a pivotal issue for 1999, and a difficult one for generic companies to navigate because "Congress and the media are watching and criticizing, acting as allies for the elderly and people who lack drug coverage plans," stated Capps. "They walk have to combat a negative perception."
Generics prices today average about half that of branded prices, although the price gap varies by product stage, she added. "When drugs first come out, they're usually at 50 percent to 70 percent of the brand price. After time, some get to be as low as 3 percent of the brand price."
Pricing matters in generics competition because "people won't distinguish between one company's formula and another's. Consumers aren't aware of the different generics manufacturers," said Capps. "They're not like brands that run direct-to-consumer ads to build as much loyalty as possible so they minimize losses when a drug goes off patent. So much volume goes to generics during the first 12 months they're available. People are incentivized to take the generic when they can get it. People don't argue."
That trend is so strong, she said, that unit volume is higher for generics than brands during the first year, with generics grabbing as much as 60 percent to 90 percent shares, depending on the molecule. "Generics are accepted rather quickly, and that's driven by economics. IMS data show that third parties cover two-thirds of the nation's scripts," she said. (Most drug chains said their experience is higher, and Capps agreed, noting that IMS data counts some transactions as cash even when consumers get reimbursed later for their prescription purchases.) "In addition, people on Medicare have to pay out-of-pocket, so if an item is available generically at half the cost, they definitely go that way."
Possible Medicare coverage of Rx
If President Clinton has his way, that may change soon. His State of the Union address on Jan. 19 advocated Medicare coverage of prescription drugs for the first time. If that came to pass, would it benefit or harm the generics drug industry?
"It could be good and bad," said Capps. "Certainly, more people would take the drugs they're supposed to, they'll be more compliant and they'll live longer, so that would help brands and generics. But, the government tends to watch prices and may put a price cap on drugs. There will be increased volume, but at a lower unit price. If suppliers have to take what the government is willing to pay for the drug, they'll need to make it up in volume. We don't know what the net effect will be of that tradeoff."
Added John Hynes, group director of managed care, IMS Health: "Of 38 million people covered by Medicare, about 20 million have no prescription benefit at all. The rest have it by having carried over benefits from work or buying separate pharmacy insurance."
Despite that mega-market, "If prices will be tagged to the lowest price the government pays, that will negatively impact the generics industry because it either forces their prices down or it makes it difficult for them to raise prices," he said. "The pharmaceutical industry will give the U.S. government the lowest price. Period. If the legislation passes--and the industry is very much against it--at that low level, the potential impact is that generic pharmaceutical prices will either be frozen or go even lower.
"Typically, this population would buy generics anyhow," observed Hynes. "This a high-usage population with more chronic disease, particularly cardiovascular, than any other group, and less usage of acute medications such as antibiotics.
"There will be a profound effect of moving this massive population into the prescription market," he stated. "It's conceivable Medicare coverage could result in higher drug utilization and people taking their medicines appropriately. Currently they tend to take [drugs] less often than prescribed because they're trying to stretch costs."
Capps summed up the consumer compliance issue: "Can I afford my medicine at all? People who pay for their own drugs can comply better with generics. If covered, then brand or generic doesn't matter except perhaps for a difference in co-pay."
Besides the prospect of Medicare coverage, the general trend in managed care is to pass more of the cost burden for prescriptions onto consumers. It's possible, Capps said, that will make it easier for generics prices to rise by providing a higher price ceiling at retail pharmacies.
COPYRIGHT 1999 Lebhar-Friedman, Inc.
COPYRIGHT 2000 Gale Group