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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."
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