Generics market paints uncertain profit picture for industry

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Generics market paints uncertain profit picture for industry

By Jim Frederick - 02/04/2018
Is the generic drug industry a victim of its own success?

Since enactment of the landmark Hatch-Waxman Generic Drug Price Competition Act of 1984, which unleashed generic competition by setting limits on the patent life and market exclusivity of pioneer branded drugs, the explosive growth of copycat medicines has transformed the U.S. pharmaceutical market and saved trillions of dollars for consumers and public and private payers.

As of 2016, the last year for which full figures are yet available, generics accounted for 89% of all U.S. prescriptions dispensed, and are on track to reach market penetration levels exceeding 90% this year or next, according to New York City-based IQVIA, formerly QuintilesIMS. The insights company noted in a recent report that generics are set to account for 92% of prescriptions by 2021 as more drugs come off patent and payers look to generics and biosimilars as a way to reduce costs.

For generic drug makers and wholesalers — not to mention American consumers and pharmacy retailers themselves — the tsunami of generics has largely been a long-term bonanza. But it’s also spawned frenzied competition, scrambled predictable profit models and, at times, upended topline sales projections. And with the Food and Drug Administration focused on speedier generic drug approvals and lower prices, an increasingly crowded marketplace continues to upend expectations for sales and profit margins for all segments of the generic supply chain.

All signs point to the continuation of the long upward trend in generic utilization, albeit at a slower pace as generic market penetration matures and approaches saturation levels. However, cost savings and an upcoming new surge in branded-drug patent expirations should keep the growth engine humming. Industry insiders also note that generics will play a key role in keeping costs low as large portions of Americans get older.

“As the U.S. population ages and more patients face chronic disease, healthcare costs will grow faster than the economy or the government can sustain,” Maple Grove, Minn.-based Upsher-Smith president and CEO Rusty Field said. “In this environment, the use of generics will continue to increase, especially as the FDA has made it a priority to reduce the backlog of generic drug applications, and to get even more generics into markets [that are] without sufficient competition.”

Fueling the continued increase in generic utilization will be another round of expiring patents on pioneer medicines. Although the stream of patent expirations won’t approach the “patent-cliff” years of explosive generic opportunity earlier in the decade, the long-term outlook for generic makers remains solid as another crop of high-selling pharmaceuticals approach the end of their exclusive market protection.

“The impact of patent expiries over the next five years, while higher in absolute dollars, will be lower in percentage contribution than the past five years — and no single year will reach the level of 2012,” said Murray Aitken, executive director of the IQVIA Institute for Human Data Science. The slowdown in branded medicines losing patent protection and the rise of more me-too manufacturers vying aggressively for first-to-file approval, and marketing rights from the Food and Drug Administration, he said, will create “fewer opportunities and higher competition … [for] generic companies.”

Nevertheless, Aitken said, “The reduction in overall spending as branded medicines lose exclusivity is expected to total $143.5 billion in the next five years — more than 1.5 times the impact as in the past five years. This includes the estimated impact of biosimilars, which will contribute between $27 and $58 billion.”

Deflation nation
Despite the highly publicized — and highly controversial — sharp increases in price for some single-source generics in 2013 and 2014, overall generics have been on a steady long-term decline.

“A number of generic drugs have … undergone steep price hikes, but in general, generic prices, as a category, remain flat or falling,” said Allan Courkell, senior director of health programs at Philadelphia-based Pew Charitable Trusts.

Generic drug prices have been dropping since at least 2010, according to the Government Accountability Office. “They have fallen even in the face of high-profile exceptions,” noted a report from the website ProPublica and The New York Times, with “dozens of old generic drugs (having) risen in price in recent years, for reasons that include supply disruptions and competitors’ leaving the market.

“Despite these cases, the trend toward deflating generic prices appears to have accelerated as companies have more aggressively undercut each other’s prices,” the report added.

“Generic inflation began easing in 2015,” said Adam Fein, president of Philadelphia-based Pembroke Consulting and CEO of Pembroke’s Drug Channels Institute. “This was due partly to the FDA’s having cleared much of the backlog for new generic drug applications. The FDA’s actions show why generic inflation is unlikely to return soon.”

For the past several years, the agency has been working full-bore to clear out the backlog of generic approval applications. Bolstered by a major increase in funding generated by the Generic Drug User Fee Act of 2012, or GDUFA, the FDA’s Office of Generic Drugs hired hundreds of new staffers and dramatically accelerated its review and approval process. As a result, the agency approved or tentatively approved 835 generics applications in fiscal year 2016 — the most ever in a single year until 2017, when the agency set another record.

The increase in approvals comes as price deflation becomes more of the norm in the generics market.

“The overall market for mature generic drugs is deflating by about 10% per year. Many generic drugs have dropped significantly in price over the past four years,” Fein said.

“Surprisingly, the prices for about 1-in-5 generic drugs remain elevated. … Scott Gottlieb, the new head of the Food and Drug Administration, has prioritized actions that should squeeze the remaining generic inflation out of the system.”

Gottlieb, who took over as head of the FDA last May, has tasked the agency to speed up generic drug approvals as a way to boost market competition and lower drug prices, in line with the Trump Administration’s oft-stated plan to reduce pharmaceutical prices. “We’re looking to create competition where there isn’t competition,” Gottlieb said last year.

More competition means lower prices — which Fein notes that this also comes with side effects. “I expect generic drug deflation to continue — and possibly accelerate — over the next 12-to-24 months,” Fein said. “Payers and consumers
will be the ultimate winners, but the drug channel faces significant disruption.”

‘A new period of hyper-competition’
Increasing competition and the downward trend in generic drug costs have hammered profits for manufacturers and roiled topline sales and profit margins for wholesalers and pharmacy retailers. And though consumers have generally seen some benefit , it has not been quite as substantial as advocates would have liked.

“Since 2013, average out-of-pocket costs for all brand and generic prescriptions have decreased by $1.19, with … 2016 brand costs declining to $28.31 from $32.36 in 2013 and generics dipping to $5.54 from a high of $6.05 in 2013,” IQVIA reported in its outlook to 2021. “The … list price for brands averaged 12 times higher than the average out-of-pocket cost for patients in 2016 compared with three times higher for generics.”

The growing price differential — and Gottlieb’s marching orders for a more aggressive FDA approach to the review and approval of generic drug applications — present the retail pharmacy industry with
a challenge.

“The pharmacy industry has entered a new period of hyper-competition, driven partly by a plateau in the generi

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