Getting poised for a steeper growth curve - Special Report: Generic Drugs - Industry Overview

New YORK -- The winds of change have begun to fill the generic drug industry's sails. Driven by expiring patents on big-selling blockbuster drugs and the frantic search for lower-cost prescription alternatives by health plan payers, generic utilization rates have grown roughly 6 percent by volume over the past two years, and are projected to maintain that pace through 2005, according to research from Merrill Lynch. Indeed, the Wall Street firm projected overall sales growth of at least 13 percent in each of the next three years.

That rosy projection for generics is borne out by new research from IMS Health--at least for 2003. "It's going to be a very good year for generic drugs, because [the industry] will have a full year of patent expirations [from 2002]behind it," said Doug Long, IMS vice president of industry relations, in a presentation at the Generic Pharmaceutical Association's 2003 Annual Meeting late last month. "It's hard to imagine things going better for the industry than they are right now."

However, said Long, that won't necessarily translate to a solid, uninterrupted growth rate over the next five years. He pointed to a dearth of expected patent expirations over the next two years, continuing efforts by brand-name drug makers to slow generic competition and growing difficulties among me-too drug manufacturers in obtaining raw materials from overseas. "I think this is going to be a weak year for patent expirations," he cautioned .generic industry leaders at the GPhA conference. "You seem to have a lot of things aligned right now, but you can't rest on your laurels."

Either way, generics are consuming an ever-larger slice of the pharmaceutical drug pie. A little less than half of all prescriptions dispensed now are generics, and that number will inch increasingly closer to 50 percent in the next three years.

There is the prospect that the legislature may enact some form of Medicare prescription benefit by 2004. "A Medicare drug benefit is going to drive [generic] utilization because we know that people who have a drug benefit indeed will use more pharmaceuticals," commented Joseph Papa, president and chief operating officer of Watson Pharmaceuticals.

"The generic industry sees that as a positive," commented George Barrett, president and chief executive officer at Teva Pharmaceuticals USA. "Having more consumers with access to medication is important. Any program that's going to provide any kind of benefit is going to have to utilize generics to keep costs down," he added.

Also fanning generic prospects are public and private third-party payers, who together now supplement 85 percent to 90 percent of all prescriptions dispensed. Managed care is constantly striving to increase generic utilization as a way to save money. And retail pharmacy is likewise whipping generic utilization up among their patients--generics equal fatter profit margins in a profit-slim business. With managed care and retailers both driving generic utilization, generics claim .an average 78 percent market share within five weeks of being on the market. After 10 weeks, market share climbs to 85 percent, according to research from IMS.

Other factors that could drive generic growth include the Bush administration's proposal for a $13 million increase in the 2003 budget for the Food and Drug Administration's Office of Generic Drugs. "President Bush's proposed budget [will] speed up generic drug reviews," said Health and Human Services secretary Tommy Thompson last month. If approved by Congress, the FDA will use the additional resources to hire about 40 new experts in generic drugs and related programs.

"If we're approaching a point in the health care evolution where cost management of high-quality, cost-effective medicine is critical, then we're [approaching] a peak period where the value that generic drug companies provide should [resonate] throughout the market," commented Barrett.

Challenges facing industry

The recent uptake in generic fortune does not automatically translate into smooth sailing for the industry, however. "The challenge obviously is the pricing pressure," remarked Hemant Shah, an independent analyst who has charted the pharmaceutical waters extensively. "This is still

a commodity business, although it's less of a commodity business than it was five or 10 years ago because there are fewer players, larger players," he said.

"The industry has matured," offered David Saks, another independent analyst and pharmaceutical expert. "The exponential high rates of growth year to year are over," he predicted. Saks argued that the success of Teva, Mylan, Watson and Ivax has made each of these companies so big that they're brushing up against the same economy-of-scale challenges their larger, branded pharmaceutical cousins face. Many of the branded pharmaceutical businesses have grown so big they have to keep at least five new blockbuster drugs in the hopper in order to realize year-over-year comp growth, Saks said. "One new blockbuster won't be enough to drive the investment growth rate to attract high demand for their stocks. The same thing goes for the generic industry," Saks added. There are only so many blockbusters every year that either become open to generic competition or become open to patent-challenging litigation that reaches a generic-friendly conclusion. When the market for those blockbusters drugs becomes open to generic com petition, it quickly matures and just as quickly dissipates, Saks argued.

Blockbusters on the horizon

The winds driving generic sales, i.e. patent expirations, reached gale proportions last year as Prilosec, with $4.6 billion in annual sales; Glucophage, a $2 billion seller; and Prinivil, at $1.1 billion, all lost patent protection. Although there will be fewer billion-dollar blockbusters exposed to generic competition in the next two years, pioneer drugs currently generating almost $11 billion in annual revenues could face generic competition by 2005. In 2006 the winds will reach hurricane proportions again, as a branded business worth more than $9 billion opens to generic competition.

Upcoming billion-dollar patent expirations include Prilosec ($4 billion) in 2003 (presently in courts); Celexa ($1.1 billion) and Cipro ($1.1 billion) in 2004; and Prevacid ($3.2 billion) in 2005. Zocor ($2.7 billion), Zoloft ($2.2 billion) and Pravachol ($1.4 billion) all come off patent in 2006.

However, a combination of branded pharmaceuticals moving to protect their pharmaceutical patents and generic companies challenging those patents in court makes it difficult to mark the proverbial X on a calendar and point to any definitive expiration date. "It has become much more litigation dependent," Barrett said. "Identifying the peak period is not always something that's easily done. What we can say is that for the period between now and 2006 [we will see] a very large number of products" become available to generic competition, Barrett said.

The Generic Pharmaceutical Association is already preparing for the day when bio-engineered drugs are opened to generic competition. "The generics industry is poised to open new frontiers for saving consumers money as more and more drug products are derived from or use biotechnology," remarked Kathleen Jaeger, president and chief executive officer of GPhA. "We will be educating policymakers about the critical role generic biologics can play in the future as the government continues to explore cost-containment measures," she added.

Increasing numbers of more generic companies are diversifying their product portfolio with branded offerings. "By being so successful [and] so big, [generics] can't keep staying with the old business plan," commented Saks. "They need more than just generics [even though] there will be more generics business [in the coming years]."