The generic landscape is shifting. What was once a progression of inevitable price cuts as patents expired has become more nuanced. The pool of generic players is shrinking and the cast of winners and losers is shifting. In the race to rock-bottom prices, prices for some difficult-to-manufacture products have already crashed and are rebounding higher. Current trends in patent expirations, utilization, and market forces are creating a complex pattern of product introductions, product shortages, price cuts, and price increases that will continue to unfold over the next five years.
A key role
Generics are still a good deal. But the deal is changing as the generic industry matures and consolidates, and as generic drugs reach their maximum saturation point. Most generic prices will continue to fall. Some, however, will rise: A few have already soared 1,000% and more.
Adam Fein“We don’t have as many high-profile drugs going generic,” said industry analyst Adam Fein, PhD, President of Pembroke Consulting. “And in some generics, we have a very fragile supply chain, with just one or two suppliers. If there is any disruption in manufacturing, you have a shortage and increasing prices.”
Michael KleinrockGenerics play a key role in health care. And that is not likely to change. The IMS Institute for Healthcare Informatics found that nearly every therapeutic class and disease state now has at least one generic among first-line treatment alternatives. IHI’s April 2014 report, “Medicine Use and Shifting Costs of Healthcare,” found that generics now represent 86% of all prescriptions filled in the United States, an all-time high.
“In the next five years, another 5% of the remaining branded prescriptions will lose exclusivity and convert to generic,” said IMSIHI Executive Director Michael Kleinrock. “We see 91% to 92% generic penetration, with 8% or 9% of remaining branded products. The challenge is being able to make those generic products to a high standard at a profit.”
The general expectation is that generic prices fall over time. And most do.
Fein found 65% of all generics falling in price from 2012 to 2013. The median price change was a 3% drop.
In light of overall trends toward ever-lower generic prices, it’s no surprise that the generic share of Rx drug volume has climbed from 57% in 2004 to 86% in 2013, Kleinrock said.
Generic penetration is still rising. In 2013, generics were dispensed for 95% of scripts that have a generic alternative. The great majority of prescription medications now carry a co-pay of $10 or less, a direct benefit of years of generic competition and steady downward pressure on drug prices combined with the near-universal dispensing of generics, when they are available.
Glen SchumockA special report by the American Society of Health-System Pharmacists, “National Trends in Prescription Drug Expenditure and Projections for 2014,” painted a similar picture.
“Across most sectors of pharmacy, there was a decrease in expenditures for drugs,” said lead author Glen Schumock, PharmD, MBA, PhD, professor and head of Pharmacy Systems, Outcomes, and Policy at the University of Illinois at Chicago.
“Retail pharmacy saw a decrease in the total amount spent on drugs,” he continued. “Same for mail order, federal facilities, long-term care. This is primarily through increased use of generics. There are some areas where generic prices spiked, but overall, we are saving money by using generics.”
Increasing generic use is moderating what could otherwise be sharp increases in drug spending. IMS found that the per capita use of medications increased 0.9% in 2013, and the cost of medications increased by 1%. The total drug spend increased by 3.2% in 2013, following a 1% decline in 2012.
That is still a modest increase, in light of the 36 new molecular entities launched in 2013, Kleinrock said. The list included 10 new cancer treatments and 17 new orphan drugs, the most to launch in both segments in over a decade.
The largest clusters of current pharmaceutical innovation are found in specialty areas, such as oncology, hepatitis C, HIV, and autoimmune disease. These areas grew by 11% in 2013. Innovation in primary care drugs, driven largely by new diabetes agents, also grew by 11%. Prices for branded products protected by patents grew by 28%.
Overall healthcare utilization also increased last year. Whether gauged by physician office visits (+2.7%), hospital admissions (+10.5%) or almost any other measure, Americans who had postponed visits to providers during the recession were flocking back. Higher utilization helped increase the number of prescriptions filled by 1.6%.
Growth in generic volume could not completely offset market trends that pushed spending higher. The reason? The patent cliff has become a series of rolling patent hills. As the branded pharmaceutical industry moves away from blockbuster introductions to more targeted agents, blockbuster generics will be fewer and further between.
“The peak of patent expiry was 2011 and 2012,” Kleinrock said. “We are at a low ebb in generic conversion. From a sustainability perspective, we have a challenge. In the past three or four years, we have seen an impossibly large number of generic drug shortages. Those are at least partially linked to prices in the market associated with generics.”
A decade ago, the branded pharma sector thrived on blockbusters. The generic sector followed a similar pattern.
Companies produced multiple generics, but the biggest share of profits came in the weeks and months following conversion of blockbuster brand drugs to blockbuster generic drugs. Hatch-Waxman paragraph IV, which grants 180 days of generic exclusivity to generic companies that successfully challenge brand patents, encouraged reliance on a relatively few, highly profitable products.
“Often prices don’t drop to their lowest point immediately after expiry,” Kleinrock said. “Often there is a very profitable period for generic companies even as patients and payers and society are saving substantially. The challenge comes when that highly profitable period doesn’t come very often. We are seeing that challenge working into the supply chain.”
In 2012, billion-dollar drugs with more than $29 billion in sales lost patent protection. In 2013, that number was just $19 billion. The details are even gloomier.
The bulk of 2012 conversions, $15.6 billion, came from 2012 patent expiries, with $11.1 billion from 2011 expiries and $2.6 billion from earlier expiries. In 2013, there was just one billion-dollar expiry, Cymbalta (duloxetin, Lilly), with $3.1 billion in branded sales. Patent expiries from 2012 were worth $12.7 billion last year; 2011 expiries were worth $2 billion and older expiries $1.5 billion.
The picture improves in 2014, with $22.6 billion in major branded drugs coming off patent. But leaner times are coming. Between 2015 and 2019, IMS sees just $25.2 billion in blockbuster sales coming off patent. That means trouble for the entire supply chain, from generic manufacturer to wholesaler to pharmacy to patient.
Hospitals hit hardest
Erin FoxHospitals are already feeling the pain. Shortages of generic agents for injection and infusion have been growing for years, said Erin Fox, PharmD, director, Drug Information Service, University of Utah Hospitals and Clinics.
“The basics that you need to run a hospital, things like morphine, saline, nitroglycerine, antinausea meds, have been short multiple times,” she said. “With injectable generics, it is rare to find more than two or three manufacturers. Oftentimes there is just one. Things have gotten so lean, there is no room for any kind of slip-up.”
Mike BonckWhen shortages occur, prices jump. Glycopyrrolate, commonly used in surgery to counter neuromuscular blocking agents, has gone from $1.20 per vial to $16. Isoproterenol jumped from $48 per vial to $180. Nitroprusside went from $48 to $215 per vial. All three agents have just one generic maker, Fox said. Price increases will add about $300,000 to the university drug spend.
Neostigmine, another reversing agent for neuromuscular blockers, recently jumped from $14.50 per 10-pack to $150, reported Michael Bonck, pharmacy manager for the Franciscan Health System in Tacoma, Wash. The drug is not in short supply, he said, but it recently converted from grandfathered generic to branded product. The new brand manufacturer promptly raised the price.
“That one drug is going to cost us $50,000 to $75,000 extra this year, just based on our surgical volume,” he said. “Reimbursement is not going up at anything approaching the same rate.”
Rena ContiThe generic industry is based on the assumption that market economics work. If a generic is in short supply, prices will rise, more manufacturers will come into the market, and prices will fall.
That scenario generally works with small-molecule oral agents, which are relatively easy to manufacturer, said Rena Conti, PhD, assistant professor, Health Policy and Economics, at the University of Chicago. It works less well with sterile injectables, which are difficult to make and even more difficult to make consistently.
“Consolidation on the acquiring side has lowered the prices of these drugs substantially,” she said. “Pricing pressure has helped drive consolidation on the manufacturing side. With one or two manufacturers, we are living on the edge. If something goes wrong at your plant, do you really want to invest $100 million in a product line that brings only minimal profit? Your competitor, if you have one, faces the same choice. Even if they can scale up production, it may not be worthwhile without a significant price increase. That’s worrisome.”
It’s a worry that hospital pharmacy can expect to see again. There are few small-molecule agents in common hospital use that have not already gone generic, Bonck said. Biosimilars will not have a significant impact on spending until 2019–2020 at the earliest.
“The opportunity for generic cost savings is fast moving past us,” he said. “It may be that we have pushed the prices too low on too many generics to keep more than one or two suppliers in the market. You need more suppliers in order for competition to work.”
Billion-dollar brand-name drugs losing patent protection in 2014
1. Abilify (aripiprazole, Otsuka). Expires October 2014: $6.5 billion.
2. Nexium (esomeprazole, AstraZeneca). Expired May 2014: $6.2 billion.
Launch of Nexium OTC pending.
3. Cymbalta (duloxetin, Lilly). Expired end of 2013: $5.3 billion.
4. Copaxone (glatiramer, Teva). Expired May 2014: $3.7 billion.
5. Lantus (insulin glargine, Aventis). Expires August 2014: $2.6 billion.
6. Diovan (valsartan, Novartis). Expired 2012: $2.2 billion.
Ranbaxy holds 180-day generic exclusivity, but is not able to produce for the United States
because of manufacturing quality issues.
7. Celebrex (celecoxib, Pfizer). Expired May 2014: $2.3 billion.
Source: IMS Institute for Healthcare Informatics
Blockbusters to lose patent protection 2015–2019
1. Gleevec (imatinib, Novartis). Expires 2015: $1.9 billion.
2. Crestor (rosuvastatin AstraZeneca). Expires 2016: $5.4 billion.
3. Advair Diskus (fluticasone and salmeterol, GlaxoSmithKline). Expires 2016: $5.2 billion.
4. Truvada (emtricitabine/tenofovir disoproxil, Gilead). Expires 2017: $2.3 billion.
5. Remicade (infliximab, Janssen). Expires 2018: $3 billion.
6. Spiriva Handihaler (tiotropium bromide, Boehringer Ingelheim). Expires 2018: $3.0 billion.
7. Lyrica (pregabalin, Pfizer). Expires 2019: $2.5 billion.
8. Herceptin (trastuzumab, Genentech). Expires 2019: $1.9 billion
Source: IMS Institute for Healthcare Informatics
The delayed impact of biosimilars
As the impact of patent expirations for traditional pharmaceuticals recedes, the industry is marching toward a new patent cliff in biologics, which it will reach between 2016 and 2018. Biosimilars, generic equivalents to branded biologics, will bring 20% to 30% price reductions after FDA finalizes the biosimilar approval pathway it has begun.
Ralph Neas“Biosimilars are an important part of the solution to the sustainability of healthcare,” said Ralph Neas, Chief Executive officer and Executive Director, Generic Pharmaceuticals Association. “Biosimilars are new to the United States, but they have been in Asia, Australia, Canada, Europe, and elsewhere for years, with a very strong safety record.”
About 40% of the total U.S. drug spend goes for biologics used by about 2% of the population, according to an Express Scripts analysis from 2013. The pharmacy benefits manager projected $250 billion in savings over the next decade, if biosimilar versions of the 11 most likely biologic candidates are approved as patents expire.