Big Pharma uses effective strategies to battle generic competitors

August 8, 2004

When a generic drug comes to market—and by 2008, drugs worth about $80 billion worldwide a year to Big Pharma are scheduled to lose patent protection—branded sales drop precipitously, as much as 80% by the time a second- or third-generation generic arrives, say industry experts. That degree of market loss has led to an aggressive search for solutions by Big Pharma, resulting in some creative strategies, especially in research development and marketing.

When a generic drug comes to market—and by 2008, drugs worth about $80 billion worldwide a year to Big Pharma are scheduled to lose patent protection—branded sales drop precipitously, as much as 80% by the time a second- or third-generation generic arrives, say industry experts. That degree of market loss has led to an aggressive search for solutions by Big Pharma, resulting in some creative strategies, especially in research development and marketing.

Generics accounted for more than 50% of all prescriptions in the United States and 13% of the $427 billion prescription drug market worldwide in 2002, the most recent year for which aggregate data are available. By the end of the decade, even conservative estimates predict double-digit growth for generics, in contrast to only 6% growth in branded prescription drug sales.

"The industry is developing fewer blockbuster drugs today, so companies are realizing the importance of protecting their assets," said Jon Hess, senior analyst at Cutting Edge Information, a research company in Durham, N.C., that focuses on the pharmaceutical industry. Hess was lead author on a Cutting Edge report on Big Pharma strategies for combating generics titled Combating Generics: Pharmaceutical Brand Defense. "They learn to anticipate generic competition, even before patents expire, planning ahead, and pursuing a course of action that often combines several defensive and proactive strategies to retain market share when generics come into play."

Once generics hit the market, there's little that sales representatives can do to combat them, according to Hess, so brand-name companies develop combative strategies early in a drug's life cycle. "This is absolutely necessary, because many of the strategies they must use require years to implement," he said.

Generic manufacturers say they are aware of the strategies employed by Big Pharma. With the notable exception of the Food & Drug Administration filing and litigation, there isn't a lot generic manufacturers can do to obstruct some strategies—or actually very much they need do. "Some of the methods skirt the line of legality or regulatory abuse, and those we fight vigorously, especially with the FDA," said the representative of one large generic manufacturer, who asked that his name not be used because "we never discuss our competition. But we really don't worry too much, once we get past federal hurdles and get to market. Our products are equally effective and cost less. Our market share speaks for itself."

Notwithstanding the truly phenomenal growth in the generic market—or because of it—the strategies employed by Big Pharma to fight generics are inventive. Take flanking, for example. In marketing, a flanking attack is a competitive strategy in which one company attacks another in a weak spot, usually by paying attention to either a geographic region or a market segment in which the rival is perceived as underperforming.

But, according to Cutting Edge, brand-name pharmaceutical companies have begun flanking generics in an inventive way: They enter into manufacturing and distribution agreements with a generic company before a patent is about to expire, attempting to preempt market share. "A typical agreement specifies that the generic company will serve as a distributor of the nonbranded, generic form of the drug, which will continue to be produced in the branded drug company's manufacturing facilities," said Hess. "It's an increasingly popular strategy, often stemming from out-of-court patent lawsuit settlements."

A successful flanking strategy can be beneficial to a generic manufacturer because it saves on capital outlay by not having to build or modify manufacturing facilities. "The brand-name pharmaceutical company benefits because the partnership enables it to continue to operate its manufacturing lines and turn a profit, thereby recouping more of its R&D investment in the drug and more of its capital investment in the manufacturing plant," said Hess.

Here's an example of effective flanking: Generic drugmaker Apotex launched a version of GlaxoSmithKline's blockbuster drug Paxil in September 2003, threatening to significantly dent GSK's $3.2 billion-a-year bestseller. In response to Apotex's entry into the market, GSK struck a licensing agreement with another generic drugmaker, Par Pharmaceutical, in April 2003. The agreement specifies that GSK will supply Par with generic Paxil, in immediate-release form. The tablets are made by a GSK subsidiary, and Par—which pays a royalty to GSK on sales—distributes them in the United States. "The royalty payments help GSK capture a small segment of the generic Paxil market, which offsets the losses of its branded Paxil sales following the drug's patent expiration," said Hess.

Flanking is very controversial because it virtually derails competition. In fact, some generic manufacturers say it's illegal. It's very similar to what the Generic Pharmaceutical Association and others regard as the illegitimate strategy of "authorized generics."

"It's an easy concept to describe," said Robert Reznick, a partner with the national law firm Hughes Hubbard & Reed. He chairs the firm's Pharmaceutical and Healthcare Practice Group and has written about the legality of authorized generics. "An authorized generic is like any other generic in that it is deemed equivalent to a brand-name drug," he said. "But rather than being made by an independent generic drug manufacturer pursuant to an Abbreviated New Drug Application, it is either made by or under a license from the New Drug Application holder itself. It may be marketed by an affiliate of the brand-name manufacturer or by a third party."

In a white paper titled "Are Authorized Generics Lawful?" Reznick and his colleagues recently concluded that agreements between brand and generic manufacturers to create authorized generics may be legal under antitrust law, but the issue has yet to be fully settled.

The issue may be legally unsettled, but as far as GPhA is concerned, authorized generics seek to circumvent the law. Because an authorized generic's introduction can be timed to coincide with the introduction of generic competition or to occur during the period when only the brand-name product has a right to be on the market, the practice "devalue(s) the 180-day exclusivity provisions of the Hatch-Waxman Act that provide the incentive for generic pharmaceutical companies to challenge weak and questionable pharmaceutical patents," said Kathleen Jaeger, GPhA president. The association has urged the FDA to examine whether authorized generics violate Hatch-Waxman.

GPhA's stance may be against the tide. On July 2, FDA regulators rejected petitions from Mylan Laboratories and TEVA Pharmaceutical Industries to outlaw the marketing of authorized generics during a generic's 180-day exclusivity period. "Marketing of authorized generics increases competition, promoting lower prices for pharmaceuticals," FDA officials said in a statement. At the same time, regulators denied a petition from Pfizer Inc. that sought to keep generic companies from waiving the 180-day exclusivity period as part of an authorized generic's backstage deal. "The FDA sees no reason to interfere with the marketing of authorized generics and waiving 180-day exclusivity, two long-standing, procompetitive business practices," the agency said.

According to Hess and others, flanking or authorized generics will most certainly come under intense legal scrutiny if the Greater Access to Affordable Pharmaceuticals Act, which passed the Senate last year and is now being considered in committee in the House, becomes law. It provides that the 180-day marketing exclusivity period typically granted to the first ANDA filer will be granted to a subsequent ANDA filer in cases in which the first filer or filers have reached agreements with brand-name drugmakers to stay out of the market during the 180-day marketing exclusivity period.

"If the bill is voted into law, it would substantially weaken this strategy for extending the generic-free marketability period," said Hess. "Furthermore, the Federal Trade Commission, concerned that such agreements could be costing consumers, insurance providers, and other payers hundreds of millions of dollars, is pushing to write into law new guidelines to prevent such arrangements."

Martin Sipkoff

Five key defense strategies for brand-name manufacturers

Brand-name pharmaceutical companies use several basic strategies to defend themselves against generic competitors, according to researchers at Cutting Edge Information.

In a report titled Combating Generics: Pharmaceutical Brand Defense, Cutting Edge examined a variety of these strategies, including five basic "principles for success in planning for generic competition":

  • Protect existing brands from patent challenges and generic competition through litigation.

  • Switch patients to next-generation drugs to balance existing brand defense strategies, a market practice known as evergreening.

  • Assimilate public, political, and regulatory changes into generic planning.

  • Initiate generic defense planning earlier and support it with necessary resources.

  • Explore licensing, deal-making, and market-crossover strategies as viable solutions to generic competition, a strategy known as flanking.