Uncommon alliances propel authorized generics to market

April 2, 2004

As a defensive move to offset competition, brand manufacturers are striking licensing agreements with generic companies.

As a defensive move to offset generic competition, brand manufacturers are striking distribution and manufacturing agreements with generic companies. Under these deals, brand companies manufacture products at their plants and generic companies distribute the "authorized generics" in exchange for royalty payments.

Partnerships between warring pharmaceutical and generic companies may seem unlikely with so many court battles over patents, but authorized generics offer substantial benefits to both sides, according to industry observers. These agreements enable pharmaceutical companies to keep their manufacturing plants running at full capacity and maintain a stronger revenue stream after generic copies hit the market. The generic company wins by having a reliable product supply without the need to invest in building or retooling a manufacturing plant. Certainly, both sides also reduce the legal costs of fighting each other in court.

There is a downside to these deals for the generic industry. Some industry observers claim these arrangements undercut the incentive of the 180-day period for generic companies; others say these deals represent free-market competition at its best by making two generic products available.

At the Generic Pharmaceutical Association Annual Meeting in March, president and CEO Kathleen Jaeger said that GPhA opposes authorized generics because they devalue 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. She said that successful patent challenges significantly accelerate consumer access to affordable pharmaceuticals. She added that GPhA supported the spirit and intent of the 180-day exclusivity period.

Drug manufacturers have several strategies to choose from to protect their medications, namely patent litigation, switching patients to next-generation drugs, offering line extensions, or producing over-the-counter versions. But some companies are taking a second look at authorized generics as an additional strategy.

"This is a defensive strategy for many brand companies," said Stephen Mock, VP of corporate affairs at Par Pharmaceutical, distributor of several authorized generics. "This way, the brand company retains some profitability and eases the decline of lost revenues from generic competition."

While fewer than a dozen of these agreements have been inked in recent years, analysts predict they will become more common in the future. "We anticipate more agreements for authorized generics on the horizon," commented Jon Hess, a senior analyst with Cutting Edge Information, a market research firm based in Durham, N.C. "More often it is in the drug company's favor to settle costly patent-infringement suits by striking manufacturing and distribution agreements with generic challengers."

These agreements, according to Hess, will become even more popular once generic biologics enter the market. "With the composition of drugs becoming more elaborate, especially when biologics are involved, these arrangements will help generic companies take advantage of branded companies' manufacturing facilities that are already built and approved by the Food & Drug Administration."

Deal making

Only a handful of brand companies, involving such powerhouses as AstraZeneca, Bayer, Bristol-Myers Squibb, and GlaxoSmithKline, have entered into distribution agreements for authorized generics, oftentimes to settle ongoing patent disputes.

It's unclear why only a few pharmaceutical companies have opted for authorized generics. The Pharmaceutical Research & Manufacturers of America would not comment from the industry's perspective because of antitrust issues.

There are two specific scenarios in which brand companies would not want to authorize a generic alternative, said analysts. When a company has a strong legal and patent defense against a generic competitor, an authorized generic would only erode sales of the brand-name drug, said Hess. Also, when a generic company wins 180-day exclusivity for a product for which it is difficult to secure raw materials, an authorized generic would only further erode product revenues of brand companies.

Some companies have turned to distribution agreements as the answer to patent-infringement lawsuits. GSK faced several patent challenges from generic companies over its top-selling antidepressant drug Paxil (paroxetine), which generated more than $3.2 billion in 2002. GSK claims the patent expires in 2006, but generic manufacturer Apotex received FDA approval of paroxetine hydrochloride in 2001, an approval later upheld by a U.S. federal judge who ruled that Apotex did not violate GSK's patent (which covers only paroxetine hemihydrate). Subsequently, Apotex launched a generic copy in September 2003. GSK is currently appealing the judge's decision.

To counter Apotex, GSK authorized generic Paxil to reach the market through a deal with Par Pharmaceutical, which had previously licensed the rights to an ANDA for Paxil filed by Pentech Pharmaceuticals. Under the agreement, Par Pharmaceutical was allowed to distribute generic copies of the antidepressant once a fully substitutable version of Paxil was available. GSK agreed to manufacture and supply generic Paxil to Par in exchange for royalties.

For GSK and Par Pharmaceutical, the settlement ended a lengthy legal dispute. "The agreement was an outgrowth of litigation, and it was a good thing in the end to reach a deal," said Mary Anne Rhyne, a spokeswoman for GSK.

According to Hess, the settlement enabled GSK to keep running its manufacturing plant and retain a larger percentage of the Paxil revenue stream.

More recently, Par Pharmaceutical, a subsidiary of Pharmaceutical Resources Inc., struck a deal with Bristol-Myers Squibb to distribute generic copies of the diabetes medication Glucophage XR (metformin extended-release). Under the agreement, Par serves as an approved subdistributor of metformin for BMS and GenPharm, a Toronto-based generic company. BMS continues to manufacture metformin and shares in royalty payments from sales. The deal was unusual in that BMS had the authority to decide when the generic version would be sold. In comparison, GSK permitted Par to launch generic Paxil once another version hit pharmacy shelves.

Why is Par at the center of two large-profile agreements? According to the company, it would like to be thought of as a good partner. "In the generic universe, we want to be the partner of choice," said Mock.

Par's agreement with BMS evolved from long-standing relationships. For many years, GenPharm has filed numerous ANDAs that have been launched by Par in exchange for a share of profits. The close partnership resulted from GenPharm's parent, Merck KGaA, holding a 43% ownership in Par's holding company until divesting it in 2001. Separately, BMS had licensed metformin extended-release from Merck KGaA.

As a result of these relationships, Par was not only the natural favorite for a distribution agreement for metformin, but it will also distribute BMS' diabetes drug Glucovance, a combination of metformin and glyburide. The product's patent exclusivity expired in January, and a generic entrant is expected shortly.

Besides Par, Barr Laboratories has launched authorized generics, including the antibiotic Cipro (ciprofloxacin, Bayer) and the anticancer agent Nolvadex (tamoxifen, Astra-Zeneca). Both agreements stemmed from patent litigation settlements. An agreement with Bayer allowed Barr to become the exclusive supplier of generic ciprofloxacin. Bayer paid Barr $24.5 million in 1997, allowing Barr to sell generic versions of the antibiotic for a six-year period.

In 1996, Barr launched a generic version of the anticancer agent tamoxifen, making it one of the first authorized generics to reach pharmacy shelves. Barr and AstraZeneca settled a patent-infringement lawsuit in which Barr agreed to abandon its challenge to the drug's patent and refrain from manufacturing or marketing a generic for 10 years. In exchange, AstraZeneca paid Barr $21 million and supplied the company with generic tamoxifen until August 2002.

After the agreement expired, Barr had expected to launch its own generic tamoxifen, but in September 2002, the FDA retroactively altered the approval date of Barr's application for tamoxifen. Barr was further delayed from reaping revenues after AstraZeneca had received pediatric exclusivity that protected Nolvadex for another six months.

Such legal games are costly and distract generic manufacturers from their primary mission. As a result, several companies have purposely avoided distribution agreements, say analysts. Instead, companies like Ivax, Mylan, and Teva have focused their resources on developing branded drugs.

According to Mock, "Some manufacturers are focusing more on developing specialty drug businesses or branded products, so distribution is not as strategically important to them and is not part of their business plan."

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