Viewpoint: Generic profitability: Is it at risk?

January 8, 2007
Bruce A. Semingson, RPh, FACA
Bruce A. Semingson, RPh, FACA

Bruce A. Semingson, RPh, FACA, is vice president of managed care sales at United Drugs, a Phoenix-based cooperative with more than 1,550 participating independent pharmacies in 31 states. He administers the third-party contracting program for the network.

Wal-Mart offers generics for $4.00. The Deficit Reduction Act cuts billions of dollars from pharmacies' Medicaid reimbursement for generic drugs. There's no doubt about it, generic margins are under siege today.

Spread pricing is eroding the financial viability of many retail pharmacies. Pharmacy benefit managers have utilized spread pricing for many years as a source of profit. Spread pricing is the activity of paying a pharmacy a contracted price for dispensing a covered drug and then marking up the pharmacy price when invoicing the payer. PBMs have increased the amount of spread pricing on generics during the past two years in response to increased payer scrutiny of brand pricing.

The Hatch-Waxman Act has also resulted in reducing generic margins. The law provides a generic maker six months of marketing exclusivity for newly released generics. Most often these drugs are priced at 20% below the comparable brand.

Brand manufacturers' acquisition of generic houses exerts further pressure on pharmacies' generic pricing. Pfizer owns Greenstone; Schering owns Warrick; Novartis owns Sandoz. The industry's objective is to reduce the impact on revenue and profit losses that occurs when brand products convert to generics. Controlling the generic manufacturer and distribution of both a brand and its equivalent generic would permit companies to maintain high profit levels for longer periods of time.

Medicare Part D has added a new twist to the generic dilemma. Many generics under Part D have total pharmacy reimbursements of $1.00, $2.50, $3.30, etc. While the percentage of gross margin on many of these claims is impressive, the dollars are small and fail to generate adequate dollars to cover dispensing costs.

While no one knows the impact of the pending average manufacturers price (AMP) initiative, early analysis indicates that it will add additional economic pressure to low-cost generics. Here are several options to help community R.Ph.s ensure that their businesses remain viable:

THE AUTHOR is VP of managed care at United Drugs, Phoenix.