Demand for generics remains strong, fueling steady growth in market share
Like a powerful tide that gradually eats away at the foundations of a once-impregnable sea wall, the booming market for generic drugs advances and recedes with the rise and fall in the number of branded drug patent expirations each year. But their long-term growth momentum remains on course, making generics an implacable force chipping away at what’s left of the market domain held by traditionally derived, broadly focused blockbuster drugs.
The steady advance of me-too medicines continues, even in the face of year-over-year declines in the number of branded-drug patent expirations since the peak of the “patent cliff” that hit Big Pharma in 2012 to 2013. “Blockbusters worth $35 billion [in annual sales] lost their patents in 2012 — the high point of the patent cliff,” noted CVS Health in a CVS Insights market trends report.
Since then, generics have maintained their upward march, impelled by cost-saving pressures among public and private health plan payers and patients, post-patent market competition, brand-to-generic substitution incentives by payers, and the continuing impact of expiring patents on traditional blockbuster medicines facing copycat competition for the first time.
In 2014, the most recent year for which full-year figures are available, “patent expiry events resulted in a reduction in spending of $11.9 billion … mostly from the impact of the loss of exclusivity for Cymbalta in 2013 and Celebrex in 2014,” IMS Health reported. “Despite the lower level of expiry impact, the share of prescriptions dispensed as generics increased by 2% to 88% in 2014.”
That rise in market share will continue — albeit at a more modest pace than in the go-go years of the past decade. “Generics will continue to dominate prescription drug usage in the United States, rising from 88% to 91% to 92% of all prescriptions dispensed by 2020,” noted Murray Aitken, executive director of the IMS Institute for Healthcare Informatics.
“Spending growth in the next five years will differ from the last four, which included the largest patent expiry cluster ever in 2012 and the largest year for new medicines in 2014,” Aitken reported. “The impact of patent expiries over the next five years, while higher in absolute dollars, will be lower in percentage contribution than the past five years — and no single year will reach the level of 2012.”
Older patients with chronic conditions that can be treated with post-patent multisource medicines are keeping the generic growth engine humming, said Doug Long, VP industry relations at IMS. “The primary drivers of the [prescription growth] forecast reside in older patients with chronic conditions treated with generic medications,” he reported. Indeed, 70% of all generic prescriptions dispensed in the United States “are for chronic conditions,” Long said, “and 65% are filled by patients 50 years old and older. This accounts for more than 41% of all prescriptions.”
Overall, the IMS Institute reported, “U.S. spending on medicines will reach $560 billion to $590 billion in 2020, a 34% increase in spending over 2015 on an invoice price basis. This growth will be driven by innovation, invoice price increases (offset by off-invoice discounts and rebates) and the impact of loss of exclusivity.”
Not to be overlooked in the steady rise of generics is the role played by pharmacy benefit managers and health plan payers. CVS Health’s Caremark PBM, for instance, makes “continuous efforts to encourage plan members to use generic drugs when they are available,” according to the company.
“We believe our generic dispensing rates will continue to increase in future periods, albeit, at a slower pace,” CVS Health reported. “This increase will be affected by, among other things, the number of new generic drug introductions and our success at encouraging plan members to utilize generic drugs when they are available and clinically appropriate.”
Over the past decade, the generic juggernaut — accompanied by the ascendancy of specialized and highly targeted large molecule biotech medicines — has upended the traditional market for branded pharmaceuticals and shifted the balance of power. “As a result of patent expirations, generic competition and a withering pipeline of broad-reaching drugs, manufacturers are shifting their drug discovery, development and pricing strategies,” said pharmacy benefit management giant Express Scripts in its most recent Drug Trend Report. “Now, manufacturers are increasing their focus on medications that treat small subsets of patients with diseases like cancer, or patients with rare diseases such as hereditary angioedema.”
“Manufacturers also are tailoring molecular drugs to patients with specific genetic profiles known to be affected by certain diseases, so the drugs are more effective in treating those specific patients,” Express Scripts reported.
Trumpeting the cost savings
It goes without saying that the primary engine driving the rise in generics’ market share is the price differential between branded and copycat medicines. Savings from generics reached an all-time high in 2014, according to the seventh annual “Generic Drug Savings in the United States” report, compiled on behalf of the Generic Pharmaceutical Association by the IMS Institute for Healthcare Informatics.
“The 2015 report shows that generic drugs are an essential part of any solution to sustaining our health system and are central to efforts that increase patient access and generate savings for patients, taxpayers, employers, payers, providers and others,” said GPhA president and CEO Chip Davis. “Nearly 3.8 billion of the total 4.3 billion prescriptions dispensed in the United States in 2014 were filled using generic drugs. Yet generic prescriptions account for only 28% of total drug spending.”
In 2014, “generic drugs were responsible for $254 billion in health system savings … bringing the total savings over the last 10 years to $1.68 trillion,” GPhA reported. What’s more, the industry group reported, “newer generic drugs introduced within the last 10 years are making significant impacts on patient and health system savings.”
Newer generics make up 57% of savings, according to GPhA. “These newer generic drugs also saved the health system $638 billion of the most recent decade’s $1.68 trillion,” said Davis. “Older generics generated upward of $100 billion in health system savings in 2014 and $1.05 trillion in savings in the last 10 years.”
The biggest cost-saving impact, said an industry report, is “in therapy areas that address mental health conditions ($38.0 billion), treat hypertension ($27.9 billion), or help manage or lower cholesterol levels ($26.8 billion). Rounding out the top 10, therapy area savings are accrued in pain medicines ($22.8 billion), anti-ulcerants ($19.2 billion), nervous system disorders ($15.6 billion), anti-nauseants for cancer ($11.6 billion), anti-bacterials ($11.3 billion), other central nervous system disorders ($9.4 billion) and attention deficit hyperactivity therapies ($8.2 billion).”
The crucial role that these cost savings play in areas like improving patient medication adherhence can hardly be overstated. “Patients’ rising exposure to costs, when not using generics, puts them at risk for worse adherence,” said Long of IMS Health.
According to CVS Health, 91% of patients surveyed by the pharmacy and PBM giant “said having cost-effective alternatives to more expensive therapies improves medication adherence.”
For drug retailers, the rise in generic dispensing remains a double-edged sword, bestowing both benefits and challenges. All pharmacy operators and pharmacy benefit managers are constantly adjusting the delicate balance between the higher margins offered by me-too meds and the lower topline sales they bring.
The dramatic price hikes put through by some generic manufacturers in recent years added another layer of complexity to that balancing act.
In a recent report on its financial performance, CVS Health underscored the tug of war between profit margins and sales volumes. On the one hand, CVS reported, “the increase in our generic dispensing rates in both of our operating segments continued to have an adverse effect on net revenue in 2014 as compared to 2013, as well as in 2013 as compared to 2012.” However, the company added, “our gross profit continued to benefit from the increased utilization of generic drugs (which normally yield a higher gross profit rate than equivalent brand name drugs) in both the Pharmacy Services and Retail Pharmacy segments for 2012 through 2014, offsetting the negative impacts [of the net revenue decline].”
Sticker shock eases
One factor that squeezed retailers’ profit margins was the generic price inflation that roiled the pharmacy market, beginning in 2013 and extending through 2014 into 2015. The sharp price hikes — particularly for single-source generics — increased pressure on pharmacy retailers, who were caught between rising acquisition costs and limits on how much they could raise their own prices at the pharmacy counter.
Compounding the squeeze: the frequent failure of MAC (maximum allowable cost)-and AMP (average manufacturer price)-based drug pricing models — and the payers that base their pharmacy reimbursements on them — to keep pace with the inflationary price spiral for some generics in their reimbursements to pharmacies for the medicines dispensed to their members.
IMS’ Long attributed the price hikes of recent years to several factors. Among them:
• “Increased scrutiny from the FDA,” which means “manufacturers need to invest more into their quality systems, and when a quality/supply issue arises … it creates the opportunity to increase prices to recoup part of their investment,” said Long. Generic manufacturers have complained bitterly about a backlog of almost 4,000 abbreviated new drug applications that had piled up at the FDA by 2015, despite the additional resources available to the agency under the Generic Drug User Fee Amendments of 2012, and Kathleen Uhl, director of the FDA’s Office of Generic Drugs, has promised that the agency will speed up its review and approval cycles as it hires additional staff to accommodate a flood of ANDAs.
• A consolidation among the retail pharmacy chains and wholesalers that depend on manufacturers’ drug product supply. The frenzied merger activity among drug makers’ customers gives them “increased purchasing power,” he noted, and “manufacturers need to make up value on products where they can.”
• A falloff in the launch of new but traditionally manufactured pioneer drug products on the branded side of the industry. “Generic manufacturers make money by launching new products … and raising prices,” Long reported. “With fewer launches, it puts more pressure on the ‘in-line’ product portfolio, which again is a driver to increase prices.”
Nevertheless, “generic substitution remains one of the best ways to save patients and payers money,” CVS noted in a report. And the dramatic and controversial price hikes on some me-too meds — which drew withering criticism from some consumer groups and scrutiny from Congress in 2014 and 2015 — have abated somewhat, industry experts said. “Generic price increases are slowing down,” noted health industry consultant Adam Fein, president of Pembroke Consulting and CEO of Drug Channels Institute. Although “about half of the generic drugs increased in cost” during the second quarter of calendar 2015, “the increases were much lower than those in our 2014 examinations,” Fein reported. “The average increase … was 2.6%, compared with an average increase of 25.7% in the second quarter of 2014. Almost half of the generic drugs declined in cost.”
George Barrett, chairman and CEO of Cardinal Health, also sees a pullback in generic pricing. “We are seeing moderation in generic pricing,” he said in a Feb. 1, 2016, conference call with analysts. Indeed, said Barrett, that moderation in prices “is somewhat steeper than we had originally modeled.”
The price hikes were, in some cases, swift and sharp, with some product prices rising exponentially almost overnight, generating sticker shock among patients and payers. But they were far from universal; many multi-sourced drugs actually saw price decreases in recent years from manufacturers.
Indeed, “a May 2015 report from AARP noted that retail prices for generic drugs fell an average of 4% in 2013, marking nearly a decade of consecutive years of decreasing drug costs,” Express Scripts noted in its most recently published Drug Trend Report. That report also notes that 73% of generic drugs in the study experienced price decreases.
Visit DrugStoreNews.com/DigitalEditions to view the full Generic Drug Report 2016.
Dialed into real health reform
This month, DSN published the fifth edition of RxImpact, a special stand-alone report that we produce to help educate lawmakers about the ever-expanding role community pharmacy plays in our nation’s healthcare system. The issues are stuffed into kits that National Association of Chain Drug Store members leave behind with members of Congress during desk-side meetings that are organized by NACDS. In addition, DSN ensures that every member of the Senate and the House of Representatives — and key House staffers — is hand-delivered a copy of RxImpact. Why? We want them to understand your story.
Here is how we framed it for them; following is the column I wrote for this year’s edition:
This year makes 19 years for me as the editor of Drug Store News. Looking back on it all, I have seen a lot change. In many ways, it reminds me of a series of TV commercials that was popular back then — AT&T’s “You Will” ads. Remember those?
“Have you ever borrowed a book from 1,000 miles away,” the voice of Tom Selleck asked. “Have you ever crossed the country without stopping for directions? … You will.”
Today, e-books and GPS are pretty common; but 20 years ago they seemed like science fiction.
The comparisons to the transformation of community pharmacy over that period are remarkable.
Back then, it would have been impossible to imagine getting a flu shot from a pharmacist because pharmacists were not licensed to do so anywhere in the United States. Today, pharmacists in all 50 states can administer flu shots and at least two other vaccinations.
Back then, it would have been hard to imagine being able to receive 80% of your primary care needs in a community pharmacy setting — the retail clinic was very much still just a concept on a dry-erase board. Today, there are more than 2,000 retail clinics in operation, with many more expected in the years ahead.
As the editor of DSN, I have seen the drug store re-emerge not just as a place that dispenses prescriptions, but as the center of health care in neighborhoods all across America.
I frequently tell people that if they could see what I see, if they could see how community pharmacy, in so many examples, is leading the way on lowering healthcare costs, expanding patient access and driving better health outcomes, they would have a pretty good sense of how to fix health care.
Like those AT&T commercials, you may not have thought about what community pharmacy could do to help fix health care. But when you read this, you will.
The digital version of RxImpact is available at DrugStoreNews.com/DigitalEditions. When anyone wants to know more about what community pharmacy can do — and is doing — to improve health care, give them a copy.
DSN/CCA feature retail healthcare webinars
As retail pharmacy increasingly becomes a healthcare destination, new telehealth models are helping to expand both access to care and the scope of care. Telehealth’s role in retail healthcare delivery was explored by MinuteClinic VP medical operations Tobias Barker as part of a six-part Retail Healthcare Webinar series, produced by Drug Store News and the Convenient Care Association.
Beyond telehealth, the series also featured a session on “Chronic Care in Retail Health,” in which Eileen Myers, The Little Clinic’s VP of affiliations and patient centered strategies, outlined strategies for patient-centered care, and understanding and measuring the impact of chronic disease management on business. The series also featured Walgreens Health Care Clinic medical director Dr. Patrick Carroll’s discussion on the opportunities for partnerships in public health; CVS Health VP of enterprise analytics Bob Darin on harnessing big data to drive improved outcomes; and national leader of KPMG’s Center for Healthcare Regulatory Insight Larry Kocot, on emerging payment models.
The complete archived webinar series is available for replay at DrugStoreNews.com/webinars.