Generics enter ‘Golden Age,’ but hurdles remain
America’s favorite bedtime snack lost its patent in April of this year, spawning an immediate rash of 13 approvals of its generic equivalent within two days.
The expiration of the patent for Sanofi-Aventis’ $2.2 billion sleep medication, Ambien, on April 21 was nothing to snooze over. It’s the biggest patent expiration this year and has led to the Food and Drug Administration approval of 13 generic versions of zolpidem tartrate, immediate-release tablets in formulations of 5 mg and 10 mg. (Sanofi-Aventis’ extended-release Ambien CR is not yet available in generic versions.)
These should be happy times for generic drug makers. Generic drugs accounted for 54 percent of total drugs dispensed in 2006, up from 50 in 2005, and upcoming patent expirations make this the “Golden Age” of generics, said Ed Pezalla, vice president and medical director of Prescription Solutions, at the recent Pharmaceutical Care Management Association’s PharmacyBenefit Management & Generic Pharmaceutical Issues Symposium.
Other brand name drugs that have lost their patent this year include Pfizer’s hypertension drug Norvasc and migraine medication Imitrex from GlaxoSmithKline. Coming soon, the loss of the patent for GSK’s Coreg in September, as well as Pfizer’s Zyrtek and Schering-Plough’s Clarinex in December.
“We’re just starting off on the biggest period of patent expirations we’ve ever seen,” said Barath Shankar, research analyst with Frost & Sullivan.
There’s a glut of expirations on the horizon—of both blockbuster pharmaceutical drugs and biotech medicines. Last year, $11 billion worth of branded drugs lost their patents and opened up the market to generic competition, and another $99 billion worth of brand name drugs are expected to go off patent between 2007 and 2012, according to Bain and Co.
One result of the growing opportunities for generic drug manufacturers is a diminishing number of companies as they consolidate to create newer, stronger powers.
“Consolidation is driven by [generics manufacturers] wanting to expand their portfolio so they can negotiate better in terms of pricing with distributors,” Shankar said. The greater the number of drugs in a manufacturer’s portfolio, the more likely they are to be carried by a distributor, he explained, because they’re of more interest to the distributor.
It’s not just generic companies merging or acquiring, he said, but there’s also a considerable amount of vertical consolidation, so that generic manufacturers can source active pharmaceutical ingredients within their own company and therefore offer better prices.
One of the factors behind this consolidation is the considerable generic forces coming from India.
The top five Indian companies are Ranbaxy, Dr. Reddy’s, SunPharma, Cipla and Nicholas Piramal. Ranbaxy made the list of the top 10 generics companies in the United States.
It’s cheaper to produce drugs in India, said Tom Newton, a pharmaceutical market analyst at Visiongain in the United Kingdom, “and these companies have been doing it for a long time, so they’re good at it.”
India also has the upper hand because outside of the United States, it has the largest number of FDA-approved sites, so the safety of its facilities is almost guaranteed. And there are many available skilled young workers, who are educated and English speaking. In fact, according to Venkat Krishnan, vice president of Ranbaxy, it is the third-largest English-speaking scientific and technological manpower in the world.
Ranbaxy entered the U.S. market 12 years ago.
“We’d always envisioned ourselves as a global company, and America was the last market to penetrate,” said spokesman Chuck Caprariello, who is based in the company’s U.S. headquarters in New Brunswick, N.J. These days, 20 percent of the company’s revenues come from the United States.
Even with branded drugs coming off patent and generics gaining share of prescriptions dispensed, there are still a number of hurdles, all of which are moving toward resolution at incredibly slow speed. (For more on these issues, see following pages.) These include:
Biogenerics are still a dream rather than a reality. There still exists no pathway to approve these drugs—also called biosimilars or follow-on biologics—in the United States because, say opponents, they cannot be an exact match of a biotech drug.
Four biosimilars already are approved in Europe, but industry experts don’t expect to see them approved in the United States any time soon.
Authorized generics basically are branded drugs disguised as generics. A branded company supplies its drug to a generic firm, or to its own subsidiary, to market the product as a generic in return for royalties. Many people say these are nothing but bad news for the generic drug industry because they cut into the 180-day exclusivity period that is granted to the first generic on the market—and they are increasing. In 2005 21 authorized generics were approved compared with 24 in 2006. In the opposing camp, however, are the generics companies who contract with the branded companies to make their authorized generics products—and reap the financial rewards.
Long a thorn in the side of generic pharmaceutical companies, citizen’s petitions, which are typically launched by a branded company in an attempt to delay the launch of a generic, have been proliferating for years now.
“It’s become almost a knee-jerk reaction by branded companies when a generic is launched,” said Bill Rakoczy, a partner in the law firm Rakoczy, Molino, Mazzochi, Siwik.
This has become such a problem, he explained, that Congress has had to step in, and he expected to see some movement in Congress on this issue in 2008.
Funding at the FDA’s Office of Generic Drugs
Behind the scenes, there’s a huge backlog at the FDA’s OGD, which has seen the number of submitted applications increase by 150 percent, according to director Gary Buehler.
David Snow, chairman and chief executive officer of pharmacy benefit manager Medco, has called for increased funding for the OGD through generic user fees.
“It’s absurd to me that there is any excuse to not fund that office properly,” he said. “The reason they can’t get the applications through the system is because they’re grossly understaffed.”
According to the FDA, fewer generics are being approved for two reasons: A shortage of personnel and the number of faulty applications that generic companies submit. To address the massive backlog, the FDA is reviewing some applications in ‘clusters,’ as it did for the recent approval of generic Ambien (from companies including Teva, Mylan, Dr. Reddy’s and Watson). This method “can only be used when we get a number of applications on the same day,” Buehler said.
Also attempting to improve the generic drug situation, Buehler said the agency has increased its staff “so we have benefited a lot from the increase in resources, but it hasn’t kept pace with the increase in applications.”
He said the OGD needs up to 100 more employees over the next three years to eliminate the build up—a move that would cost between $16 million and $19 million a year.
Grocer sings new tune in community involvement
Meijer is taking another step in community relations, to the tune of promoting and selling CDs of local musicians.
The Michigan-based 176-unit grocery chain launched the Outside the Mainstream promotion in February with a solo CD from Josh Davis, a singer from Lansing, Mich., whose Fool Rooster CD was recognized by Performing Songwriter magazine for its lyric.
Each month, the chain is featuring a new performer in its circulars, which are sent weekly to 7 million households in Ohio, Michigan, Illinois, Indiana and Kentucky, according to company vice president of public affairs Stacie Behler. Meijer purchases 1,000 of the artist’s CDs and offers them for sale in all the chain’s stores for $7.49.
“The goal of the program is to bring some of the talent that we find in our own backyards to a wider audience than they can normally reach by themselves,” Behler said. “And by supporting this with a low price and a feature in our circular, hopefully it will lead people to gamble on the purchase of music that is worthy of discovery.”
Meijer, according to Behler, is trying to create regional loyalty to its stores by promoting local talent.
CDs chosen for promotion, according to the chain, must have a UPC and be professionally duplicated. Submitted CDs are sorted according to state and chosen on the basis of whatever state will be featured that month and how different the music is from the previous month.
Featured in April is Michigan-based Potato Moon with its CD “The Life of The Lonely Jones.”
CVS wins Caremark battles
WOONSOCKET, R.I. —The battle for Caremark Rx has finally come to an end. And, to the dismay of Express Scripts, CVS has emerged the winner, creating a $75 billion pharmacy benefit management powerhouse that is likely to serve as a benchmark for additional mergers within the industry.
“CVS/Caremark will offer end-to-end services, from plan design to prescription fulfillment, as well as the opportunity to improve clinical outcomes, which will result in better control over health care costs for employers and plan providers,” stated Tom Ryan, president and chief executive officer of CVS/Caremark, late last month when the deal closed. “The company will improve the delivery of pharmacy services and health care decision-making, enabling consumers to benefit from unparalleled access, greater convenience and more choice.”
With the close of the transaction—ultimately valued at $27 billion—CVS/Caremark has moved into a strong, competitive position. The combined company will be No. 1 in pharmacy sales, PBM-managed lives, specialty pharmacy sales and retail-based health clinics. It will be No. 2 in mail services.
That adds up to a lot of extra leverage for the retail health care juggernaut with suppliers, as well as insurers and payers.
In terms of synergies, CVS expects to realize between $800 million to $1 billion in revenue synergies in 2008, and significantly more thereafter. The company expects about $500 million in cost savings, largely related to better purchasing.
“We would like to note that every deal that both CVS and Caremark have done historically has yielded synergies significantly in excess of original guidance,” stated Citigroup analyst Deborah Weinswig in a recent research note. “We believe this deal will be no exception.”
Charles Boorady, also of Citigroup, believes that if the company achieves cost savings from the drug-procurement process, it likely will come from a combination of the following: manufacturers accepting the lower price or offering greater rebates, the wholesalers and distributors accepting lower prices and manufacturers bypassing the wholesalers and selling directly to the combined CVS/Caremark entity.
While many industry observers view the merger as a boon for the companies, it undoubtedly will have major implications on the industry, in general, as vertical integration is a new paradigm that—if successful—could clear the way for more mergers moving forward, with Medco and Express Scripts likely being the next targets.
“The fragmentation in the past may be the reason why vertical integration did not work, but the sheer scale of the CVS/Caremark company may be able to make it work,” Boorady said. “The only test will be whether customers buy into the concept or the concerns over the perceived channel conflict will outweigh it.”
Either way, Boorady sees it as a win-win for rival PBMs. “I see Medco and Express Scripts winning either way. If this integration works, they are likely to be the ones that are acquired next. If it doesn’t work then they could stand to gain customers that prefer a standalone [PBM] instead of a vertically integrated model.”
Another issue such a deal brings to the forefront is network restriction. If customers are willing to restrict the retail pharmacy so that employees can get their prescriptions filled at a single chain, or just a few chains in the market, then it will make the synergy from a vertical integration more obvious, according to Boorady.
However, this has been a concern for several years and has yet to materialize.
“I think most employers have concluded, and will continue to conclude, that the sheer hassle factor that you are putting on your employees by making them go to a CVS instead of a Walgreens, or vice versa, isn’t really worth what little savings you can get relative to other things you can do that present less of a hassle to the employee but can save a lot more money,” Boorady said.
However, prior to the deal, CVS Pharmacare controlled a provider network of more than 56,000 retail pharmacies. Meanwhile, Caremark’s network numbered more than 60,000 retail pharmacies, so it is unlikely that the combined company, post-merger, would suddenly pull back the size of its network—particularly, if the end goal is to remain attractive to insurers and payers and competitive with stand-alone PBMs.
According to William Blair & Co. analyst Mark Miller, the combined company is facing its first big test as it expects an announcement on the large Federal Employee Program contract—currently up for negotiation—as early as May. Three years ago, Caremark won this contract from Medco and it is likely that the two PBMs, among others, will bid for this business aggressively.
“While there are many moving parts to these types of negotiations, this will be the first big test for the new CVS/Caremark, and may provide some incremental perspective on the current state of the competitive environment,” Miller stated in a research note.
In related news, CVS/Caremark has announced the members of the company’s board of directors. As previously disclosed, the 14-member board was evenly split among designees from CVS and Caremark.
Former Caremark chairman and chief executive officer Mac Crawford has been elected chairman of the board of the combined company. Ryan will continue to serve as president and chief executive officer.
The following individuals named to the board from CVS are:
Ryan, president and chief executive officer of CVS/Caremark Corp.
David W. Dorman, senior advisor and partner, Warburg Pincus LLC.
Marian L. Heard, president and chief executive officer, Oxen Hill Partners.
William H. Joyce, chairman and chief executive officer, Nalco Co.
Terrence Murray, former chairman and chief executive officer, FleetBoston Financial Corp.
Sheli Z. Rosenberg, former vice chairman, president and chief executive officer, Equity Group Investments LLC.
Richard J. Swift, former chairman, president and chief executive officer, Foster Wheeler Ltd.
The following individuals named to the board from Caremark are:
Mac Crawford, chairman of CVS/Caremark Corp.
Edwin M. Banks, founder, Washington Corner Capital Management LLC.
C. David Brown II, chairman, Broad and Cassel.
Kristen E. Gibney Williams, former executive of Caremark’s Prescription Benefits Management division.
Roger L. Headrick, managing general partner, HMCH Ventures; president and chief executive officer, ProtaTek International
Jean-Pierre Millon, former president and chief executive officer, PCS Health Systems
C.A. Lance Piccolo, chief executive officer of HealthPic Consultants