Generics market paints uncertain profit picture for industry
Is the generic drug industry a victim of its own success?
Since enactment of the landmark Hatch-Waxman Generic Drug Price Competition Act of 1984, which unleashed generic competition by setting limits on the patent life and market exclusivity of pioneer branded drugs, the explosive growth of copycat medicines has transformed the U.S. pharmaceutical market and saved trillions of dollars for consumers and public and private payers.
As of 2016, the last year for which full figures are yet available, generics accounted for 89% of all U.S. prescriptions dispensed, and are on track to reach market penetration levels exceeding 90% this year or next, according to New York City-based IQVIA, formerly QuintilesIMS. The insights company noted in a recent report that generics are set to account for 92% of prescriptions by 2021 as more drugs come off patent and payers look to generics and biosimilars as a way to reduce costs.
For generic drug makers and wholesalers — not to mention American consumers and pharmacy retailers themselves — the tsunami of generics has largely been a long-term bonanza. But it’s also spawned frenzied competition, scrambled predictable profit models and, at times, upended topline sales projections. And with the Food and Drug Administration focused on speedier generic drug approvals and lower prices, an increasingly crowded marketplace continues to upend expectations for sales and profit margins for all segments of the generic supply chain.
All signs point to the continuation of the long upward trend in generic utilization, albeit at a slower pace as generic market penetration matures and approaches saturation levels. However, cost savings and an upcoming new surge in branded-drug patent expirations should keep the growth engine humming. Industry insiders also note that generics will play a key role in keeping costs low as large portions of Americans get older.
“As the U.S. population ages and more patients face chronic disease, healthcare costs will grow faster than the economy or the government can sustain,” Maple Grove, Minn.-based Upsher-Smith president and CEO Rusty Field said. “In this environment, the use of generics will continue to increase, especially as the FDA has made it a priority to reduce the backlog of generic drug applications, and to get even more generics into markets [that are] without sufficient competition.”
Fueling the continued increase in generic utilization will be another round of expiring patents on pioneer medicines. Although the stream of patent expirations won’t approach the “patent-cliff” years of explosive generic opportunity earlier in the decade, the long-term outlook for generic makers remains solid as another crop of high-selling pharmaceuticals approach the end of their exclusive market protection.
“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,” said Murray Aitken, executive director of the IQVIA Institute for Human Data Science. The slowdown in branded medicines losing patent protection and the rise of more me-too manufacturers vying aggressively for first-to-file approval, and marketing rights from the Food and Drug Administration, he said, will create “fewer opportunities and higher competition … [for] generic companies.”
Nevertheless, Aitken said, “The reduction in overall spending as branded medicines lose exclusivity is expected to total $143.5 billion in the next five years — more than 1.5 times the impact as in the past five years. This includes the estimated impact of biosimilars, which will contribute between $27 and $58 billion.”
Despite the highly publicized — and highly controversial — sharp increases in price for some single-source generics in 2013 and 2014, overall generics have been on a steady long-term decline.
“A number of generic drugs have … undergone steep price hikes, but in general, generic prices, as a category, remain flat or falling,” said Allan Courkell, senior director of health programs at Philadelphia-based Pew Charitable Trusts.
Generic drug prices have been dropping since at least 2010, according to the Government Accountability Office. “They have fallen even in the face of high-profile exceptions,” noted a report from the website ProPublica and The New York Times, with “dozens of old generic drugs (having) risen in price in recent years, for reasons that include supply disruptions and competitors’ leaving the market.
“Despite these cases, the trend toward deflating generic prices appears to have accelerated as companies have more aggressively undercut each other’s prices,” the report added.
“Generic inflation began easing in 2015,” said Adam Fein, president of Philadelphia-based Pembroke Consulting and CEO of Pembroke’s Drug Channels Institute. “This was due partly to the FDA’s having cleared much of the backlog for new generic drug applications. The FDA’s actions show why generic inflation is unlikely to return soon.”
For the past several years, the agency has been working full-bore to clear out the backlog of generic approval applications. Bolstered by a major increase in funding generated by the Generic Drug User Fee Act of 2012, or GDUFA, the FDA’s Office of Generic Drugs hired hundreds of new staffers and dramatically accelerated its review and approval process. As a result, the agency approved or tentatively approved 835 generics applications in fiscal year 2016 — the most ever in a single year until 2017, when the agency set another record.
The increase in approvals comes as price deflation becomes more of the norm in the generics market.
“The overall market for mature generic drugs is deflating by about 10% per year. Many generic drugs have dropped significantly in price over the past four years,” Fein said.
“Surprisingly, the prices for about 1-in-5 generic drugs remain elevated. … Scott Gottlieb, the new head of the Food and Drug Administration, has prioritized actions that should squeeze the remaining generic inflation out of the system.”
Gottlieb, who took over as head of the FDA last May, has tasked the agency to speed up generic drug approvals as a way to boost market competition and lower drug prices, in line with the Trump Administration’s oft-stated plan to reduce pharmaceutical prices. “We’re looking to create competition where there isn’t competition,” Gottlieb said last year.
More competition means lower prices — which Fein notes that this also comes with side effects. “I expect generic drug deflation to continue — and possibly accelerate — over the next 12-to-24 months,” Fein said. “Payers and consumers
will be the ultimate winners, but the drug channel faces significant disruption.”
‘A new period of hyper-competition’
Increasing competition and the downward trend in generic drug costs have hammered profits for manufacturers and roiled topline sales and profit margins for wholesalers and pharmacy retailers. And though consumers have generally seen some benefit , it has not been quite as substantial as advocates would have liked.
“Since 2013, average out-of-pocket costs for all brand and generic prescriptions have decreased by $1.19, with … 2016 brand costs declining to $28.31 from $32.36 in 2013 and generics dipping to $5.54 from a high of $6.05 in 2013,” IQVIA reported in its outlook to 2021. “The … list price for brands averaged 12 times higher than the average out-of-pocket cost for patients in 2016 compared with three times higher for generics.”
The growing price differential — and Gottlieb’s marching orders for a more aggressive FDA approach to the review and approval of generic drug applications — present the retail pharmacy industry with
“The pharmacy industry has entered a new period of hyper-competition, driven partly by a plateau in the generic dispensing rate,” Fein said. “As the market matures, the pressures on pharmacy profits from generic drugs are intensifying.”
It’s no secret that the dwindling margins for generics and the uncertain outlook of a highly competitive market impact retail pharmacies.
Among the big players, CVS Health reported a 3.4% decrease in pharmacy same-store sales in its third quarter of 2017, which included the “negative impact of [approximately] 435 basis points due to recent generic introductions,” according to the company.
CVS Health also reported a slowdown in its specialty pharmacy business due in part to an “increase in generic dispensing within specialty.” However, the company noted, the growth of biosimilar versions of biotech medicines “decreases revenue, but benefits margin.”
In its third quarter, Camp Hill, Pa.-based Rite Aid reported a roughly 198-basis-point negative impact that it said was the result of new generic from new generic introductions in its fiscal 2017 third quarter.
Based on a market analysis by the discount pharmaceutical website GoodRx, retail drug prices for 92 mature and commonly prescribed generic drugs fell 2.4% on a weighted-average basis from mid-2016 to mid-2017. The deflation that Fein predicts will continue as Gottlieb’s FDA streamlines the approval process, and it also comes as generics manufacturers continue to consolidate. Among notable mergers this year, Amneal is hoping to complete its acquisition of Impax Labs.
What this means for the retail pharmacy industry, in a word, is uncertainty that will force retailers to anticipate the impacts that generics will have on their bottom lines.
“Further consolidation among generic manufacturers coupled with changes in the number of major brand-name drugs anticipated to undergo a conversion from branded to generic status may … result in gross margin pressures within the industry,” Walgreens Boots Alliance chairman and CEO Stefano Pessina said recently. “In any given year, the number of major brand-name drugs that undergo a conversion from branded to generic status can vary, and the timing of generic conversions can be difficult to predict, which can have a significant impact on retail pharmacy sales and gross profit dollars.”
Pharmacy plays key role in chronic care
Chronic care management has become an all-consuming topic for retail pharmacy. It has moved beyond a niche industry topic to a high-profile, national conversation that involves healthcare costs, government policy, emerging technologies and, most importantly, daily life for millions of consumers.
The pharmacy industry is now debating next steps in chronic care management to identify strategies that support the best outcomes and sustainable business models for an era of value-
“Today we have the majority of the population with a chronic care condition, rising costs in our system, our population living longer, changing policy, increased consumerism, emerging technologies and the real possibility of disruptive entry into the pharmacy business,” said Andre Persaud, a business advisor and senior industry executive with 25 years of retail and drug store experience. “What an exciting time to be discussing chronic care management.”
Chronic care management was the focus of a panel moderated by Persaud at the recent DSN Industry Issues Summit in New York City, at which much of the discussion centered on challenges related to diabetes, and the role pharmacy can play in keeping patients healthy.
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“If we can keep the patients at the center and keep the focus on their needs, we’re going to have success,” said Crystal Lennartz, chief pharmacist at Health Mart. “As pharmacists, we know we touch the patient 12-plus times a year more than a primary care provider does, so how can we use those touches to really empower the patient to make a difference?”
Key role of the pharmacist
Community pharmacy can play an important role in filling gaps created by primary care shortages, said Becky Dant, director of professional services at Issaquah, Wash.-based Costco.
“There are a lot of disease states that pharmacists are capable of managing, including blood pressure, hypertension and diabetes,” she said. “If we’re involved with the healthcare systems in our communities and have agreements with those systems, we can manage some of these less complicated patients to goal, and refer them back to the provider when they’ve been titrated to goal on their blood pressure medications or their diabetes medications.”
Leon Nevers, director of business development and procurement at San Antonio-based H-E-B, pointed to the need for new business models to better address chronic care.
“I think in the future we’re just going to have to shift from volume transactions — and honestly, we’re already evolving into that — by discussing things like health clinics and new diabetes management tools and different things that are going on in the industry,” Nevers said. “We’re going to have to be reimbursed for that and manage the data and show outcomes.”
Having the ability to prescribe certain medications is an important component for pharmacists as they play bigger roles in chronic care, according to Earth City, Mo.-based Medicine Shoppe International vice president Todd Treon.
“The community pharmacist is engaging and playing a more important role,” he said, citing activities that include more collaboration with physicians and sharp growth in the level of screenings. “I think as you look ahead to how that paradigm will shift, it goes to prescriptive authority. Arguably, you now have 38 states where there’s some level of prescriptive authority that’s available to the community pharmacy. That enables them to extend as a point-of-care destination.”
Technology’s impact on diabetes
Marcus Silva, director of U.S. marketing and analytics at BD Medical–diabetes care, said the extreme prevalence of diabetes and the staggering costs — more than a billion dollars globally in the short term — create an opening for solutions from technology.
“It’s no surprise we’re seeing advances in technologies,” he said. “We’re seeing wearable devices that can connect to CGM, connect to smart meters, connect to healthcare professional offices, even connect to paying members’ iPhones through an app. These advances give us hope that someday we could potentially eradicate the complications and burdens associated with diabetes. And we do know that to truly maximize patient outcomes, you want to marry the advances in technologies to best-in-class fact-to-face counseling.”
Given that chronic diseases overwhelmingly impact the elderly, technology for this segment of the population needs to be as user-friendly as possible, Tampa, Fla.-based Smart Meter vice president of sales Brahim Zabeli said.
“The elderly are the least likely to be able to use a connectivity tool,” he said. “They’re the least likely to be able to use a smartphone or be willing to understand how it works. The trick is to make the technology very, very easy. Without that, there’s not going to be any adoption.”
Pharmacists are giving more thought to how their roles integrate with their larger organizations’ efforts to address such chronic care diseases as diabetes. In the grocery channel, the opportunities to reach beyond the prescription counter include marrying pharmacy guidance with resources on the food side of the store.
“In the grocery environment, we have opportunities to learn more about nutrition as pharmacists, or bring in nutritionists as experts to help our patients shop through the store,” Dant said. The goal is to “help patients make better food decisions, be able to better identify healthy choices — whether it’s snacks or meals — and help them with preparation.”
Pharmacists are taking a somewhat different tack in the independent channel, which differs from grocery in aspects that include a smaller front end, Lennartz said.
“So it’s less about the interaction with the front end, and more about curated products and services to meet the needs of the patients,” she said. “One of the ways that we’ve really seen our Health Mart pharmacies go the last mile is not just with in-home delivery, but in-home services, such as comprehensive medication reviews, so they can meet the patient where they are.”
Identifying solutions on the OTC side
Pharmacy also has a role to play in diabetes beyond the prescription counter when it comes to the OTC side of the store, executives said.
“People with diabetes who inject insulin tend to visit the store three times more than the average shopper,” Silva said. As a result, pharmacists have an opportunity to “educate them on ways to better manage their therapy, which typically results in the purchase of more things within the walls of the pharmacy that can help improve their self-care.”
Moreover, patients are more likely to patronize more of the store if pharmacies spur loyalty, both through financial incentives and outstanding service, Zabeli said.
“To the degree that retail pharmacy can continue to do what it’s doing from loyalty programs that provide economic incentives, and then also build upon them to treat that customer extremely well, all the better,” he said.
Industry leaders said they generally agree that preventive health has a major impact on managing chronic conditions, and emphasized that a range of stakeholders — from manufacturers to retail pharmacies — all have roles to play in fostering preventive measures.
“No matter what the chronic condition, there’s a lifestyle or [preventive] component to it,” Lennartz said.
She said Health Mart and McKesson have partnered with manufacturers on educational tools for providers, pharmacists and patients, among other initiatives. “Retail pharmacy, no matter what the sector — independent, chain or mass — has a really important role to play from a partner perspective,” she said.
Treon said “there are ways in which we can better partner with payers, manufacturers and other stakeholders to drive value.” He said that at a time of industry cost pressures, independents within his company’s franchise system and also at Cardinal Health have had to adjust to reimbursement realities.
“Our challenge as an industry is to help them to find scale, operating efficiencies and then work together across the partners, from the manufacturers to the payers and every point in between, to help bring it to reality.”
Last Word: Optimizing specialty supplying
The purpose of any prescription medication — whether it is a branded drug, generic, specialty medication or biosimilar — is to treat illnesses, cure diseases, mitigate symptoms or, in some cases, to help prevent disease. As an industry, it is our collective job to work together to get that medication to patients at the right time and right place in order for them to be successful.
Evolving distribution models
It is no surprise that the specialty pharmaceuticals market continues to grow, with both the number of specialty drugs and the percentage of drug spend increasing. While a number of these products are managed through the specialty pharmacy channel, many specialty drugs also can be dispensed at hospitals, clinics and retail pharmacies. This is particularly true of medications for hepatitis C, HIV and inflammatory conditions, among others.
These medications often have special needs for handling and storage, and may have shorter shelf lives than traditional medicines. This, when combined with the need to ensure access to help patients avoid delays in starting treatment, has changed how biopharma and life science companies think about distribution channels. More products are managed using a just-in-time approach that utilizes overnight delivery to fulfill next-day service to providers.
McKesson is building an ecosystem that connects biopharma and life sciences companies, providers, pharmacies and payers to successfully commercialize medications and maximize our collective impact on patients’ lives. Today, delivery service performance is the price of entry. We are proud that McKesson maintains 99.999% inventory and order accuracy. However, we believe what sets us apart is our ability to work with biopharma and life science companies to help educate and design the right commercial model that reaches a variety of healthcare providers to ensure patient access. This is about designing a commerical strategy that optimizes patient access to medication and supports the efforts of physicians, pharmacists and other healthcare providers to care for patients throughout their treatment journey.
Supporting biopharma companies with the careful coordination of their specialty products through the entire product lifecycle, McKesson’s third-party logistics, or 3PL, services provide a seamless service model for patient and customer ease of access. By combining McKesson’s long-standing distribution services success with pharmaceutical experience, our 3PL services help biopharma companies deliver products accurately and on time to hospitals, physician practices, pharmacies and clinics.
Beyond distribution models, McKesson is focused on helping patients avoid delays in treatment, using its award-winning call center to accelerate patient on-boarding, prior authorizations, medication benefit investigation and access to foundation support, if needed. McKesson utilizes live agent support to identify adherence barriers, and offers solutions that can be paired with financial assistance or educational support programs.
McKesson is committed to working with our biopharma and life sciences partners in designing the right commercial strategy for their medications. Together, we do this to improve the lives of the patients who we communally serve.
Layne Martin is vice president of supply chain services at McKesson Specialty Health.