Industry divided on authorized generics issue
One of the most challenging issues facing generic drug manufacturers is that of authorized generics. An authorized generic is a pharmaceutical originally produced by a branded manufacturer but, upon patent expiration, is marketed under a generic name.
Because many authorized generics are launched by subsidiaries of the branded companies, bringing them to market is easy. Authorized generics can bypass the rigorous FDA approval process and do not have to adhere to the 180-day market exclusivity provision granted by the Hatch-Waxman Act to the first generic on the market.
According to Kathleen Jaeger, president and chief executive officer of the Generic Pharmaceutical Association, the practice of authorized generics “is a brand tactic aimed at discouraging generic competition.”
The pipeline for authorized generics
|Brand company||Brand product||AG company||Approx AG launch date||Partnership vs. settlement||Timing of AG launch vs. first ANDA launch|
Since 2003, 103 authorized generics have been launched onto the U.S. market. Generic companies launched 69 percent of these drugs while brand subsidiaries launched the remainder.
Those statistics beg the question, Why would generic companies who are only hurt by competition from authorized generics, get into that business themselves?
“The one-word answer is revenue,” according to Eric Bolesh, research team leader with Cutting Edge Information. “If you can guarantee investment, it’s hard to turn it down. This is money going in the door and it’s money Wall Street is going to see.”
It also gives smaller generic companies an opportunity to get drugs out there, if they work for the branded companies, he added. “A small company is never going to invest in R&D and in having a law firm to bring the branded companies to court. So authorized generics make sense.”
While GPhA may be firmly against authorized generics, the Pharmaceutical Research and Manufacturers of America last year issued a report stating that authorized generics save consumers money by increasing price competition among drug makers. The report says that the generics are sold to pharmacies and health care facilities at greater discounts than regular generics.
These savings are hard to ignore, said Mark Merritt, president of the Pharmaceutical Care Management Association, which supports payers and consumers “I think it’s unclear whether, long-term, the generics companies will be hurt,” he said. “It’s very hard for us to turn down short-term savings until we know more about the long-term [impact]. It’s a trickier issue than it seems.”
Bolesh questioned the savings, citing studies that have shown prices actually drop more significantly in the long-term if there are many generic products on the market. But, the number of generic products that are launched is typically less if an authorized generic is present during the 180-day exclusivity period.
While the debate over authorized generics continues, bills have been introduced to both the House of Representatives and the Senate, asking for authorized generics to be blocked during a generic drug’s 180-day period of exclusivity. The Federal Trade Commission also is conducting a study of the use, and likely short- and long-term competitive effects, of authorized generics in the prescription drug marketplace, but as yet has drawn no conclusions.
Branded pharmaceutical companies and their authorized generic subsidiaries
|Brand company||Authorized generic subsidiary|
|Johnson & Johnson||Patriot|
Authorized generics are not the only thing that’s being thrown at generic companies by the branded pharmaceutical giants.
The number of citizen’s petitions, in which the FDA is asked to review a NDA based on legal or scientific reasons, that are filed is on the upswing and there is no sign that the pace is slowing down.
“These petitions have always been around,” said Bill Rakoczy, a partner at law firm Rakoczy Molino Mazzochi Siwik, who represents generic companies. “But they’re increasing because of the sheer number of generics [on the market now]. The brand companies have nothing to lose and it costs them nothing.
“It’s out of control and has almost become a knee-jerk reaction by the branded companies,” he said. For almost every generic that’s launched these days, he noted, there’s an accompanying citizen’s petition.
Citizen’s petitions are typically launched just before a generic drug is approved, which holds up the approval process and gives the branded equivalent more market exclusivity.
The FDA is not doing anything to protect generic companies against these petitions, although Sen. Kennedy has launched S.1082 legislation, the Food and Drug Administration Revitalization Act, which has a provision to remedy the delays wrought by them. It would also force the FDA to make decisions on them, so as not to delay the launch of generic drugs.
“So there could be some movement in Congress in the next year,” Rakoczy said. “It’s become such a problem that Congress has had to step in, because the agency, for some reason, hasn’t.”
Don Mizerk, an attorney with law firm Winston & Strawn also is confident that there are changes ahead. “I’m optimistic…that the FDA will be prohibited from delaying approvals while they are considering a citizen’s petition. And they’d have to act on them within 180 days, which would encourage brand companies to file them sooner.”
The FDA is in a difficult situation, he said, because if a citizen’s petition shows safety concerns, “[the FDA] is reticent to issue an approval until that concern is addressed,” since safety concerns are paramount.
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