/publications/issue/2006/2006-07/2006-07-5680

Authorized Generics: Good or Bad?

Author: Authorized Generics: Good or Bad?

Branded pharmaceutical companies have many tactics for fighting generic competitors, but few are as controversial as authorized generics. Under the Hatch-Waxman Act, the first generic company that successfully challenges a branded-drug patent is rewarded 180 days'exclusivity. The act, however, does not exclude products that have already been approved, so branded- drug companies compete by relabeling their existing products and selling them cheaply through a generics company as "authorized generics."

Since the first of these launches about 3 years ago, the practice has become so widespread that generics makers assume that there will be an authorized generic following every successful patent challenge, analysts say.

There is little argument that authorized generics have been effective in cutting into the profits and market share of generics companies. Banc of America Analyst David Maris estimates that the tactic cuts by 50% the generic company's potential profit during the 6-month exclusivity period.

The Generic Pharmaceutical Association (GPhA) claims that the practice could discourage generic companies from filing challenges, so that ultimately fewer generics will come to market. Attempts by generics companies to stop the practice have failed, however, with courts upholding a decision by the FDA that authorized generics can actually be "pro-competitive," because they generate more competition and lower prices during the exclusivity period.

Now, the Federal Trade Commission (FTC) is planning a study of the competitive effects of authorized generics, in order to analyze the long-and short-term effects on generic drug competition. The FTC plans to examine drug pricing, licensing agreements, and business factors related to the issue. If the FTC finds that authorized generics are anticompetitive, it could lead to new legislation aimed at curbing the practice.

In the meantime, though, the situation is becoming more complex as authorized generics become even more entrenched. Nearly all the major generics companies, including those that have publicly objected to the practice, have now signed licenses to sell authorized generics. Authorized generics have included versions of blockbusters such as paroxetine hydrochloride (Paxil) and bupropion SR (Wellbutrin SR). One fast-growing company, Prasco, has positioned itself as an authorized generics supplier, distributing versions of fexofenadine hydrochloride (Allegra), glimepiride (Amaryl), and other products under license.

More recently, authorized generics have become part of another controversial trend: complex settlements in which a generics company agrees to drop a patent challenge, delaying market entry in return for incentives such as cash and a license to sell an authorized generic at a later date.

Recent examples include a deal between brand company Forest Laboratories and generics company Alphapharm over escitalopram oxalate (Lexapro), according to Gregory Glass of ParagraphFour.com, who tracks patent challenges. "We are beginning to see authorized generics used as a bargaining chip," he said.

Agreements like this one have become common since appeals courts decided that they were legal in 2005, reversing a previous FTC decision, said FTC Commissioner Jon Leibowitz earlier this year. At least 7 of 10 settlements between brand and generics drug makers this year have included a payment from the brand company and an agreement to defer market entry. "This appears to be the new way to do business," he said.

While the FTC moves to study authorized generics, Congress has acted to plug what generics proponents saw as a legal loophole that was costing the government money. Until early this year, makers of brand drugs were not always required to include authorized generics in the "best price" calculation provided to the Centers for Medicare & Medicaid Services. That provision has now been changed, and the GPhA estimates that the fix will save the government more than $150 million per year.

The debate over authorized generics is likely to continue for some time. The FTC is not due to complete its proposed study until 2007. In the meantime, most observers say that authorized generics will remain an established part of the pharmaceutical industry.

Mr. Faden is a freelance medical writer based in Portland, Ore.