A Market Overview of the Generic Industry Today
The outlook for the generic drug industry for the next several years is promising yet volatile. It will benefit from an unprecedented number of major brand-name drug patent expirations, but will also be confronted by a changing health care landscape and uncertain economy.
Generic medications are currently a bright spot in the prescription medication market. Sales of generic medications continued to rise even as the volume of prescription medicines consumed overall rose at historically low levels in 2010. According to the IMS Institute for Healthcare Informatics, there was a 2.3% increase in spending on prescription medications in the United States in 2010—strikingly lower than the 5.1% growth rate in 2009. But the breakdown of 2010 spending figures in an April 2011 IMS report reveals that “Spending on brand-name drugs declined 0.7% in 2010, while spending on branded and unbranded generics rose 4.5% and 21.7%, respectively.”
The main factor behind the slowdown in overall prescription pharmaceutical spending rates and the growth in generics in 2010 as the loss of patent protection for a number of major branded products. Also playing a role was the slower demand and less spending on new therapies as fewer patients visited their health care providers and initiated new chronic therapy treatments, due to poor economic conditions.
In 2010, generic medicines accounted for 78% of prescriptions dispensed by retail drugstores and long-term care facilities—a historic high that is 4% higher than 2009 figures. All 10 of the most-prescribed medications in the United States were generic drugs, led by the generic equivalents of Vicodin (hydrocodone plus acetaminophen), Zocor (simvastatin), and Zestril/Prinivil (lisinopril).
Rising Sales of Generics, Declines in Brand Names
Patent expirations of major branded drugs are peaking in the next few years, fueling continued growth in the US generic drug market. Michael Kleinrock, Director of Research Development at IMS, notes that the significant boon realized by generic companies as a result of branded patent expirations will last for a few years but then will come to an end. However, the pressures that are expected to be brought to the market by changes in the US health care law—including its effect on the Medicare and Medicaid programs—will likely keep the growth in the generic market going well into the future.
The market analysis and research firm RNCOS Industry Research Solutions noted that despite the recession and slowdown in overall pharmaceutical spending, generics enlarged their share in the market in terms of both revenue and prescriptions. As noted in Marketwire (March 22, 2011), RNCOS predicts that the US generics market will grow at a compound annual rate of approximately 10% yearly from 2010 through 2013.
Unprecedented Patent Expirations Will Drive Generic Usage
Several very popular drugs became first-time generics in 2010, including the Alzheimer’s treatment Aricept (donezepil hydrochloride) and the prostate treatment Flomax (tamsulosin hydrochloride). In 2010, the FDA also approved the first generic formulation of the anticoagulant enoxaparin (Lovenox) after many years of controversy and review.
This year the attention-deficit/ hyperactivity disorder (ADHD) treatment Concerta (extended-release methylphenidate) became available in a generic version, and the FDAapproved generic version of OrthoMcNeil-Janssen’s antibiotic Levaquin (levofloxacin) also became available. In November 2011, Pfizer’s blockbuster cholesterol therapy Lipitor (atorvastatin) loses patent protection. Eli Lilly’s antipsychotic olanzapine (Zyprexa), GlaxoSmithKline’s asthma drug Advair Diskus (fluticasone propionate), Novartis’s breast cancer treatment Femara (letrozole), and Pfizer’s glaucoma drug Xalatan (latanoprost) are each losing patent protection this year.
The expiration of high-sales brandname drug patents will peak in 2011 and 2012, with 6 of today’s 10 largest products in the United States expected to face generic competition. Important patent expirations will continue to accrue in 2012 through 2015 in many therapeutic areas, including treatments for Alzheimer’s disease, diabetes, hypertension, cardiovascular disease, cancer, asthma, arthritis, pain, depression, schizophrenia, multiple sclerosis, and gastroesophageal reflux. By 2016, medications that currently generate $133 billion in sales for brand-name manufacturers in the United States will be facing generic competition (Table).
Effects of the New Health Care Law
“It’s fairer to say ‘How will generics affect the new health care law?’ than ‘How will the new health care law affect generics?’” said Kleinrock. “Generics will make drugs more affordable.” The evidence shows that generics offer significant cost savings: according to the Centers for Medicare & Medicaid Services (CMS), generics now account for 69% of prescriptions dispensed in Medicare, yet account for only 18% of the program’s drug spending.
The passage of the Patient Protection and Affordable Care Act (PPACA) will itself affect generics by expanding drug coverage to as many as 32 million Americans who currently do not have health insurance. This includes 16 million people who are anticipated to obtain coverage through Medicaid, significantly increasing the number of prescriptions paid for by Medicaid.
Aware that rates of generic dispensing are affected by pharmacy reimbursement policies, Congress addressed 2005 Deficit Reduction Act (DRA) Medicaid reimbursement formula changes that had attempted to reduce federal government payments to state Medicaid programs for generic drugs. These changes had been the subject of a court injunction, and Congress took the opportunity in the PPACA to increase the maximum level of federal government reimbursement for Medicaid generic drugs. The full impact of these changes will be determined by CMS regulations and state policies.
The PPACA reverses some of the 2005 DRA’s proposed reductions in generic reimbursements through modifications in the definition of Average Manufacturer Price, which the new health care law uses to calculate reimbursements to pharmacies for Medicaid-dispensed drugs. It is estimated that the reimbursement formula will be between the pre-2005 rate, which has been in effect due to the injunction, and the proposed DRA rate.
If data from a recent study conducted by the National Bureau of Economic Research on the impact of Medicaid are any indication, adding 16 million people to the program will certainly mean a greater demand for prescription drugs. The study found that previously uninsured patients were 15% more likely to use prescription medications after going on Medicaid. They were also 30% more likely to visit a doctor or clinic after they were insured by Medicaid—a factor described earlier as being directly related to prescription drug consumption. It can be expected, therefore, that demand for generic medications will rise after this provision of the new health care reform law takes effect in 2014.
The PPACA legislation also gradually fills much of the “Doughnut Hole” coverage gap for Medicare Part D enrollees for both brand-name and generic prescription drugs. Starting in 2011 and extending through 2020, beneficiaries in the coverage gap receive gradually increasing subsidies from brand-name manufacturers and CMS, respectively, for prescription drugs and generics. In 2020, Medicare Part D beneficiaries will be responsible for only 25% of the total cost of their drugs during the coverage gap. In addition, between 2014 and 2019, the law reduces the out-of-pocket amount required to reach the catastrophic coverage threshold, reducing costs for those with relatively high prescription drug expenses. With Medicare Part D representing 30% of all prescriptions in 2010, this change may well have a significant impact on drug usage.
The actuarial and consulting firm Milliman, Inc, has expressed concern that making the cost-share for brandname drugs the same as that for generics may discourage the use of generics because Medicare beneficiaries can hit the catastrophic limit more quickly with brand-name drugs. However, this concern has not been echoed by the Congressional Budget Office or widely reported by other analysts.
Important Issues Facing Generics
An important issue facing the generic pharmaceutical market is the challenge to develop biosimilars, also called “biogenerics” and “follow-on biologics.”
“Currently, the number of companies involved in marketing biosimilars is relatively low because of technical and clinical trial requirements needed for approval,” said Kleinrock, who predicts that there won’t be any biosimilars marketed in the United States until 2014.
Given the molecular complexity of biopharmaceuticals (proteins, glycoconjugates, and antibodies), the FDA faces an enormous regulatory challenge to meet the requirements of the recently passed Biologics Price Competition and Innovation Act (BPCI) of 2009 to approve biologics as biosimilar to or interchangeable with reference products, notes an April 2011 Life Sciences Law & Industry Report. With biopharmaceuticals expected to represent 50% of the top 100 prescribed medications by 2014, this is an important area of future growth for the generic drug industry.
Kate Kuhrt, director of generics and API intelligence at Thomson Reuters, noted that although generic manufacturers are trying to move into biosimilars, there are significant barriers to getting biosimilars to market, including the costs of developing and running clinical trials, manufacturing, and marketing. “Development costs for follow-on biologicals are estimated to be between $100 and $200 million, compared with $1 to $5 million for a typical small molecule generic drug,” she said.
According to the Generic Pharmaceutical Association (GPhA), the investment in technology required to bring these products to market will both add to the risk and change the economics required for the industry to succeed. “Companies who compete in the biosimilar segment will need to invest in the characterization technologies, process engineering, and clinical tools needed to demonstrate the safety and efficacy of these products. This will change the face of our industry,” said GPhA board member Craig Wheeler, who is president and CEO of Momenta Pharmaceuticals.
But steps forward in the area of biosimilars have begun. The BPCI establishes a process for the FDA to approve biosimilar versions of brandname biologic products through an abbreviated process. In a speech in April 2011 before the annual meeting of the GPhA, FDA Commissioner Margaret A. Hamburg, MD, told the group, “Under the abbreviated approval pathway that is now authorized by statute, biosimilar drugs can be legally approved due to their similarity to already approved reference products. This is a huge step forward.”
She stated that the FDA will begin the process of engaging stakeholders to develop the first user fee program for the biosimilars industry in order to help finance needed technologies and regulatory science and research needed to deal with the complexity presented by biosimilars.
Disruptions and Shortages
The number of prescription drug shortages has nearly tripled over the last 6 years, according to the FDA, reaching a record high of 178 in 2010 and continuing at a rapid pace. (This figure doesn’t include vaccines, immune globulins, and other biologics.) Most of the shortages have involved generic medications, especially injectables and intravenous drugs. Medications affected by shortages have included chemotherapy drugs, antibiotics, anesthetics, succinylcholine, and nutritionals. There have also been shortages of oral medications such as those for ADHD.
“Supply disruptions and drug shortages could become more important as some molecules do not have appropriate levels of redundancy in terms of manufacturers,” notes Kleinrock.
The shortages are growing more severe because of quality and manufacturing problems and a lack of raw materials, as well as business decisions and industry consolidation. The FDA is supporting legislation recently introduced to require companies to notify the agency when an issue arises that can lead to shortages.
Generic drugs are positioned for growth, largely as a result of the significant patent expirations of popular brand-name drugs over the next 5 years.
However, while growth is anticipated to continue, uncertainties created by the new health care reform law remain, and technical and financial hurdles posed by entry into the biosimilar drug category will need to be surmounted. PT
Jacqueline Syrop is a medical and health affairs writer based in New Jersey.