A Message from Kathleen Jaeger: Keeping an Eye on the Future of Generics

FEBRUARY 01, 2006

As the generic pharmaceutical industry looks ahead to 2006, several issues could affect how accessible affordable medicines will be for patients. These issues include Medicaid reform, authorized generics, biodefense, and generic biopharmaceuticals.

Medicaid Reform and Authorized Generics

With state spending on Medicaid outpacing spending on primary education, governors and state and federal lawmakers recognized that significant steps were needed to control program costs. In December 2005, Congress took a few steps by approving legislation to change certain aspects of the Medicaid program.

One issue was rebates. Through the rebate program, generic manufacturers reimburse states at a discount for the medicines sold under Medicaid. Initially, the Senate had considered increasing the federal rebate standard on generics from 11% to 17%, but rejected this idea after recognizing that generics operate on a much different business model than the brands. If generics were forced to pay a rebate higher than 11%, many companies would have been forced to sell many drugs at a loss, or even discontinue manufacturing less profitable medicines. That would have been unfavorable for all consumers and for the Medicaid program.

In addition, Congress modified the Average Manufacturer Price (AMP)-based model as the basis for pharmacy reimbursement; pharmacies now will be required to reimburse at AMP plus 250%. The Generic Pharmaceutical Association (GPhA) is still reviewing this change to determine the impact on beneficiaries, pharmacies, generic utilization, and the Medicaid program. In particular, the generic industry wants to ensure that any new reimbursement model will include fair and reasonable reimbursement to pharmacists and continue to encourage increased generic drug utilization.

Congress could take further steps to realize even more savings in Medicaid, such as embracing genericsfirst programs, with written justification; eliminating carve-outs; redesigning prescription pads; and organizing education campaigns. Some states already have enacted such cost-saving measures, and GPhA is encouraging federal lawmakers to take similar actions. Just a 1% increase in generic utilization could save Medicaid $475 million each year.

As part of Medicaid reform, Congress also changed the way that the best price of authorized generics will be reported to Medicaid. Authorized generics are brand products masquerading as generic products. Under current law, the federal Medicaid program—and thus, the American taxpayer—is overpaying for these brand medicines marketed under a different label by the brand company or a third-party distributor.

Currently, the Centers for Medicare & Medicaid Services (CMS) fails to require brand companies to include their authorized generic in their "best price" calculation, which is the lowest price at which CMS purchases medicine. Through the manipulation of this loophole in the system, some brand companies obtain a major financial windfall, to the detriment of federal and state government programs. In other words, when it comes to federal reimbursement, CMS is paying higher prices for these products. Legislation approved by Congress at the end of 2005 should ensure that if brands want to make generic products for Medicaid, they will be reimbursed at generic prices rather than monopolistic brand prices.

Prior to passage of this legislation, CMS had acknowledged that it was looking into its treatment of authorized generics, and that CMS' Office of the Inspector General would be undertaking the review. Similarly, the Federal Trade Commission is studying the issue.


Throughout 2005, GPhA kept a watchful eye on proposed changes to BioShield, a federal law encouraging the development of countermeasures, or medicines that could be used to treat Americans in the event of a bioterrorist attack. Several members of Congress had introduced legislation to expand BioShield in a way that could make it difficult to bring generics to market in a timely matter. Specifically, lawmakers proposed including generous patent extensions and market exclusivities on already-marketed products as incentives for companies to become involved in the biodefense arena.

GPhA absolutely supports efforts to encourage the production of these countermeasures, such as full funding during the development cycle of these products, guaranteed purchasing, FDA fast track review, and the creation of a robust biodefense pharmaceutical sector.

Yet, patent extensions, as well as market exclusivities, would only encourage brand pharmaceutical companies to extend patents on blockbuster products instead of developing new ones. Patent extensions also would greatly increase costs to the health care system by delaying generics from coming to market.

Late last year, the Senate Health, Education, Labor, and Pensions Committee approved S. 1873, the Biodefense and Pandemic Vaccine and Drug Development Act of 2005. As it was approved by the committee, this bill defined "countermeasure"so broadly that many drugs approved as common cures could be considered countermeasures. Even worse, those products would not have to be novel—a company could simply change the label of a medicine, and the product could qualify for 10 years of market exclusivity.

Although Senators approved the bill in committee, they did agree to make changes to address GPhA's concerns and others prior to bringing the bill for a vote on the Senate floor. But no matter what the Senate ultimately decides to do—and House lawmakers are interested in developing their own legislation—any bill should be free of intellectual property protections that would delay generics from coming to market.

Generic Biopharmaceuticals

The biotech segment of the pharmaceutical industry is growing at a rapid rate, with some estimates placing growth at more than 17% and sales at roughly $30 billion. As of now, more than 600 biotech drugs are in various stages of clinical trials, with even more in development.

In 2006, however, patients will continue to pay high prices for biopharmaceutical products, such as insulin and human growth hormone, unless the FDA decides to allow the approval of generic versions of these and other expensive medicines.

Generic biopharmaceuticals could offer tremendous savings to patients and the health care system. In Australia, a newly launched generic version of human growth hormone costs 25% less than the brand version. In the European Union, the first wave of generic biopharmaceuticals is estimated to save governments around 2 billion euros a year.

Yet, Americans will not be able to realize those savings unless the FDA moves forward with a definitive, flexible, abbreviated approval pathway for generic biopharmaceuticals. The FDA already is aware that generic biopharmaceuticals will be part of the health care system in the very near future. For several years, the FDA has been working to develop a white paper and guidance documents that will provide a guide for how these medicines should be approved. The FDA's concerns about how best to merge the scientific and legal issues involved has slowed the process. GPhA is hopeful that these issues will be resolved soon. The American health care system depends on it.

Kathleen Jaeger, RPh
President and CEO
Generic Pharmaceutical Association

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