After the Patent Cliff: Calm After the Storm

JULY 11, 2014
Eileen Oldfield, Associate Editor
The generics industry experienced a year in transition in 2013, seeing the effects of the patent cliff wane during the first half of the year, and experiencing an increase in generic drug list prices during the latter half of the year. Meanwhile, the generics drug market has seen a lull in 2014 that is expected to continue to 2015, before the next round of patent expirations take hold.

“We may have seen the peak of smallmolecule patent expiries and the finish of the erosion of those, but we’ve also perhaps seen the bottom as far as the price points for some of the generics,” Michael Kleinrock, director, research development, of IMS Institute for Healthcare Informatics, said in an interview with Pharmacy Times.

After years of slow growth resulting from patent expirations, the use and cost of medicines increased slightly in 2013, according to the IMS Institute for Healthcare Informatics’ report, Medicine Use and Shifting Costs of Healthcare. The underlying dynamics of drug spending, including components meant to ensure long-term savings and restrain drug spending, remain unchanged, however. As a result, the use and cost of medicines are not expected to increase greatly in coming years.

According to the report, nominal pharmaceutical spending increased 3.2% to $329.2 billion in 2013, and accompanied the 0.9% increase in medicine use and 1.0% increase in medicine cost. Researchers attributed the uptick to fewer patent expiries and new drug launches. Table 1 shows the components of change in total spending from 2009 through 2013.

Reduced impact from patent expirations was the biggest single contributor to spending growth, and accounted for 3.5% of the 4.2% total shift from 2012 to 2013. The lessened impact meant brand manufacturers lost $19 billion from patent expirations in 2013, which is a $10 billion decrease from the $29 billion lost in 2012. Despite the decrease, groups of primary care therapy classes with significant patent expirations still declined 10% in 2013, reaching $80 billion in spending.

Therapy areas with limited innovation or patent expirations contributed to the largest amount of spending growth, which was $128 billion in 2013. Protected brands contributed $20 billion to the total growth.

Generics Market Still Volume-Driven
Despite the decrease in patent expirations, the generic drug industry has seen some price-driven growth in generic drug list prices that has been countered by difficulties in getting approvals for certain generic formulations.

“Usually when there’s a big expiry, it’s instant,” Kleinrock said. “There are cases in the market where the generic challengers are not able to get approved and not able to get into the market. That can have substantial impact, and can certainly act as a halo for some of the branded companies.”

Spending in therapy classes affected by the patent cliff fell by 10% in 2013, and contributed $80 billion to spending. Furthermore, only 1.6% more prescriptions were filled in 2013, which is a 0.4% increase over 2012 levels, the IMS Institute for Healthcare Informatics report stated.

The generics industry remains a volume- driven market, however, as 86% of overall prescriptions are dispensed as generics.

“There’s a vast majority of the volume that’s generic. And the first-line therapy in many therapy areas is a generic option,” Kleinrock said.

Most prescription medicines dispensed in 2014 had copays less than $10, and more than half of all prescriptions cost less than $5. Generic medications are responsible for most of the growth in prescriptions priced at $5 or lower, and also represent most of the prescriptions without-of-pocket costs below $10. Table 2 shows the difference in out-of-pocket costs for prescriptions dispensed in 2012 and 2013.

“A lot of the retail pharmacies have pursued very low-cost generic programs for patients, so you’re seeing $2, $4 generics for a 30-day supply, $10 or less for a 3-month supply,” Kleinrock added. “There’s a lot of activity in terms of encouraging those patients on a chronic therapy that their medications can be available cheaply and easily in the market.”

Although brand name medications tended to have out-of-pocket costs above $20, manufacturers used several strategies to offset medication costs, the report stated. Branded product manufacturers offer patient assistance programs, including coupon or savings programs, which can reduce out-of-pocket costs for commercially insured patients. Coupons specifically brought out-of-pocket costs for newer diabetes medications from between $50 and $75 to as low as $5—a price comparable to that of generic therapies.

These strategies have not made a particular impact on the generic drug space, however.

“Most of that is driven by brand, so it’s mostly brand activity,” Kleinrock said. “If anything, what it does is insulate the patient who might have considered moving to a generic, and keeps them on the brand for slightly longer. Ninety-five percent of the time that a generic is available for a molecule, it is dispensed that way. They have a very robust business, so brands holding on to a few patients isn’t really moving the needle for generic manufacturers at this point.”

Generics Lower Costs in Most Therapy Areas
The unprecedented generic competition wrought during the 2012 patent cliff continues to lower drug costs in most of the top 10 drug therapy classes. Therapies for high cholesterol, asthma, depression, and mental or neurologic disorders dropped in both utilization and in unit cost, leading to a drop in drug trend for those therapies, according to Express Scripts’ Annual Drug Trend report.

Drug utilization for traditional prescription medications increased by 0.5% from 2012 to 2013 as well, whereas unit cost increased just 1.9% in 2013. The increases in drug utilization and drug cost lead to an overall drug trend increase of 2.4% for generic medications in 2013.

Furthermore, drug trends are expected to remain relatively stable through 2016, with spending in prominent traditional therapy areas increasing nominally year to year. Generic medications are expected to offset increased therapy use, resulting in an estimated 2% projected drug trend increase per year, Express Scripts states.

Although drug utilization in traditional therapy classes remained flat in 2013, Express Scripts reported utilization increases in therapies to treat diabetes, attention disorders, and depression.

Diabetes remained the most expensive therapy class for the third consecutive year, due, in part, to therapies with new mechanisms that are still covered by patent protection. Per patient per year spend for diabetes medications increased 14% in 2013, to reach $83.53, despite a generic fill rate of 47.4%.

Newer mechanisms of action in branded medications coupled with the progression from monotherapy to combination therapy makes diabetes a particularly difficult area for generic growth. Many newer therapies are both safer and more tolerable, and have added benefits that include weight loss.

Despite a decrease in unit cost for medications to treat attention disorders, spending on therapy for attention disorders grew 4.0% in 2013. Utilization among adult patients was the primary spending driver, and led to a 5.3% increase in drug utilization within the class. Express Scripts reported a 67.2% generic fill rate for the medication class, and an average cost per prescription of $144.06.

Generic medications face a slight challenge within the attention disorders realm, as many once-daily formulas remain under patent protection. Still, the proportion of generic drugs within the therapy class is increasing, which is expected to minimize cost increases and contribute to decreases in drug trend in the therapy class.

Although medications to treat depression had one of the highest fill rates in 2013, therapy costs in this area are lower because many of the prescriptions are available as generic formulas. The 5 most common therapies are available as generics, and contribute more than two-thirds of total market share for this medication class.

The availability of many generic medications in this therapy area lead to a 9.1% decrease in per member per year spend.

The December 2013 patent expiration of Duloxetine (Cymbalta; Eli Lilly and Company) was the start of a trend of double digit decline in therapy spend that began in 2014 and will extend into 2016. In addition, new drugs in the pipeline will need to compete with existing generic therapies for these conditions, many of which are already effective in many patients.

Generics remain competitive within therapy classes that have protected brand name medicines because the branded medicines address smaller groups of patients, Kleinrock stated.

“What you see in a lot of therapy areas where you have approved generics that have already entered the market and there are fewer protected brands is that essentially, the brands are in a smaller niche,” Kleinrock said. “So whether that’s mental health, or diabetes, or cholesterol, they’re not driving market-level growth for those therapy areas; they’re driving a subset. Those brands are essentially delivering options that the generic patients can achieve with the generic drugs. It’s not necessarily a market driver even in those categories; they end up being much lower growth altogether.”

Up and Down: Riding the Prescription Drug Price Elevator
Generic medication prices dropped in 2013 compared with 2012, with generic medication prices in December 2013 averaging 15.9% lower than the prices seen in December 2012. Meanwhile, prices for brand name drugs increased in 2013, Express Scripts reports. A comparison of brand name prices in December 2012 and December 2013 showed a 13.9% increase. When considered in relation to base prices set in January 2008, the changes amount to a decrease to $46.44 (in 2008 dollars) for the most commonly used generic medications and an increase to $197 (in 2008 dollars) for the most commonly used brand name medicines.

Although the price gap between generic medications and their brand name counterparts remained in flux throughout 2013, the gap between the brand and generic prices is not as wide as it was in 2012. According to Express Scripts’ figures, the gap dropped by 14.6 percentage points, falling from 44.4 percentage points to 29.8 percentage points.

Brand name medications dominate the top 10 drugs chart, occupying 9 spots. Several of the drugs will soon be open to generic competition, Express Scripts notes.

The prevalence of generic dispensing offsets the use of branded therapies, and provides savings when coupled with the lower cost, according to the IMS Institute for Healthcare Informatics. Table 3 shows the share of out-of-pocket costs for several prescription brackets.

“The good news is that when you have 80% of a population that is able to use a generic medication to achieve a clinical result, there’s more money in the payer’s pocket and the patient’s pocket to afford the next step up,” Kleinrock said. “And that’s necessary if they haven’t achieved clinical results.”

In Coming Years, Expect Average Generic Growth
With the uptick that accompanied the patent cliff leveling and fewer big-ticket drugs coming off patent, growth within the prescription drug market is expected to return to average levels.

“It was basically in the middle of 2013 that we started to see the dollar growth come up,” Kleinrock said. “In 2013, there was 19 billion dollars lost by brands to patient expiries. It was a big reduction in the impact.”

Express Scripts’ report predicts 2% year-over-year climb in drug trend over the next 3 years, which should contribute to stable growth within prescription therapies. According to Kleinrock, the following years will see a return to the average profits seen prior to 2011 and 2012.

“Most of the last 5 years or so, an average year was about $15 billion, so we’re right back to the average,” Kleinrock stated. “They’re generally going to be more average years now, going through to 2017.”

“Basically, 4 out of the next 5 years are going to be roughly the same size, so the negatives are going to be the same on the brand side,” he said. “That also leaves less of a pipeline for the generic companies.”

The narrowing generic pipeline led some generic manufacturers to consolidate with other, smaller companies. According to Kleinrock, the appeal for larger generic companies is to increase product scale, whereas smaller companies may look to develop products with less traditional formulations, such as patches, injectables, or inhalation formulas.

“Those capabilities aren’t absolutely easy to develop in the same way that a little white pill is, so you see companies acquiring those capabilities for specialty generics over the past 5 years or so,” Kleinrock said. “So that’s a lot of the consolidation, essentially finding niches to be specialized and to make some space in the market, to find pockets of uniqueness and pockets of profitability.”

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