Abby Christopher

held a roundtable discussion about ?The Future of the Pharmacy? at the American Pharmacists Association convention in Atlanta, Ga, where students and executives discussed the varying issues affecting the field of pharmacy today and how those issues may impact the future. Stephen Eckel, PharmD, assistant director of pharmacy at University of North Carolina Hospitals Department, hosted the lively discussion that covered a wide range of topics?Medicare Part D, medication therapy management (MTM), pharmacist education, and the role of technicians. Not surprisingly, the focus was squarely on patient care and the value of building trust between patients and pharmacists. Medicare Part D and MTM have provided a springboard for pharmacists who are eager to delegate pill dispensing and to become part of a whole health care team.

Participants agreed that while Medicare Part D has in many ways been quite positive for patients, notably improving compliance, many challenges still remain.

?There needs to be more communication and education for those people [patients] so they can understand [Medicare Part D].... Many seniors do not understand, and they lose trust,? said Rhonda Garner, a University of Tennessee-Memphis student. Megan Barnes, a student at <?xml:namespace prefix = st1 />

, agreed and added, ?I also agree that it is a major problem of seniors not understanding the plan. I think it is very important that pharmacists get involved and make sure that every senior citizen who comes in and is eligible for a Medicare Part D plan is counseled and understands their options.? Pharmacists were encouraged by the improved communication with patients throughout the year and were relieved that patients were not pill splitting or rationing their medications.

?There really is an improvement in the system?, [including] Compliance to medications as well as an increase in the interaction, and the opportunity for the interaction with the pharmacist and the patients...,? said Papatya Tankut, vice president of pharmacy professional services, CVS Corp.

Throughout the discussion of Medicare Part D, concerns were raised about the pressure that pharmacists have been under to help patients understand their drug benefits and how to make good choices. 

Making sure pharmacists are prepared to help patients on an ongoing basis was a high priority for both students and executives on the panel. A common recognition was voiced that earning and keeping patients? trust will not be easy. While the education of pharmacists is critical, all pharmacists will be learning some of their most important new skills on the job.

?It is incumbent upon us to help our pharmacists so that they are prepared to answer those questions [regarding Medicare Part D from patients],? according to Susanne Hiland, PharmD, director of professional services and government relations at Wal-Mart Stores Inc. 

David Trang, RPh, assistant professor in pharmacy practice at the University of the Incarnate Word, Feik School of Pharmacy, feels that students are very well trained via curriculum but may benefit from additional training in business and management. He said, ?It surprises me the immense amount of training that students get?. But, the one thing that I see that they do not get particularly enough of, which we are incorporating into our program, is that management and that business training?the skills that they do not necessarily get.?

MTM is a very positive extension of patient relationships established in the first year of Medicare Part D, according to the panelists. Although the response to MTM has been quite encouraging, it is important to establish industry-wide standards, so that all pharmacists can be trained within a common framework. Generally, participants also agreed that MTM standards help patients, and decision-makers can all become familiar with what MTM is and what it can accomplish. Multiple approaches, however, may confuse pharmacists as well as other stakeholders that pharmacists who eager to reach.

?One of the things that has been mentioned many times is that there are so many different plans out there that offer their own type of MTM, which makes it very difficult for training, especially in large partners. But eventually, as more standardization comes out, it is something we are all going to have to do in order to make this happen,? according to Scott A. Miller, PharmD, director of clinical education and medication services at Walgreens Health Services.

The student panelists felt prepared and were excited about the prospect of providing MTM to patients. ?I think we are [ready], and I think we are also getting very excited about it,? said Cristina Gonzalez, a student from 

. ?I think the issue is that there are a lot of minds that need to be changed. We need to provide a lot more education to patients and physicians,? she said.

While there is some appreciation for PharmDs and individuals trained with other advanced degrees, panelists also were keen to point out that patient care is not something students will learn in a classroom. Participants agreed that more work needs to be done to help prepare students for the demands of providing direct patient care, particularly to our aging population.

?Clinical and face-to-face interaction can be done by PharmDs, bachelor?s degrees, and others as long as we are all committed?and passionate about?quality interactions with our customers,? said Wal-Mart?s Hiland. ?As the profession changes from pill dispensing to patient care, schools should provide on-the-job training for students to participate in these changes without driving up the cost of health care.?

Pharmacy chains employ tens of thousands of technicians who free up pharmacists to spend more time counseling and interacting with patients at every level.

?We employ over 40,000 pharmacy technicians,? said CVS? Tankut. ?I believe that the correct utilization and training for technicians provides and affords the pharmacist the opportunity to be able to do the things they are trained to do and spend more time counseling and interacting with the patients.?

Delegating pharmacists? tasks can be tough, however, because of an issue of trust between pharmacists and the technicians they team with. If a technician makes a dispensing error, the pharmacist is accountable, for example. Participants agreed that one way to help establish trust and demonstrate competence may be to require every technician to be certified in each pharmacy he/she works.

?The pharmacist is not familiar with those technicians?. Maybe require every technician to be certified in that pharmacy?, then [the pharmacist] may see the technician as trustworthy,? said Carlisha Colbert, a student at 

Pharmacy chain executives agreed that trust has to be earned, and certification is a good step in that direction. Delegating more tasks to technicians was seen important to moving the profession forward as well.

?They [technicians] are the pharmacist?s right hand,? said Walgreens? Miller. ?I think there is a timeframe where trust is earned. So, where at first a practitioner [pharmacist] might try to do everything themselves and not fully utilize their technician because they are concerned that ?this is my license?. I have just spent the last 6 years of my life getting this,?? Miller said. ?But, that symbiotic relationship develops rather quickly when the pharmacist is saying, ?Alright, I just cannot do everything.??

At the end of the roundtable, participants were enthusiastic though realistic about the future of pharmacy and pharmacists? roles in direct patient care. Common goals included establishing ways to regularly collaborate with other health care professionals, delegating more duties to technicians, and improving direct patient care through MTM and other approaches. Giving students more exposure to patient care and learning to adapt to dynamic changes in health care policy also were key areas of concern among participants. At the same time, the uncertain future of Medicare, health care costs, and the other unspoken challenges remain. 

Janet Strain, a student from Midwestern University, Chicago College of Pharmacy, concluded, ?I think pharmacy is headed more towards being an integrated part of the health care team...through collaborative practice and working with physicians.?

?We have to find a way as a profession to impact the cost of health care and make ourselves a valuable part of the health care team that can reduce costs and provide ultimate patient safety and improved health outcomes,? said

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Ms. Christopher is a freelance writer based in Portland, Ore.

ROUNDTABLE DISCUSSION: "THE FUTURE OF PHARMACY"

With increasing fanfare, pharmacies, supermarkets, and ?big-box? retailers are leasing space in their stores to health clinics in the hopes of attracting new customers and driving up sales revenues. Today there are ~500 retail clinics in the United States. At the World Health Congress in April 2007, Wal-Mart announced its plans to host as many as 2000 clinics in its stores in the next 5 to 7 years, firmly rooting this new brand of retail medicine in communities around the country. Wal-Mart presently hosts ~76 retail clinics.

With this influx of retail clinics, pharmacists could proactively team with clinic staff members to routinely share general information on patient demands and trends on conditions that are common to the individual communities their pharmacies serve. To date, however, any teaming between clinic and pharmacy staffs has been largely informal. Instead, the pressure is on the clinics to puzzle out their business models and reach profitability in the face of many challenges. More than 20 companies run these new clinics, and most are privately held. Notable exceptions include CVS/MinuteClinic, Target Clinics, Intrepid/My Healthy Access, and hospital-funded retail clinics. CVS/ MinuteClinic and RediClinic are among the leading clinic operators, and Walgreens has just bought Take Care Health.

As tenants of the retail stores in which they operate, retail clinics are responsible for their own success. With relatively high fixed costs, it is difficult for clinics to break even, according to such analysts as Mary Kay Scott, author of ?Health Care in the Express Lane: The Emergence of Retail Clinics,? a report published by the California HealthCare Foundation in July 2006.

For example, retail clinic operator My Healthy Access has a 36-month master rental agreement with Wal-Mart for ~$1620 per month for each clinic, or ~$20,000 per year per clinic, according to the most recent 10K filing from its parent company, Intrepid Holdings. Labor (~$75,000 salary plus benefits for each nurse practitioner [NP]), information technology, malpractice insurance, rent, and corporate overhead are 85% of fixed costs. Variable expenses, laboratory tests, and equipment make up ~15%.

A 450-sq-ft clinic with fixed costs of $600,000, just to break even, would need to see 2 to 3 patients per hour, 30 per day, 220 per week, and 11,500 per year, according to Scott?s report. This calculation assumes that each patient visit averages $52?with a range of $40 to $100. If a clinic is able to sustain that patient load, it is still too soon to know to what extent patients will pay out of pocket or file insurance claims. Processing insurance claims for a high volume of patients also could be a considerable operating cost.

In spite of the uncertainties and financial challenges in this nascent market, positive consumer response to recent surveys and the shortage of family physicians have encouraged clinic operators and their investors to keep expanding. Retailers?and increasingly drugstore chains?are banking on 1-stop shopping to attract more customers and to drive up in-store sales on such items as prescription drugs and OTC medications. Clinic operators pitch retailers when trying to secure lease agreements, citing how much more revenue they will drive.

For example, 95% of patients diagnosed in Target clinics in a 2006 survey had their prescriptions filled in the same store. This survey was conducted before Target established its own clinics and leased space to operators such as MinuteClinic, prior to that firm?s acquisition by CVS.

Clinic operators hosted by retailers are capitalizing on consumer frustration with established primary care physicians. Part of the market-scoping process is to get data on local emergency department traffic and the ratio of family physicians to the metropolitan population.

There is a natural rift between established family practices and clinics, adding to clinic operators? challenges. At the same time, as a new access point, clinics potentially create opportunities for pharmacists to team with clinic staff in providing patient care.

The threat of competition is arguably physicians? strongest concern. Pediatricians and general practitioners also are worried about continuity of care and quality standards.

NPs and physician assistants (PAs) treat patients at most retail clinics. They follow state regulations that determine their scope of practice and when they need to check in with a physician before making a treatment decision, for example. In an effort to satisfy demands from physician associations, the Convenient Care Association members have agreed to follow guidelines for managing their retail clinic staff and operations.

Yet, state chapters of physician associations still are lobbying for laws that would stiffen existing regulations for the medical staff that run clinics. Stricter state regulations could increase the cost of running retail clinics, potentially cutting into margins and slowing clinic operators? ability to reach or maintain profitability.

At press time, the Massachusetts State Board of Health was evaluating CVS/MinuteClinic?s request to set up retail clinics. In May, the Illinois State Medical Society introduced the Retail Health Care Facility Permit Act that would limit doctors to supervising 2 ?advance practice? nurses and would limit the scope of retail clinic advertising.

In the face of potentially costly regulations, recent consumer surveys have encouraged retail clinic operators and their retail hosts to keep expanding. Although few consumers actually have been treated at retail clinics, those who have have had positive experiences, according to a Wall Street Journal Online/Harris Interactive poll of >2000 consumers. Ninety percent of those surveyed said that they were satisfied with the quality of care.

A related survey conducted by CS Mott Children?s Hospital at the University of Michigan found that parents would gladly trust NPs and PAs to treat their children in retail clinics. Among parents who had previously taken their child to a retail clinic for care, >70% planned to return.

A Market Strategies Inc study also found that 30% of consumers surveyed think that retail clinics should compete with primary care physicians by offering a broader variety of more complex care and diagnostic services.

These survey data could be used to develop more organized ways for pharmacists and clinic staff members to team up on patient care. Recent MTM pharmacist training tours could potentially complement care provided in retail clinics.

For example, Rite Aid?s MTM program, Rite Care, is partnering with doctors and the University of Pittsburgh to treat patients with chronic conditions. This service for a fee needs to be marketed to patients as well as to payers. In a recently filed 10K, Rite Aid reported that it is ready to gear up and go national with MTM services in its pharmacies, should demand increase and payers provide reimbursement.

?The key to the whole puzzle is developing a system to pay pharmacists for these services. As long as the pharmacy reimbursement model is based only on product distribution, it is very hard to see how this type of model could be viable in a retail pharmacy setting,? said John Cronin, owner of community pharmacies in southern California and a lawyer who focuses on pharmacy law.

The known brands such as Wal-Mart and Walgreens tend to get the spotlight, but Wal-Mart does not own or operate any of the clinics in its stores. In spite of the obvious cross-marketing opportunities, particularly for pharmacies, most clinic operators are not tied in any substantive way to the retailers from which they lease space, with notable exceptions such as Target Clinics and CVS/MinuteClinics.

Although in-store clinics have been operating since 2000, only in the past year or so have clinic operators announced plans to expand aggressively. Retailers and clinics are both experimenting with various business models and ways of leveraging the others? resources. Smaller players have established unique identities in the regions in which they operate.

For example, Harmony Pharmacy has established a pharmacy/retail clinic at Newark Liberty International Airport in New Jersey, focusing on travelers and airport employees. My Health Access is targeting the uninsured and underinsured in urban communities. QuickCare and MediMin offer translation services to Hispanic communities and also target the uninsured and underinsured.

Even if a business model proves sustainable, clinic operators face staffing bottlenecks. Thousands of clinics are planned in the coming 3 to 5 years, but the NPs and PAs required to staff them are in short supply. If these tenant/clinics are not prepared to staff up and offer quality of care consistently, the reputation?and the sales revenue?of the host retailers could suffer. As a result, retailers are starting to carefully evaluate which clinic operators to host and which would be the most reliable partners.

Primary Care Clinics Take Root in Retail Pharmacies

New legislation introduced byRep Henry Waxman (D, Calif)and others this fall?likely to bereintroduced next year?makes a strongcase for establishing regulatory pathwaysfor biogenerics. Equally, officials ofindustry lobbying groups, theBiotechnology Industry Organization(BIO) and the Pharmaceutical Researchand Manufacturers of America (PhRMA),argue against the proposed bill, sayingthat makers of biogenerics will not beable to meet criteria for safety, efficacy,and comparability. At the same time,biotech companies are concerned thatthe approval of biogenerics would eroderevenues earmarked for research anddevelopment (R&D) for the next wave ofnew biologics.

"Big pharma and the high cost of biologicsare up against managed careorganizations, insurance carriers, payers,[and] pharmacists," who sent letters ofsupport for Waxman's legislation, accordingto Andrew Merseth, an analystwith Decision Resources. He is the leadauthor of "Biogenerics 2006-2015: AnEmerging Reality for Biologic Brands." Inspite of the enthusiasm and broad supportfor follow-on biologics, Mersethbelieves that it will take time to implementregulatory pathways, even oncethey are passed by Congress.

"We expect Congress will enact legislationallowing biogeneric abbreviatedBLAs [biologics license applications] in2007-2008, and the first biogenerics willarrive [in the United States] no soonerthan 2009," said Merseth.

The Waxman legislation, while significantin spirit and for the support it hasgarnered, will not be voted on this year.The outcome of the midterm elections,however, and a landmark biologics pricingcase involving PhRMA, BIO, and theDistrict of Columbia have caused a dramaticshift in Congress' drug-pricingagenda. In fact, some policy analystsbelieve that much anticipated changes tothe Food, Drug, and Cosmetic Act and thePublic Health Service Act may incorporatedrug-pricing policies, including provisionsfor a biogenerics approval process.

"The generic drug industry may have apowerful ally and will push for a streamlinedFDA approval process for so-calledfollow-on biologics," said legislative andhealth care attorney Catherine P. Bennettof the Washington, DC-based law firmVenable LLP. "But it's important [that] legislationalso support ongoing drug developmentand innovation for the next waveof biologics," she added.Weighing patientand managed care needs?affordabilityand safety?as well as the needs ofindustry to innovate is at the crux of thedebate, according to Bennett, who also isa former Pfizer vice president.

The high cost of biologics has intensifiedbattles over the government's rightto control drug pricing and access tolower-cost generics. For example, severalmonths' dose of a biologic such asGenentech's bevacizumab (Avastin;used to treat colorectal cancer and alsoto help prolong life for non-small-celllung cancer patients) can cost from$55,000 to more than $100,000, includingvery high copays. In response to outcriesabout the medicine's price, inOctober, Genentech announced a$55,000/year per patient price tag forpeople with lower incomes. Avastin isexpected to be much more widely prescribed,because it is in trials for treatmentfor other forms of cancer as well.In spite of this recent price reduction,cost is still expected to provoke furtherdisagreement among biotech companies,policy makers, payers, and patients.

"Many patients are now denied accessto these important drugs, because eventhe copayments can reach thousands ofdollars a year. And the skyrocketing costof biotech medicines is imposing increasingburdens on employers, insurers, andthe federal government," Waxman saidwhen his bill was introduced in lateSeptember.

The Access to Life-Saving Medicine Actis designed to help resolve the ongoingdebate by defining a biogenerics approvalprocess for the FDA. One provisionof this bill gives the FDA the discretionto fast-track a biogeneric or requireit to undergo more extensive clinicaltrials?each on a case-by-case basis.

BIO and PhRMA, among other organizations,have filed citizens' petitions with theFDA regarding the safety of biogenerics.Waxman plans to also address prescriptiondrug safety and related recommendationsrecently made by the Institute ofMedicine. Thus the process of determiningthe safety of new medicines couldslow the approval of a number of classesof generic biologics and the definition ofregulatory pathways for these drugs.

"[The] innovator biopharmaceuticalfirms' lobbies BIO and PhRMA are strongand will delay any legislation as long asthey can hold off public pressure fromthe other side, arguing largely from aquality assurance/safety perspective,"said Fredric Cohen, MD, president ofPharma Growth Strategies LLC, a pharmaceutical strategy consultancy.

While BIO and PhRMA raise biotechcompanies' concerns about the safetyand comparability of biogenerics, theyalso are worried about the industry losingincentives to innovate and invest inR&D for biologics. The average cost ofdeveloping a new biotechnology productis $1.2 billion, according to new findingspublished in November by the TuftsCenter for the Study of Drug Development.Although this figure is similar to thecost of making a blockbuster drug, thecomplexity of these new medicines hasmade it more difficult for biotech companiesto get their biologics FDA-approved.

"Capitalization increases biopharmaceuticalcosts relative to traditional pharmaceuticalcosts, because of a longerdevelopment timeline and a higher costof capital," according to the Tufts study.

In the meantime, although the prospectof defined regulatory pathways forbiogenerics remains uncertain for now,the District of Columbia and such statesas West Virginia and Maine haveattempted to set or suggest price limitson biopharmaceuticals.

These efforts have led to a fierce landmarkcase currently under appeal in theDistrict of Columbia. BIO and PhRMAsued the District for interfering in thepricing of patented prescription drugs.For example, according to a statementfrom PhRMA about state and cityattempts to suggest and possibly setprice limits on prescriptions: "Under longestablishedUS patent law, a patent holderretains the exclusive right to use andsell a patented drug for a limited periodat the price determined in the market.This limited exclusivity spurs innovation,allowing inventors fair opportunity torecover the benefits of their inventionand discover new cures."

On November 6, 18 consumer groupsfiled an amicus curiaebrief in support ofthe District's effortsto suggest price limitson lifesavingmedicines, includingbiologics. BIO andPhRMA officialsargue that, by virtueof holding US patents,they can pricetheir new medicinesat their own discretionand that theyneed the revenuethey make from thesale of their drugs tofund R&D.

"The thing aboutthis case is that thelaw is written sobroadly that [dependingon the outcomeof the case] itcould allow [drug]companies tocharge whatever they want," said Jamie Love, an intellectualproperty expert and director of the Consumer Project on Technology."PhRMA has argued that there is no such thing as anexcessive price," he added.

If BIO and PhRMA win the landmark case, states may lose theright to regulate not only prescription drug prices, but also theprices of other goods and services that state regulatory boardshave monitored and controlled fordecades (eg, natural gas, phone service,water, and transportation). So stated SeanM. Fiil-Flynn, Professor of Law, Programon Information Justice and IntellectualProperty, Washington College of Law atAmerican University.

If the District of Columbia loses thecase, such an outcome could further rallylegislators such as Waxman and consumerlobbies eager to lower drug pricesto champion legislation to define regulatorypathways for biogenerics and negotiateprices for federal drug plans such asMedicare Part D.

Patents on $11.5 billion worth of biologicdrugs will have expired by the end of2006. In 2005, global biopharmaceuticalsales grew by 17.1% year on year to $56billion, according to IMS Health. Sales ofbiologics could total $90 billion in 2009, according to pharmacybenefits manager Pharmaceutical Care Management. 

Biogenerics and Drug Pricing: A Battle Royal

Patent expirations of blockbuster drugs have dramatically changed the dynamics of the pharmaceutical industry. Patents for branded drugs worth more than $43 billion in annual sales are expected to expire by 2009, according to IMS Health (Table 1). Large pharmaceutical companies may not be able to depend on blockbusters to sustain them. 

Although generics companies seem to have the upper hand, the nature of the industry is more complex. As part of the shift in business models, generics firms and big pharma companies, once distinct enemies, are becoming strategic allies in certain deals, while at the same time continuing to compete fiercely. 

The increased threat of patent expirations has made both big pharma companies and generics makers vulnerable and has forced both to reassess their competitive strategies. Whereas the sheer number of blockbusters going off patent?and the revenue unbranded versions could generate?may give generics makers reason to celebrate, big pharma companies are not giving up their territory without a fight. Each category of player?generic and branded?has nudged closer to or even sprinted energetically into the other's once-well-defined market. 

With low barriers to entry, competition among generics makers is already quite fierce. As more and more drugs come off patent, big pharma's increasingly defensive responses have made it considerably more difficult for generics makers to succeed by solely manufacturing FDA-approved knockoffs. Big pharma companies' defensive strategies include slowing the rate at which generics hit pharmacy shelves; undermining generics' credibility with health care providers; offering followon products to compete with generics; offering their own authorized generics; and engaging in price wars (Table 2). 

Even as moneymakers such as paroxetine (Paxil), bupropion HCl (Wellbutrin SR), and sertraline HCl (Zoloft) go off patent, big pharma companies have retained some revenue from these drugs by offering authorized generic versions in the 180-day exclusivity period. To market its authorized generics, big pharma has partnered with generics makers, in some cases divisions of their own companies. For example, in July 2006, Pfizer authorized a generic version of its blockbuster Zoloft to its Greenstone subsidiary. 

Authorized generics offered by big pharma can hit the market at the same time as unbranded generics because the formulas are proven and do not require an approval process. They are relabeled versions of the established branded drugs. 

Some legislators and industry analysts argue that branded generics are anticompetitive. In July 2006, when introducing a bill restricting authorized generics, Sen Charles Schumer (D, NY) said that "authorized generics are wolves in sheep's clothing." The Generic Pharmaceutical Association commissioned a study, the results of which also were published in July, which claims that introducing authorized generics "significantly reduces incentives for independent generic firms to challenge invalid brand name patents and to develop noninfringing processes." 

In response to the critics, the Pharmaceutical Research and Manufacturers Association commissioned IMS Health to conduct a study, published earlier this year, on the effect of authorized generics on pricing in the exclusivity period. The researchers said that "authorized generics actually add to competition, which is good for consumers." The Federal Trade Commission is studying the effect authorized generics have on market competition. 

At the same time, big pharma companies, in a perhaps predictable twist, have urged generics makers vulnerable to thin margins and in need of alternative revenue sources to join their ranks to market authorized generics. For example, Dr. Reddy's markets the generic versions of simvastatin (Zocor) and finasteride (Proscar) as part of agreements it has with Merck. 

The fact that several blockbusters are due to go off patent between now and 2011 has raised the stakes and made the battle fiercer, but also more complex. The slow demise of the blockbuster revenue model has changed the nature of the pharmaceutical business overall. 

Big pharma companies are increasingly wary of relying exclusively on branded drugs. As a result, companies may be comprised of both a branded business and a generics division. An example is Novartis, with its generics division, Sandoz. As part of Pfizer's acquisition of Pharmacia in 2002, Pfizer bought Greenstone Ltd, a generics subsidiary that already is manufacturing authorized generic versions of the company's blockbusters. Sanofi-Aventis also has established a generics division, Winthrop Medicines. 

Big pharma companies have routinely funded studies to extend the life span of their drugs. Many firms have applied to the FDA for new uses for their blockbusters, organizing new advertising campaigns around branded drugs that will soon be off patent or whose patents have been successfully challenged. For example, the FDA recently approved Plavix for treatment of the sudden blockage of coronary arteries or acute ST-segment elevation myocardial infarction, in patients who are not going to have angioplasty. 

To defend against big pharma's strategies, generics makers have bulked up and acquired specialized manufacturing capabilities via consolidation. They also have started to develop generic branding for their organizations and diversified to add research and development operations for new drugs. 

Although some biopharmaceuticals have already come off patent, it is still hard to say when generic alternatives will hit the market in force. The FDA's approval of Sandoz'recombinant human growth hormone Omnitrope (whose active ingredient somatropin also is found in Pfizer's Genotropin) earlier this year has encouraged the generics industry to be hopeful about other future opportunities. 

Yet, the FDA has still not defined a process of evaluating and clearing generic biopharmaceuticals for approval, and the agency has cautioned the industry not to expect many, if any, further approvals of biogenerics in the near future (Table 3). 

Blockbuster Patent Expirations Bring a Shift in Business Models

Marriage frenzy took hold of the generics market in 2005. Analysts believe that this is part of an ongoing consolidation trend that will continue for the next few years. As more popular branded drugs come off patent (Table 1), staying in the game is expected to become more difficult. 

Teva Pharmaceutical Industries Ltd, Sandoz/Novartis, and Actavis have been the busiest deal makers in recent months (Table 2), and there are rumblings that generics manufacturers from India will start shopping more fervently as well, through leveraged buyouts and with the help of venture firms. 

Less-than-stellar earnings reports among publicly traded generics makers, thin margins, and the goal to develop new branded drugs have all ignited merger and acquisition activities and alliances (Table 3). 

"The name of the game strategically for most [generics makers], if not all, is to get enough generic products on the market (especially generic copies of some top-selling brand name drugs) to generate enough revenue so that they can begin research and development work to bring branded drugs to market and get into the higher margin industry," says Jon Hess, research team leader of Cutting Edge Info. 

A common aim of moving up the value chain towards higher margins arguably motivates many companies to join forces. Fierce competition among generics makers has led to disappointing earnings, making any significant R&D investment impractical today for most unbranded players. 

Big Pharma's generic offerings (authorized and branded generics) have also stolen sales and earnings from manufacturers of unbranded generics, making even well-established generics makers vulnerable. Wholesalers and other purchasers do not like buying generics from brand companies, however, because it gives the brands even more leverage than they have now, according to Richard Watson, an analyst with William Blair & Co LLC. 

Even as the demand for unbranded drugs soars, it is a huge struggle for individual generics makers to get their medicines onto formularies. It is arguably the toughest obstacle unbranded players face today. Although insurers such as Aetna have taken the sting out of some of the marketing costs by sampling generic drugs to physicians, there is still the matter of making deals with volume buyers. 

"An individual generic drug company has a limited family of drugs to market?the greater the range of drugs, the more effectively a generic drug manufacturer can market its drugs to the thousands of physicians, insurers, and pharmacy benefit managers [PBMs]," says David Balto, a partner at Kaplan, Miller, & Cerisi, whose clients include generics firms. 

Although barriers to entry into this market are decidedly low, generics companies are eager to improve their ability to strike the most competitive deals with pharmacy chains, wholesalers, PBMs, and other key players in the supply chain. As Medicare, insurance carriers, lobbies (eg, the AARP), employers, and others fight to reduce health care costs with generic medications, generics manufacturers themselves must also lower their costs in order to compete. 

Generics makers face considerable pricing pressures. To respond competitively to the purchasing strategies of volume buyers, generics companies must be ready to offer attractive deals. 

For example, Walgreens has adopted electronic auctions to get the best prices on medicines from generics makers. The drugstore chain is also expected to purchase up to 15% of generic medicines on a drug-by-drug basis directly from Indian manufacturers in exchange for deep discounts, according to a report published by Lehman Brothers in October 2005. Generics companies must be able to anticipate and aggressively respond to that sort of dramatic shift in buying strategies. 

Consolidation can offer companies skilled at integrating acquisitions economies of scale and scope. Such potential cost efficiencies could help arm companies to win business from companies like Walgreens. 

Through acquisitions, generics makers also "bolt on manufacturing expertise and expand geographical coverage via acquisitions," said Watson. Increasing manufacturing expertise in key therapeutic areas can help strengthen product portfolios, which in turn can help increase cost efficiencies overall. 

Companies with market presence and established distribution in countries where demand for generics is expected to grow can help improve the bottom line, especially since sales margins in the US market are getting decidedly thin. Indian and Eastern European generics companies are attractive acquisition targets because of the low costs of manufacturing and labor. 

In the short term, it is not clear what effect consolidation will have on pricing. "I think the consolidation of branded and generics pharma hasn't had a huge impact on price competition yet. However, if the consolidation trend continues, it could start to become a factor," says Hess. 

Not everyone in the supply chain is sure what the consolidation will mean for them, however. When the discussion turns to pricing, there is a notable attempt to be polite and vague. "The more manufacturers, the more competition there is. That's good for us," says J. Marc Bover, senior director of pharmaceutical purchasing at Rite-Aid. 