Authorized Generics: Good or Bad?

Branded pharmaceutical companieshave many tactics for fightinggeneric competitors, but feware as controversial as authorized generics.Under the Hatch-Waxman Act, thefirst generic company that successfullychallenges a branded-drug patent isrewarded 180 days'exclusivity. The act,however, does not exclude products thathave already been approved, so branded-drug companies compete by relabelingtheir existing products and sellingthem cheaply through a generics companyas "authorized generics."

Since the first of these launches about3 years ago, the practice has become sowidespread that generics makers assumethat there will be an authorizedgeneric following every successfulpatent challenge, analysts say.

There is little argument that authorizedgenerics have been effective in cuttinginto the profits and market share ofgenerics companies. Banc of AmericaAnalyst David Maris estimates that thetactic cuts by 50% the generic company'spotential profit during the 6-monthexclusivity period.

The Generic Pharmaceutical Association(GPhA) claims that the practicecould discourage generic companiesfrom filing challenges, so that ultimatelyfewer generics will come to market.Attempts by generics companies to stopthe practice have failed, however, withcourts upholding a decision by the FDAthat authorized generics can actually be"pro-competitive," because they generatemore competition and lower pricesduring the exclusivity period.

Now, the Federal Trade Commission(FTC) is planning a study of the competitiveeffects of authorized generics, inorder to analyze the long-and short-termeffects on generic drug competition. TheFTC plans to examine drug pricing,licensing agreements, and business factorsrelated to the issue. If the FTC findsthat authorized generics are anticompetitive,it could lead to new legislationaimed at curbing the practice.

In the meantime, though, the situationis becoming more complex asauthorized generics become even moreentrenched. Nearly all the major genericscompanies, including those thathave publicly objected to the practice,have now signed licenses to sellauthorized generics. Authorized genericshave included versions of blockbusterssuch as paroxetine hydrochloride(Paxil) and bupropion SR(Wellbutrin SR). One fast-growing company,Prasco, has positioned itself as anauthorized generics supplier, distributingversions of fexofenadine hydrochloride(Allegra), glimepiride (Amaryl), andother products under license.

More recently, authorized genericshave become part of another controversialtrend: complex settlements in whicha generics company agrees to drop apatent challenge, delaying market entryin return for incentives such as cash anda license to sell an authorized generic ata later date.

Recent examples include a dealbetween brand company Forest Laboratoriesand generics company Alphapharmover escitalopram oxalate (Lexapro),according to Gregory Glass ofParagraphFour.com, who tracks patentchallenges. "We are beginning to seeauthorized generics used as a bargainingchip," he said.

Agreements like this one have becomecommon since appeals courtsdecided that they were legal in 2005,reversing a previous FTC decision, saidFTC Commissioner Jon Leibowitz earlierthis year. At least 7 of 10 settlementsbetween brand and generics drug makersthis year have included a paymentfrom the brand company and an agreementto defer market entry. "This appearsto be the new way to do business," he said.

While the FTC moves to study authorizedgenerics, Congress has acted to plugwhat generics proponents saw as a legalloophole that was costing the governmentmoney. Until early this year, makersof brand drugs were not always requiredto include authorized generics in the"best price" calculation provided to theCenters for Medicare & MedicaidServices. That provision has now beenchanged, and the GPhA estimates thatthe fix will save the government morethan $150 million per year.

The debate over authorized generics islikely to continue for some time. The FTCis not due to complete its proposedstudy until 2007. In the meantime, mostobservers say that authorized genericswill remain an established part of thepharmaceutical industry.

Mr. Faden is a freelance medicalwriter based in Portland, Ore.