Institute for International Research

Authorized Generics May Draw More FTC Scrutiny, Expert Says Oct. 5, 2005

Although an increasing number of generic drugmakers appear willing to participate in the authorized generics market, the controversial practice may soon face increased scrutiny from the FTC, according to an industry expert.

David Balto, an attorney with Robins, Kaplan, Miller and former policy director in the FTC's Bureau of Competition, said regardless of whether some generic firms are in favor of authorized generics, the anticompetitive nature of the business strategy is something the FTC is expected to monitor closely.

"Authorized generics lead to short-term cost savings for consumers and that's important, but that's not the end of an antitrust analysis," Balto said at the recent Institute for International Research's annual Generic Drugs Summit in Washington, D.C.

"Protecting incentives is crucial to the balance undertaken in the Hatch-Waxman Act," Balto added. "Without that, what efforts are [generic drugmakers] going to be making to challenge invalid patents? Authorized generics ... are in a number of ways a long-term disincentive to develop generics."

For instance, Balto said, a brand drugmaker may discourage generic competition by launching an authorized generic every time a standard generic product is launched, which can significantly lower profits for the generic company that is first to file an abbreviated new drug application.

Congress has already asked the FTC to investigate the competitive effects of authorized generics, Balto noted, citing a May 9 letter by Sens. Chuck Grassley (R-Iowa), Patrick Leahy (D-Vt.) and Jay Rockefeller (D-W.Va.) that asks the FTC to review the practice (DID, May 13, Page 1). The FTC could very well grant the request, said Balto, who noted the agency has undertaken several initiatives to address generic competition issues, including a study on generic drugs in 2002. The FTC also issued a recent report on pharmaceutical benefit managers, a study in which it constantly notes the importance of generic competition for consumers, he said.

The issue of authorized generics remains a polarizing one among generic drugmakers, with some firms electing to stay out of the market and others jumping ship to form partnerships with brand firms. William Kennally, president of Pfizer's generics subsidiary Greenstone, said a schism has formed between the companies that support the practice and those that don't.

Most of the more than 30 generic-brand partnerships to market authorized generics have occurred since 2004, though the Generic Pharmaceutical Association (GPhA) came out with its first initiative that year against authorized generics, Kennally noted. In short, GPhA's members are "not aligned," he said. "The top is saying one thing and the troops are saying something else."

Kennally argued that ANDA filers can still recoup a handsome return on investment (ROI) even when an authorized generic is launched. Research by Pfizer on all Paragraph IV drug launches between January 2003 and June 2004 showed that on average, assuming $10 million in litigation costs, ANDA filers would need $46 million in sales to break even without an authorized generics launch, and $89 million in sales without a branded generic launch.

But one conference attendee dismissed the study's findings: "Generic companies, for their business model to work, need 100 percent of that 180 day exclusivity to keep their generic pipeline going, just like brand companies need blockbusters every few years to keep their model going. I think that is the essence of the argument. If you submit that Pfizer study to the FTC to support their study of authorized generics it may backfire," he said. - Dar Haddix, FDA News

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Despite Patent Windfall, Market Challenges Remain for Generics, Analyst Says Oct. 4, 2005

Wall Street's outlook for generic companies includes increasing generic market penetration and a wave of potentially lucrative patent expirations, but an influx of authorized generics will hurt the profitability now enjoyed by first-to-filers, according to a financial analyst.

Patents covering drug products worth an estimated $62 billion will expire between 2006 and 2010, compared to $35 billion between 2001 and 2005, and $15 billion between 1996 and 2000, said Richard Silver, who spoke at the recent Institute for International Research's (IIR) Generic Drugs Summit in Washington, D.C.

Silver, a senior vice president at financial group Lehman Brothers, added that generic substitution rates have in just a few years leapt from 60 percent within six to eight months, to 80 percent market penetration within four to six weeks, and will continue to be fueled by the widening gap between tiered drug co-pays and the higher profit margin retailers achieve with generic drugs.

But not everyone will share in this pie. "Dominant generic players are expected to continue to capture the lion's share of the market," Silver said, while those companies likely to take a hit will be those with "modest distribution capabilities and whose first-to-files represent a large percentage of ANDA [abbreviated new drug application] filings."

The authorized generic drug landscape has changed, Silver explained, with generic drugmakers and brand drugmakers no longer partnering to market brand generics just as an alternative to litigation, but also in regular business deals outside of litigation, he said. Such deals can draw innovators for several reasons, including if there is a high chance of rapid generic penetration into the market, he added.

Brand drugmakers are likely to keep manufacturing authorized generics through independent generic companies rather than through their own generic subsidiaries, but brand drugmakers with smaller product lines will be more likely to launch authorized generics through subsidiaries, he said.

Silver also addressed the stabilization of generic drug prices and how generics companies can stay competitive in the face of this development, noting that in any case "lower pricing ultimately does not lead to market share gain." The ongoing trend of generic drug industry consolidation, as well as brand drugmakers exiting the generic drug market, has stabilized prices, he explained.

In light of the consolidation, remaining generic competitors will have an opportunity to raise the prices of older, "low margin" products, Silver said. However, the trend also means that generic drugmakers should "balance pricing strategy with market share goal," by focusing on other factors including breadth and depth of portfolios, depth and breadth of ANDA pipeline, customer service, capacity to meet demand, and speed to market with new products. - Dar Haddix, FDA News

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