Pharma Report: When Generics Attack

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Sales of branded drugs in the US rose 5.1% to $300 billion last year, according to IMS Health, as a break in major patent expirations and drug safety scares fueled spending. That's a significant improvement over 2008's record-low 1.8% growth, even if it pales in comparison to the double-digit increases enjoyed through much of the go-go Oughts.

But happy times aren't exactly here again. Next year will bring another round of blowout blockbuster patent expiries accounting for a loss of more than $30 billion in US sales, including the likes of Lipitor, Plavix, Seroquel, Zyprexa and Actos. Brands worth nearly $20 billion in US sales lose patent protection in 2012, and after a lull in 2013, another $20 billion worth will be exposed to generic competition in 2014.  

And the inexorable march of genericization continues, with branded drugs now accounting for only a quarter of dispensed scripts in the US. Just six years back, branded drugs made up 46% of prescriptions dispensed.
“We could see that 75% [generic] volume share going up to 80%, maybe even a little higher,” says Michael Kleinrock, director, Thought Leadership at IMS Health. “It really depends on the future contribution from the pipeline. Right now, we're seeing a large group of products that contribute a lot to sales go through the end of their protected life cycle.”

On the bright side, the market for prescription drugs has proven remarkably robust at a time of tremendous economic distress. Dispensed prescription volume in retail channels grew 2.1%—to 3.9 billion dispensed prescriptions—up from 1% growth in 2008. While the volume of new therapy starts in the 17 major chronic disease areas declined by around 1%, the volume of add-on therapy starts, switches and refills rose nearly 2% in 2009.

IMS credits that growth in part to sustained pricing practices by manufacturers competing on the basis of clinical evidence and value.

“We consider that resilience, based on the treatment of medical need, to be an important factor in why the industry has delivered the 5.1% economic growth we saw in 2009, despite the economic crisis,” says IMS's Kleinrock.

Other factors, according to IMS Health, include greater use of specialty pharmaceuticals, which now constitute 21% of the US market and grew 7.5% last year, and include better inventory management practices by retail pharmacies.  

Surprisingly, fears that unemployed and underemployed patients would split pills or skip refills have proven largely unfounded.

“What we've seen in our patient level data does not reflect people stopping taking their drugs for six months,” says Kleinrock. “It reflects a very, very moderate level of patients slowing down their visits to doctors and usage of drugs, but it's more about switching to lower-cost alternatives—either lower-cost brands or generics. And even that's relatively moderate.”

This year, at least, should prove pretty tranquil, says Deutsche Bank managing director Barbara Ryan, but come January, buckle your seatbelts.

“I think 2010 will be like 2009, with not a great deal of new product introductions having much of an impact,” says Ryan. “By the same token, there are not an enormous number of patent expirations, which become much more pronounced in 2011 and 2012. I suspect we aren't going to see anything be better than last year—if anything, it will probably be a little weaker.”

The essentially flat 1.8% growth of 2008 was the industry's lowest in IMS Health's 55-year history. “Other factors that contributed to that low growth in 2008 were pre-existing factors, prior safety issues and large levels of patent expiries,” says Kleinrock. “We don't see those factors continuing as much. We haven't had in the industry a very large product or class of products experience a Vioxx-class safety issue in the past five years, so that lack of a negative issue is essentially a positive for the market. And certainly, we are in a lull period in terms of the impact of patent expiries on the industry between the last big back in '06-'07 and the next big batch in 2011-2012.”

Patent protection loss will also have a knock-on effect of forcing companies to slash R&D spend, as Bernstein senior analyst Tim Anderson noted in a December briefing.

“Investors need to understand the degree to which large, highly-profitable products ‘fund' other parts of the organization, such as R&D,” wrote Anderson. “At present, most companies paint a picture of not cutting R&D, but unless pipelines are able to generate substantial new product flow over the next few years, our models suggest the more desperate ‘cliff' companies might be forced to do this.”

Merck's Cozaar loses patent protection this year, as do Johnson & Johnson's Levaquin, AstraZeneca's Arimidex and Eli Lilly's Gemzar. Those are relatively small hits, but there isn't much in the near-term pipeline that looks promising.

“Next year, maybe some factor 10as, but there's really not much on the horizon for the remainder of this year that's likely to be all that spectacular,” says Deutsche Bank's Ryan. “Unfortunately.”

Given the long lead time on drug development, there's not a whole lot companies can do but ride out the storm.
“At least for the four major drug companies, they've already made their beds,” says Ryan. “In the case of Merck and Pfizer, they've done big mergers to dilute their dependence on products that will lose patent protection and to create economic synergies that will, in large measure, replace lost profits once they are genericized. And Lilly and [Bristol-Myers Squibb] have basically bet on their research pipeline. There's much higher risk to their cashflows over the next couple of years, because they face an earnings cliff, but they would hope their pipeline is successful enough that they will have a rapid acceleration in revenue and earnings off that cliff. Whereas Merck and Pfizer have sort of alleviated the cliff, but by the same token, they're that much larger and have diminished the impact of anything that might come out of the pipeline by definition of their size.”

That means companies need to look beyond the US for growth. “Sales outside the US, particularly in these emerging markets, are going to become a much more significant part of all these companies' business,” says Ryan. “That's going to be where growth is taking place, barring some dramatic epiphany in R&D. And that could happen, but unless somebody comes up with a breakthrough Alzheimer's drug or something that meets a critical unmet need, then the US will continue to decline as a percentage of the industry's overall sales.”
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