Can a nonprofit make generics great again?

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Last year was not pretty for generics. Many companies suffered sharp drops in revenue and plunges in stock prices. Others were accused of price fixing and conspiracy, and some have pled guilty to these charges. Acquisitions that were applauded a few years ago, such as Teva's purchase of Allergan's generic business, now look like lemons.

FDA commissioner Dr. Scott Gottlieb is turning the heat on drug prices, even though generic profit margins are already paper-thin.

It's like being in the ring with both Mike Tyson and Muhammad Ali.

What else could go wrong? On January 17, a consortium of nonprofit hospital systems, including Intermountain Healthcare, Ascension, Trinity Health, and SSM Health, announced they were creating a company to manufacture and deliver generic drugs.

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The initiative, dubbed Project Rx in early reports, represents more than 450 hospitals, a good slice of the 3,000 or so private nonprofit hospitals in the U.S. When you add the fact that the Department of Veterans Affairs is interested, it could be a big deal.

The consortium leaders identified two major factors behind the idea. First, shortages of drugs, ranging from injectable morphine to sodium bicarbonate, have become endemic. As many as 200 shortages, most of which are generics, occur on any given day of the year.

The second factor is price volatility. A recent Government Accountability Office report stated more than 20% of generic drugs had doubled (or more) in price in the last few years.

Remember when the cost of doxycycline hyclate went from $0.056 a pill in 2012 to $3.65 in 2013?

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The relentless pressure on generic prices caused by the Affordable Care Act and the growing influence of payers and pharmacy benefit managers have forced a dramatic consolidation in the industry.

According to Erin Fox, a pharmacist at the University of Utah, “Only two to four manufacturers are actually making these drugs. That means when there is any type of supply glitch, such as a manufacturing or quality problem, it almost always ends up in a shortage.”

Carolyn Clancy, M.D., executive in charge, Veterans Health Administration, confirmed the importance of a reliable supply chain. “The Department of Veterans Affairs looks forward to the value this new company will bring to healthcare in the U.S. Increasing generic drug manufacturing capacity will generate a more stable supply and reduce the negative clinical impact of chronic shortages, including the impact on our nation's veterans.”

What would this new company look like?

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Marc Harrison, president and CEO of Intermountain Healthcare, envisions a nonprofit that will supply about 20 as yet unnamed generic drugs to participating hospitals.

Harrison was reticent about the details, stating a concern that the industry might temporarily drop prices, only to restore them later.

As to the company's future, Kevin Schulman, M.D., one of the group's advisers, noted, “If all [hospitals] agree to buy enough to sustain this effort, you will have a huge threat to people trying to manipulate the generic drug market.”

How will industry leaders respond? I suspect they will wait and see. But in my experience, leaders who wait for the future to unfold before acting often find themselves behind the curve. What would you do in their shoes?

Sander Flaum is a principal at Flaum Navigators. 

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