Crackdown on Big Pharma May Result in More Generics

If the Federal Trade Commission gets its way, inexpensive generic versions of blockbuster drugs will arrive soon at a pharmacy near you.

This week, for the first time ever, the FTC took action against a pharmaceutical company for allegedly abusing the patent system to protect exclusive drug manufacturing rights. The FTC said the company, Biovail (BVF Quote), had improperly extended its patent on the high blood pressure treatment Tiazac, preventing rival Andrx (ADRX Quote) from making a generic version.

As a result, generic Tiazac stayed off shelves while the two companies fought in court. "The end result of the practice is that consumers have been denied the lower-priced generic drug for years," says Andrew Forman, a pharmaceutical analyst with Friedman Billings Ramsey.

This isn't an isolated case. The FTC is currently investigating the tactics pharmaceutical companies use to protect and extend lucrative patent rights. And in Congress, Sens. John McCain (R., Ariz.) and Chuck Schumer (D., N.Y.) have introduced the Greater Access to Affordable Pharmaceuticals Act, which would make it easier for generics to enter the market. The bill alters the 1984 Hatch-Waxman Act, which is packed with provisions companies use to delay generic drug introductions.

Pharmaceutical companies go to great lengths to protect patents because even a single day of sales reaps major profits. In 2000, at its peak, Eli Lilly's (LLY Quote) Prozac averaged $5.75 million in sales daily. "That's why this is such a hot issue. I'm exaggerating a bit, but some pharmaceutical firms are spending as much time figuring out how to protect patents as they are discovering new drugs," says David Webster, president of Webster Consulting Group, which provides consulting services to the pharmaceutical industry.

The Generic Issue

The FTC's action couldn't come at a better time for consumers. The patents on 47 blockbuster drugs with combined sales of $31 billion will expire before 2005, according to SG Cowen's research. If the crackdown is successful, consumers could find generic versions of GlaxoSmithKline's (GSK Quote) depression-drug Wellbutrin and Roche's (RHHBY Quote)obesity-drug Xenical at the pharmacy in the next couple years.

A Date With Expiration Here's a sampling of big-selling drugs whose patents will expire between 2002 and 2005
Expiration Date	Drug Name	Brand-Name Maker	Indication
April 2002	Axid	Eli Lilly	Gastrointestinal
December 2002	Claritin	Schering-Plough	Allergy
December 2002	Augmentin	GlaxoSmithKline	Infection
December 2002	Intron A	ICN Pharmaceuticals	Hepatitis-C
December 2002	Relafen	GlaxoSmithKline	Arthritis
November 2003	Flovent	GlaxoSmithKline	Asthma
November 2003	Flonase	GlaxoSmithKline	Allergy
November 2003	Cipro	Bayer	Infection
December 2003	Engerix-B	GlaxoSmithKline	Hepatitis-B
January 2004	Diflucan	Pfizer	Infection
April 2004	Paraplatin	Bristol-Myers Squibb	Cancer
June 2004	Xenical	Roche	Obesity
July 2004	Lamisil	Novartis	Tenia Pedis
August 2004	Wellbutrin	GlaxoSmithKline	Depression
October 2004	Lupron	TAP Pharmaceuticals	Cancer
December 2004	Lovenox	Aventis	Deep-Vein Thrombosis
Source: Business for Affordable Medicine, TSC Research

"The FTC is going to make it easier for those generics to get to the market," says Ian Sanderson, pharmaceutical analyst with SG Cowen. "They'll be available, and the price [of generics] to the consumer is anywhere from a 30% to 50% discount [below brand names]."

And that would certainly save consumers and insurers a bundle.

The average retail price for filling a prescription was $65.29 in 2000, whereas a generic cost only $19.33, according to a November 2001 study from Kaiser Family Foundation/Health Research and Educational Trust. And that gap is only increasing. From 1994 to 2000, generic drug prices rose 36%, while brand-name drug prices rose 75% -- more than twice as much.

Meanwhile, prescription drug spending continues to escalate, rising 17.3% last year, the sixth straight year of double-digit gains, according to the Consumers Union. "And that's a huge cost driver for all the health care world," says Janell Duncan, legislative counsel for the Consumers Union.

For the insurance industry, the additional costs result in higher premiums. Drug costs for companies that provided prescription drugs under a separate plan rose 15.5% in 2001, higher than the overall health plan premium increase of 11%, the Kaiser study showed.

For the insured, the lack of generics results in higher copayments. Most generic drugs cost $5 or $10 per prescription, while costs for brand names can reach $50.

A Specific Case

How much will consumers save? It's hard to predict the future, but a dispute between Barr Laboratories (BRL Quote) and Eli Lilly over the rights to make a generic version of Prozac offers a good illustration.

In February of 1996, Barr filed an abbreviated new drug application (ANDA) to make a generic version of Prozac. Lilly sued Barr and automatically received a 30-month extension legally mandated under Hatch-Waxman and continued to make the drug. "If it's not sorted out in 30 months, and it usually isn't, then a generic can't get on the market," Forman says.

When the 30-month stay expired, Lilly used another delay tactic and filed for a six-month pediatric extension, exploiting a section of Hatch-Waxman used to encourage drug safety trials for children.

After more than four years of appeals and delays, Barr received tentative approval to make generic Prozac in July 2001. In a surprise decision, the court ruled that Lilly's patent expired in 2001, not 2003, because the company had illegally double-patented Prozac, issuing multiple patents on what is essentially the same drug. "That's when a patent has only been filed strategically, issued so the company can protect the franchise," says Forman, who adds that a new patent may cover something unrelated to how the drug works, such as pill shape.

Because of the ruling, consumers didn't have to wait until 2004 for generic Prozac. "The brand name was $2 a pill, but now it's about 20 cents a pill, which consumers wouldn't have paid during 2003 and 2004," says Forman. "Between those two years, by my rough estimate, the amount saved by consumers is about $2 billion."

Indeed, a recent survey of 46 states by Business for Affordable Medicine concluded that states could save $260 million in 2003 if generic versions of drugs whose patents expire in 2002 are not needlessly delayed.

You'll Need Some Prozac After This One Barr Laboratories fought for more than five years to win clearance to release a generic version of Prozac
Date	Action
February 1996	Barr Laboratories files an abbreviated new drug application to make a generic version of Eli Lilly's Prozac. Lilly receives notice of the application.
March 1996	Lilly sues Barr to halt its efforts. Under the 1984 Hatch-Waxman pharmaceutical patent reform law, Lilly automatically gains another 30 months to make Prozac because of the lawsuit.
August 1998	Nearly 30 months later, a judge dismisses half of Barr's claims.
January 1999	Legal wrangling continues. Barr drops most of its remaining claims in order to expedite its appeal and take its strongest claims to the appellate court level.
June 2000	A year and a half after the appeal, Barr receives tentative approval from the appellate court to make a generic version of Prozac.
August 2000	In a split decision, the appellate court rules Lilly's patent is valid until 2001, but, in a surprising turn of events, says the company's 2003 patent is deemed invalid.
September 2000	Lilly files petition for court to hear case again.
December 2000	Lilly receives a six-month pediatric extension, which provides additional time to conduct safety trials on children.
July 2001	U.S. Court of Appeals denies rehearing of case. The final decision will stand: Lilly's patent on Prozac will expire in 2001.
August 2001	Lilly's pediatric exemption ends. Barr's generic version of Prozac ships.
January 2002	Barr's six-month exclusive manufacturing rights on generic Prozac ends, and at least 10 companies begin production of their own generic versions. The price per pill drops from $2.00 for the brand name to 20 cents for the generic.
Source: Friedman Billings Ramsey research reports.

Some Hope for Consumers

The Greater Access to Affordable Pharmaceuticals Act would curb some abuse, most notably the automatic 30-month stay period. The FTC's investigation is ongoing, and the agency's action against Biovail may be a sign of things to come.

But while these steps offer a measure of hope for consumers, the industry could ultimately pass on costs to consumers in the long run. "Essentially, consumers will get quicker generic entries in the short term, but ultimately, branded pharmaceuticals will be more expensive. Innovating new drugs is harder to do," Webster says.

The bottom line: The political climate has changed, and that will help consumers save money. "The abuse by the pharmaceutical industry is better understood," says Forman. "Are they cheating? The answer is yes."