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)

, had improperly extended its patent on the high blood pressure treatment Tiazac, preventing rival

Andrx

(ADRX)

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) - Get Report

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) - Get Report

depression-drug Wellbutrin and

Roche's

(RHHBY)

obesity-drug Xenical at the pharmacy in the next couple years.

"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)

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.

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."

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