How Can Generic Pharma Get Its Groove Back?

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By Bronwyn Mixter and Llewellyn Hinkes-Jones

Generic pharmaceutical companies are looking to Congress to help get the industry out of its recent funk.

Total revenue for the generic drug industry went down 12 percent from June 2016 to June 2017 even though the number of generic prescriptions went up slightly, by 1 percent, according to the head of a generic industry group. And two major generic drugmakers—Mylan NV and Teva Pharmaceutical Industries Ltd.—recently reported disappointing quarterly results. While Mylan and Teva also make branded drug products, they both said in recent financial reports they were experiencing generic drug price erosion.

If the revenue declines continue, “you’re going to see consolidation of the generic companies” and “you’re going to see shortages of products,” Dan Mendelson, chief executive officer of the consulting firm Avalere Health, told Bloomberg BNA Aug. 21. He also said he is worried about product quality because companies trying to make ends meet could end up making lower quality products.

Mendelson said “it’s ironic that the generic industry is facing such commercial difficulty just at the time the health-care system needs these product to be widely available.” Generics account for 89 percent of prescriptions dispensed but only 26 percent of total drug costs in the U.S., according to a recent report from the Association for Accessible Medicines (AAM), the generic industry group.

Reasons for the revenue decline include consolidation on the demand side, practices of branded corporations that stifle competition, and more competition among generic products due to more product approvals, industry group leader Chip Davis told Bloomberg BNA. Davis, chief executive officer of the AAM, said there a number of things Congress could do to help, including prohibiting anticompetitive practices by branded drug companies, repealing a penalty in the Medicaid program that unfairly targets generic drugs, and increasing the use of generics in Medicare Part D.

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Consolidation of Buyers

Davis said one reason for the decrease in revenue “is there’s a bit of market imbalance in this marketplace that has been historically defined or at least its success has been defined by robust competition.”

While there’s still robust competition on the supply side, “what you’ve seen is an overwhelming amount of consolidation on the demand side of the generic marketplace. By that I mean the wholesalers and the retail pharmacies and a little bit by extension the PBMs [pharmacy benefit managers].”

“If you look at the wholesalers and the retail pharmacies, you now have these large purchasing consortiums that make up about 90 percent of all U.S. generic drug prices,” such as McKesson and Red Oak Sourcing, Davis said. These consortiums “often collaborate between retailers and wholesalers in order to increase their negotiating leverage on their side of the table” to get lower prices. McKesson declined to comment and Red Oak Sourcing didn’t return a request for comments.

Jonathan J. Darrow, an instructor of medicine at Harvard Medical School, told Bloomberg BNA Aug. 14, “Buyers [such as wholesalers and pharmacies] are increasingly consolidating or coordinating their purchasing behavior, and just as an oligopoly (a small number of sellers) can cause prices to rise, an oligopsony (a small number of buyers) can cause prices to fall.”

Anticompetitive Business Practices

Another issue that’s causing problems for the generic industry is “an increase in the amount of what we refer to as anticompetitive business practices that you are increasingly seeing from certain branded companies,” Davis said.

Branded drug companies are abusing risk evaluation and mitigation strategies (REMS) and REMS-like limited distribution programs to “deny generic and biosimilar companies the ability to purchase [drug] samples at fair market value in order to do the necessary pharmacovigilance to file an application with the Food and Drug Administration,” Davis said. The FDA sometimes requires a REMS plan from a drugmaker to ensure the benefits of the product outweigh its risks.

Davis said Congress could solve this issue by passing the Creating and Restoring Equal Access to Equivalent Samples Act (CREATES Act) ( H.R. 2212; S. 974) or the Fair Access for Safe and Timely (FAST) Generics Act ( H.R. 2051). Both bills would prevent branded drug manufacturers that have REMS from keeping generic or biosimilar drug developers from obtaining samples to perform studies. Biosimilars are lower-cost versions of biologic drugs.

But the branded industry has a different view. Andrew Powaleny, director of public affairs at the Pharmaceutical Research and Manufacturers of America (PhRMA), the branded drug industry group, told Bloomberg BNA in an Aug. 17 email that REMS “are a critical regulatory tool for protecting patient safety while minimizing risks. Many medicines subject to REMS with elements to assure safe use (ETASU) programs already have generic competitors or tentative approvals.”

Of the 42 REMS with ETASU programs, Powaleny said 10 are shared systems, meaning that generic versions have been approved and “do not preclude generic competition.” Powaleny added, “Should FDA believe there are issues concerning the REMS program, the agency currently has the authority to address these issues.”

Powaleny said both the CREATES Act and the FAST Generics Act “would put patients at risk by undermining existing safeguards required by a REMS while also spurring meritless, wasteful litigation.”

Generic Pricing Pressures

“The issues facing generic peers like Mylan and Teva are multifaceted, but one common thread is generic price pressure in the U.S.,” Bloomberg Intelligence Analyst Elizabeth Krutoholow told Bloomberg BNA in an Aug. 15 email.

Harvard’s Darrow told Bloomberg BNA, “One of the major reasons [generic] drug prices may be falling is the impact of the Generic Drug User Fee Act (GDUFA)" of 2012.

“GDUFA allows the FDA to collect user fees from generic drug companies, the purpose of which is to help speed generic drug approvals,” Darrow said. “As more drugs are approved, that increases the supply of generic drugs available, and increasing supply can lead to lower prices.”

Darrow said the reason generic prices are decreasing now, five years after GDUFA was enacted, “is that it has just taken some time for the FDA to hire and train the new staff contemplated by that law.”

“The FDA expected a delay between the passage of GDUFA and the time when rates of ANDA [abbreviated new drug application] approvals would increase” and “it seems the GDUFA statute may now be bearing some fruit,” Darrow said.

In fact, Kathleen Uhl, director of the FDA’s Office of Generic Drugs, said in a Feb. 24 blog post that in 2016, the FDA approved the highest number of generic drugs in the history of its generic drug program. Uhl said a total of 800 generic drugs received full approval or tentative approval in 2016, which surpassed the previous record of 726 in 2015.

Krutoholow said that another key issue “is that first-time generics are not the ones getting approved—you see drugs that already have two copies getting a third and fourth, etc., approved, which further increases the competition.”

Darrow also said recently “there have been some alleged antitrust violations by sellers. Large generic companies like Mylan and Teva, as well as some small companies, have been accused of price fixing or other antitrust violations.”

Pfizer Inc. Aug. 10 announced that its generic unit is being investigated by the U.S. Justice Department as part of an industrywide probe into possible price fixing. Pfizer disclosed in a regulatory filing that the department’s antitrust division began probing its Greenstone generics unit last month. About a dozen companies have said they’ve received subpoenas, including Mylan NV, Endo International Plc, Lannett Co., and Teva Pharmaceutical Industries Ltd. Perrigo Co. said in May that its offices were searched.

“If these claims by state attorneys general or class action plaintiffs are causing these companies to ease up on their price fixing, assuming there is in fact price fixing, that would be expected to result in a lowering of prices,” Darrow said.

What Would Help the Generic Industry?

The AAM’s Davis said “on the legislative side, what members of Congress need to do first and foremost is to repeal the Medicaid rebate penalty that was passed as part of the budget deal in the Fall of 2015.”

At issue is Section 602 of the Bipartisan Budget Act (BBA) of 2015 (Pub. L. No. 114-74), which amends Medicaid rebate policy to impose a new penalty on generics for price increases exceeding inflation in rebate periods beginning in 2017. Prior to 2015, the penalty only applied to branded drugs.

Because branded drugs “have a monopoly status, [the penalty] was designed to serve as kind of a guardrail from companies with patents and exclusivity protections from raising their prices too high on an annual basis,” Davis said. “If they did that, they had to return part of that price increase back above and beyond the base level for a rebate to participate in the program.”

Davis said the problem with the penalty for the generic industry is that the provision can get triggered when a company doesn’t take a price increase.

A generic company “can have a change in their customer mix and that provision can get triggered, which means the company is now paying a higher rebate or an additional penalty even though they didn’t take a price increase,” Davis said. “That is obviously a disincentive to stay in the market.”

“There’s a host of other things Congress can do in the low income populations for Medicare Part D, where the generic utilization rate is lower than the national average,” Davis said.

Davis said Congress could adjust the copayments for that program in order to increase generic utilization, which would expand the market and “save the federal government $17-20 billion over the next 10 years.”

Avalere’s Mendelson also told Bloomberg BNA policymakers “can make sure that payment rates are adequate in public programs” and “can make sure that when a patient accesses generic drugs, that those drugs are inexpensive to the patient because that drives more demand for the generics.” He said “right now, if a Part D plan is able to structure a formulary where there’s a $30 copay on a $5 drug, the patient doesn’t get to see the savings and that tends to depress demand.”

“So I think that’s another area where the government can engage to make sure the benefit of these lower prices are actually be passed on to consumers,” Mendelson said.

Congress also “can make sure there’s appropriate oversight and scrutiny of practices and efforts to extend either patent life or exclusivity provisions or abuse citizen petitions [submitted by companies to the FDA] far beyond what they were ever originally envisioned to do,” AAM’s Davis said.

“What we’re focused on obviously is just trying to address these concerns because we want to make sure that the ability of our members to continue to deliver over a quarter of a trillion dollars a year in savings to the U.S. health-care system isn’t compromised moving forward,” Davis said.

Davis said all of these issues can be addressed, but “the question in many instances is there going to be the political will and fortitude to do it.”

Clarity on Complex Generics Needed

Krutoholow also told Bloomberg BNA generic companies need “more clarity on the [FDA’s] approval pathway for complex generics. Delays on these products with a larger market opportunity have hindered Mylan’s performance in 2017.”

A complex generic is a generic that could have a complex active ingredient, formulation, route of delivery, or complex drug-device combinations, according to the FDA. Simple generics are copies of small-molecule reference drugs that are chemically identical to their branded counterparts.

Approvals of complex generics “sometimes require trials and data beyond that required of a typical generic so more interaction is needed with the FDA to properly design studies and create packages for approval,” Krutoholow said. “A focus on approvals for generics of branded products without any generics would also aid larger peers like Mylan and Teva.”

To contact the reporter on this story: Bronwyn Mixter in Washington at bmixter@bna.com

To contact the editor responsible for this story: Brian Broderick at bbroderick@bna.com

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