Generic Drugs have Market Vulnerabilities Too

As mentioned in the previous post generic drugs now account for more than 70% of prescriptions filled in the US and that percentage is likely to increase with patent protection expiring on several blockbuster products over the next 3-5 years.  With additional support from the Obama administration to exploit the potential cost savings from the use of more generic drugs and continued efforts to ease the way to market for generic drugs, including biologics, you would think the future for generic drugs has never looked more promising.  Yet, there are five vulnerabilities and risks that could undermine the cost savings potential and success of generic drug manufacturers in the future.

  • Manufacturing Quality

Drug manufacturing is difficult, especially delivering lot-to-lot consistency for tablets and capsules and ensuring the sterility of injectable products.  One of the biggest concerns raised most often about the use of generic drugs is whether they are, in fact, the same as the branded products.  The FDA goes to great lengths to dispel purported generic drug misinformation and to provide definitive answers to common questions regarding comparability.  According to the FDA website:

“Health care professionals and consumers can be assured that FDA approved generic drug products have met the same rigid standards as the innovator drug. All generic drugs approved by FDA have the same high quality, strength, purity and stability as brand-name drugs. And, the generic manufacturing, packaging, and testing sites must pass the same quality standards as those of brand name drugs.”

I’m not sure how the FDA can possibly making sure “all generic drugs have the same high quality, strength, purity and stability as brand-name drugs.”  When you consider the increasing number of generic drug products being made available by more manufacturers (many, if not most, not even in this country), their assurance seems a bit definitive and even suspect (lacking credibility) given FDA’s already stretched resources and limited inspection capacity and capabilities.

Generic drug vulnerability in manufacturing quality comes with the potential for some well publicized cases of documented manufacturing problems, safety issues, or FDA warnings about any quality concerns that would compromise healthcare provider and public confidence in the efficacy or safety of generic drugs.  In fact, any concerns voiced by the FDA with regards to the use of generic drugs could destroy the confidence of an already skeptical patient population.

  • Unsustainable low prices

Even though generic drug manufacturers have built their business models around being low cost providers they still must make a reasonable profit to stay in business.  It is important to note that drug manufacturing, especially sterile injectable drugs, is not cheap.  Regulatory compliance and cost of goods can still make pharmaceutical manufacturing expensive, even for generic drugs.

When the healthcare market (e.g., pharmacies, wholesalers, Pharmacy Benefits Managers) drives competitive prices down to a point where even generic drug manufacturers can no longer make a reasonable profit, fewer manufacturers participate in that market and ultimately the healthcare market becomes more susceptible to shortages for those products.  I believe this is a major reason for the current shortage of over 150 medically necessary drugs, many which are generic drugs.

So, generic drug manufacturers are vulnerable to the negative financial impact of unsustainable low prices.  When they decide to manage this by limiting or eliminating the manufacturing of low or no margin products they leave themselves open to criticism and diminished public confidence as more of the critical drug shortages start to be blamed on the generic drug industry rather than on Big Pharma (the perception today).

  • Supply of Active Pharmaceutical Ingredients (APIs)

As generic drug manufacturers squeeze their suppliers for lower prices, those suppliers also lose interest in delivering at those low prices and a cascade of events begins to drive a shortage of APIs when you need them.  Without the financial incentives (reasonable profits) to ensure supply availability, even API suppliers start to limit and maybe even discontinue making the lowest margin products on a regular basis in favor of higher margin opportunities.

Unlike in other markets, the regulatory and manufacturing challenges of pharmaceuticals makes it difficult and time consuming for new manufacturers (API or generic drugs) to step in and take advantage of these drug shortages.  Even if a new manufacturer were able to begin production, the finished generic drug’s price would almost certainly be much higher than the previous generic drug price.  Again, potentially irritating and alienating the healthcare market and patients.

  • Burdensome Government fees

Additional fees levied on generic drug manufacturers (i.e., FDA reviews) as proposed by the Obama administration could erode the cost savings potential to the healthcare providers system.  Expecting generic drug companies to absorb these incremental fees could be counter productive (resulting in higher generic drug prices). More importantly, high fees across a portfolio of products could put sustainable profitability for smaller  generic drug companies at risk, even forcing some out of the market.

  • Product Liability

As more products become available and more patients take generic drugs, product liability cases will inevitably increase for generic drug companies.  As a result, they may become more inclined to avoid or quit manufacturing products with the potential for an inordinate amount of litigation.  Again, with their low cost of operations and thin profit margin business models, repeated and protracted litigation for low margin products may not be financially feasible, will add to their overall cost base, and could negatively impact healthcare provider and patient perceptions of quality.

The potential liabilities for generic drug companies is especially noteworthy in light of the pending Supreme court review of whether or not generic drug companies can be held liable for “failure-to-warn” when they rely on the prescribing information developed by the branded drug company and approved by the FDA.   Should generic drug companies not prevail, it will open generic drug manufacturers to new potential liabilities and future litigation which could further compromise their low cost business models.

So, while the future looks very promising for generic drug manufacturers, it is not without challenge or risk.  For the market to continue to reap the financial benefits of a consistent and safe generic drug supply, generic drug manufacturers must guard against these vulnerabilities.  And as much as insurers and patients might enjoy the low prices we pay for generic drugs, the low prices only matter when the products are as effective as the brand, are safe to take, and are available when we need them.

Healthcare Reform and Generic Drugs will Drive Branded Prescription Drug Prices Higher

Recently, in one month, the price of my branded prescription drug for high cholesterol went from $130 per month to $145 per month at the same pharmacy.  Yesterday I changed to a generic drug alternative (not the same as the brand I was taking) which will cost me $4 per month after joining a $20 per year prescription savings club.  I now get more than two years of medication for the price I was paying for one month of the branded product.  Assuming I will be able to control my cholesterol with this new medication (no reason to believe it won’t as I have taken most of them over the past several years),  at $1 per week it is hard to complain about the high price of prescription drugs.

So why was I even paying $130 in the first place, when generic alternatives were available?  Well, when I had prescription drug coverage through my employer provided insurance,  my co-pay for the branded products was about $20.   I not only didn’t think about the actual price of the drug but I didn’t even care to know what it would have cost without insurance.   Generic drug alternatives didn’t enter the thought process.  Besides, how much lower priced could the generic drug be? More recently, until the price increase,  I just kept getting the prescription filled even though it seemed expensive at $130 per month.

Fortunately my physician agreed to try me on the generic alternative.  For once I also felt fortunate that I was not covered by a government program (e.g., Medicare, Medicaid, and TRICARE) which would have made me ineligible for this savings club and these generic drug prices.  There is a wide range of therapeutic categories with over 400 generic medications available from this pharmacy prescription savings club priced at $12 for a 90-day supply (or $9.99 for 30 days).  Again, hard to suggest these prices are unreasonable and they certainly are not expensive in the context of most prescription drug price discussions.  Even without the savings club membership the price would have been less than $30 per month.

Despite the fact that over 70% of prescriptions in the US are now filled with generics drugs, I can’t help but to think from my own experience that there are still a lot of people who could financially benefit from a switch to generics.   I also believe healthcare reform will bring significant cost pressures to get more patients converted to generic drugs.  The Congressional Budget Office reported that in 2007, if all of the 45 million Medicare Part D prescriptions filled with multiple-source brand-name drugs (brand name drugs with generic alternatives) had instead been filled with their generic counterparts, an additional $900 million would have been saved.  And that is without considering therapeutic substitutions (as my case would be considered) or the potential savings from the blockbusters now coming off patent over the next few years.

The biggest downside for patients resulting from this healthcare market evolution to encouraging the use of more generic drugs is that if you need one of the innovative branded products for which there is no good generic alternative, you are going to pay much higher prices than you might have in the past.  If my generic cholesterol lowering agent isn’t as effective (or has more side effects) as the branded product I was taking, I’ll be back to paying the $140 per month.

I believe two factors will drive branded product prices higher with healthcare reform.   First, truly innovative treatments that deliver real clinical value and unique therapeutic benefits will command a premium price because they will be deemed worth paying for and taking.   Second, more generic drugs and more patients taking generic drugs will shrink the market for branded products to people who absolutely need the branded products.   Drug companies will have to exact their profits from fewer products that can deliver these unique therapeutic benefits to much smaller patient populations.   Companion diagnostics will further reduce these already small populations of patients, by identifying responders and eliminating those who might experience side effects.

So the good news for patients is there will be more generic drugs available at low prices resulting in lower costs to government programs (tax payer benefit), private insurance (keeps co-pays lower), and patients.   Pharma companies on the other hand will be able to, and will have to, charge even higher prices when patients need their innovative branded products.

Disclosure:  I am not compensated  by the prescription savings club.  The link is included here only as a reference.

Another Challenge for Healthcare Reform and the Pharmaceutical Industry

The recent CDC report on how poorly we are doing in preventing the leading cause of death in the US, cardiovascular disease, despite the availability of inexpensive effective treatments, is pretty disappointing.  It is probably a good surrogate for how people think about illness.

If the symptoms are silent and merely precursors for what might happen, people tend to be indifferent and less interested in paying any associated expenses.  If they are sick with symptoms that are uncomfortable, make daily activities impossible, or they are told they are dying from the disease, they will do just about anything and pay just about anything to eliminate the symptoms or disease.

I believe this reflects both a healthcare systems failure and tremendous patient apathy that suggests they don’t feel responsible for expenses (thinking either insurance or the government should pay) related to the consequences of their own poor health.

The report concludes:

“Although treatment of high blood pressure and high cholesterol is very effective and relatively low-cost, most people with these conditions remain at elevated risk for heart attacks, strokes, and other problems.”

  • By the Numbers – High Blood Pressure
    • 1 in 3 Adults has high blood pressure
    • 1 in 3 Adults with high blood pressure does not get treatment
    • 1 in 2 Adults with high blood pressure does not have it under control
  • By the Numbers – High Cholesterol
    • 1 in 3 Adults has high cholesterol
    • 1 in 2 Adults with high cholesterol does not get treatment
    • 2 in 3 Adults with high cholesterol do not have it under control

The insurance coverage focus of healthcare reform will probably make little difference in these numbers.  In this same CDC report, it is noted that more than 80% of patients who lack control of theses cardiovascular disease symptoms already have insurance.  Additionally, the cost to treat these conditions is relatively low with many highly effective treatments now available as inexpensive generic drugs.

Unfortunately, over the past several decades while healthcare provider systems battled Pharma companies over drug prices and Pharma companies focused on driving the market for “new prescriptions,” a huge market of untreated and ineffectively treated patients was building.

Why should we care?

Well, Pharma should care because there are tens of millions of potential patients yet to be treated.  Perhaps not all these potential patients will be willing or able to pay high prices for branded products but some may and will.

More importantly, beside the thousands of people suffering debilitating consequences or even dying prematurely, this same CDC report notes that cardiovascular disease costs the nation $300 billion each year.

So how do we improve and expand the treatment of patients with high blood pressure and high cholesterol?

The CDC report includes several suggestions and recommendations for programs, systems, and incentives for prevention and improving the treatment of cardiovascular diseases.  Unfortunately, many are similar to tactics being deployed today, previously suggested, or that have been tried before.

I believe the solution to this dilemma is to make the patient take responsibility for their health.  Pharma companies can make effective treatments available, physicians can prescribe the life style changes and medications, insurance companies and the government can pay for the treatments.  But, if patients don’t seek out and comply with the life style changes and treatment regimens, there is little the rest of the healthcare provider system can do to help patients prevent cardiovascular disease.

So how do we get patients to take responsibility?  This may be a little radical but what about making patients personally,  financially responsible for the consequences of not seeking diagnosis and treatment or complying with their treatment regimens.  If you have high blood pressure or high cholesterol and you choose not to find out (get checked) or be treated or not to be compliant with your prescribed treatment (including life style changes), that’s fine,  but you become personally responsible to pay for any medical expenses related to your heart attack or stroke.

While people have a hard time appreciating the health consequences of a heart attack or stroke until it happens, they seem to understand the financial consequences without experiencing the event.  That is why people buy insurance and why health insurance is so important to them when seeking employment.  They can relate to the financial implications more than the health consequences.

Want more patients to have their high blood pressure or high cholesterol controlled?  Make them financially responsible for the consequences of not seeking treatment and not staying in control of their disease.