Authorized Generics: Here to Stay?
Pharma’s Cutting Edge
Vol. 3 Number 3 - March 2005
Authorized Generics: Here to Stay?
Contrary to what you might have read recently, the U.S. authorized generic drug debate continues, and it is one pharma investors need to keep a close eye on in 2005.
Authorized generics are created when a pharmaceutical innovator licenses its branded drug to a selected generics maker (the generic partner) in anticipation of competition from another generics firm (the generic competitor). The authorized generics are usually manufactured by the innovator and distributed by the generic partner. A twist to remember later comes when the innovator and the generic partner are subsidiaries of the same pharmaceutical company (e.g. Sandoz and Novartis Pharma).
Normally, a generics manufacturer that challenges an innovator’s patent successfully (via the so-called “paragraph four” certification) is provided six months of generic market exclusivity. These six months without generic competition account for the bulk of a generic drug’s profits, because generic firms can maintain relatively high prices for their products during this period.
Authorized generics immediately dilute the value of being the “first-to-file” generic firm by creating instant competition. Instead of a marketplace consisting of one innovator and one generic for 180 days, a market with an authorized generic contains two generics launched roughly simultaneously. Pricing pressure erodes the generic competitor’s expected profit margins, in some cases substantially.
Proponents of authorized generics argue that consumers benefit because two less costly alternatives to the innovator drug are launched at the same time, reducing prescription costs. Opponents argue that in the long run fewer generics will come to market.
Authorized generics deals have opened a fissure within the generic-drug industry. On one side are companies such as Watson, Par, Sandoz, and Greenstone (owned by Pfizer) who believe that partnering with innovators is a sound business strategy. On the other side are companies such as Teva, Mylan, and Apotex, who, along with the Generic Pharmaceutical Association (GPhA), fear that authorized generics threaten the long-term health of the generic industry. “Allowing authorized generics to be marketed and distributed during the 180-day exclusivity period is directly contrary to the [Hatch-Waxman] statutory provision since it undercuts the incentive for generic companies to take on questionable patents,” the GPhA said in a June 2004 press statement.
The opponents of authorized generics haven’t been sitting still but so far have made little progress in their efforts to stop the practice. Mylan was the first to take action when it filed a Citizens Petition with FDA in February 2004 asking FDA to stop the sale of authorized generics. Mylan then filed suit in U.S. District Court against Watson in March 2004, alleging that Watson’s distribution of an authorized generic of P&G’s Macrobid violated federal law and misled consumers. Mylan’s Petition with FDA was followed by similar petitions from Teva and Apotex. Submitting counter-arguments to FDA were Pfizer and Johnson & Johnson, who argued that the cost savings for consumers justified the practice. Read the rest of this entry »
