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.
After considering the petitions, FDA refused to take action against authorized generics. “FDA’s mission is protection and promotion of public health and does not generally call for review of the business dealings of drug manufacturers. FDA sees no reason to interfere with the marketing of authorized generics…[and has no] statutory authority to delay the entry into the market of brand generic drugs.”
This opinion from FDA was not surprising, according to Gregory Glass, Editor of the Paragraph Four Report: “When FDA decided the issue the way it did, it really came as little surprise. Two years ago during the ‘patent stacking’ era, FDA took a similar position when it was asked to review patents before listing them in the Orange Book and to reject those patents that appeared to be submitted only for the purpose of delay.”
The fight hasn’t gone any better for generic competitors in the courts thus far. In late December, the U.S. District Court in Washington, D.C. denied Teva’s motion for summary judgment in their August 2004 lawsuit against FDA. The suit alleged that FDA’s position is arbitrary, capricious and violates federal law. Teva asked the Court to overturn FDA’s denial of Citizen’s Petitions submitted by Teva and Mylan. The Court sided with FDA, concluding that the agency acted in accordance with federal law when it rejected the petitions. Specifically, the Court ruled that federal law “only prohibits the FDA from approving subsequent ANDAs until after the 180 day exclusivity period has expired. Nothing in the statute provides any support for the argument that the FDA can prohibit [NDA] holders from entering the market with a brand generic drug during the exclusivity period.”
Mylan awaits its day in court against P&G, and, no doubt, other lawsuits will be forthcoming.
Andrx, meanwhile, decided to Petition FDA yet again. In their Citizen’s Petition filed in December, Andrx requested that FDA seek the advice of the FTC and Justice Department on the issue, since “FDA has acknowledged that it lacks expertise in matters of competition.”
While the debates continue, generic firms who are the “victims” of authorized generics are feeling the pinch. Apotex for example, has indicated that its generic version of GSK’s antidepressant Paxil had sales of roughly $200 M during its 180-day exclusivity period—a third of what they claim to have expected prior to launch. Apotex argued that authorized generic competition from Par/GSK was responsible. “There can be no doubt that the Par-authorized generic crippled Apotex’s 180-day exclusivity,” they said.
On the other hand, at least one industry analyst has suggested that, while significant, the loss of profits due to authorized generics is not severe enough to erase incentives for generic competitors to file ANDAs early. Jonathan Siegel of Bear Stearns, speaking in December at a Food and Drug Law Institute conference, said that without an authorized generic, a generic firm with 180-day exclusivity could reap a 1,000% return on investment (ROI). With an authorized generic product on the market, the ROI declines to approximately 470%. “Clearly, that still remains to be a windfall for the generic company, although some would argue that changes the environment and may prevent companies from challenging patents going forward,” he said.
And here Mr. Siegel has found the heart of the matter. Authorized generics effectively diminish the incentive to file ANDAs as quickly as possible, arguably the raison d’être of the Hatch-Waxman law that spurred the growth of the generics industry over the last 15 years. There can be little doubt about it.
Why else would innovator firms be interested in authorized generics? You can be sure that it is not to keep generic drug prices low for consumers. Innovator firms are trying to break the back of the generic drug industry by…joining it.
In essence, innovators aim to substitute risky and expensive litigation, with its potential windfall of treble damages against patent infringers, for the relatively risk-free, systematic erosion of generic competitor profit potential. Less profit potential means less R&D investment and erosion of generic firm market value, which will ultimately lead to industry consolidation and less generic competition.
Without intervention, it is easy to envision a future that consists solely of generics companies that either are subsidiaries of large pharmaceutical innovators or that make proprietary drugs a core of their business.
Surely, legislators can envision this anti-competitive future.
Hatch-Waxman was intended to create drug pricing competition by allowing generics to get to market more quickly. It provided the profit incentive and the regulatory pathway to make this happen. Authorized generics remove much of the profit incentive. They are antithetical to the spirit of Hatch-Waxman if not its wording. If the courts don’t outlaw them, Congress likely will. Just when is the question investors are asking. It’s not likely to be any time soon.
