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Big Pharma pain, generic gain
$38 billion in drugs losing patent cover; savings for consumers, but problem for major drug makers.
October 25, 2005: 3:32 PM EDT
By Aaron Smith, CNN/Money staff writer

NEW YORK (CNN/Money) - The patent tussle between brand name drug makers and their generic competition is intensifying, much to the benefit of consumers.

More than $38 billion worth of drug revenue is expected to lose patent protection through 2008, according to a Tuesday report from a major pharmacy benefit manager.

As a result, consumers will save $20 billion in drug costs, said Express Scripts (down $1.03 to $62.62, Research). But branded drug companies will have to scramble for new drugs to fill revenue gaps as their blockbusters go off patent.

Meanwhile generic drug companies stand to gain about $8 billion over the next three to five years, said Casey Alexander, analyst for Gilford Securities, Inc.

Drug prices drop about 20 percent during the first six months after they lose patent protection, said Alexander. The first generic drug company to file with the Food and Drug Administration for a generic license is granted first-to-file production rights for six months. During that time, only the lead generic maker and the drug maker who held the patent are producing the drug. After that half-year expires, production opens to other generic makers and the drug's price plummets again.

"Six months later, when it becomes the generic company Wild West show, the price tends to drop to about 20 percent of the [branded] price," said Alexander.

Pfizer (up $0.02 to $21.11, Research), the world's biggest drug maker, announced a 52 percent plunge in third quarter net profits on Friday, and chief executive officer Henry McKinnell blamed generic competition in part. Pfizer will lose $10 billion of sales from expired patents through 2008 and will have a difficult time filling that gap, said A.G. Edwards analyst Al Rauch.

But drug companies do not go gently into that good night. Big Pharma companies often wage battles in court to hold on to patents even after they expire, Alexander pointed out, slowing down the process and delaying new revenue for generic drug makers.

Dr. Steven Miller, vice president for product management at Express Scripts, said that increased generic pressure could change the mix of drugs that are developed by the big pharmaceutical companies.

"Obviously, they're going to have to discover unique drugs and it probably discourages a lot of investing in me-too drugs," said Miller.

Producers of me-too drugs, which are similar to drugs that are already on the market, will find themselves trying to compete against cheaper generics once the first-in-line drug goes off patent, said Miller.

The FDA approved an unprecedented 474 generic drugs in 2004, up nearly a third from 364 the previous year. Despite the increased work load in 2004, the agency managed to trim its approval process for generic applications to a "record time" of 15.7 months from 17 months.


To find out how Teva Pharmaceutical Industries (down $0.36 to $38.35, Research) became the world's biggest generic drug maker, click here.  Top of page

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