Drug Makers Use New Tactic To Ding Generic-Drug Firms
By LEILA ABBOUD
Staff Reporter of THE WALL STREET JOURNAL
Big pharmaceutical companies have found a creative way to stick it to the generic-drug industry: licensing a brand-name drug to a selected generics maker to undermine a rival generics maker that plans to copy the drug.
Such deals usually involve a drug that is losing patent protection, often because a generics competitor challenged it in court. The big pharmaceutical company allows another generics company to sell an "authorized copy" of the drug -- sometimes even made by the brand-name company itself.
Normally, a generics maker that challenged a patent would be granted six months of exclusive sales under a federal law designed to spur generics. But the "authorized" copies are able to skirt such restrictions, and they immediately cut into the rival generic makers' sales.
That's how Johnson & Johnson was able to cut the legs out from under Barr Laboratories last month. Barr, a unit of Barr Pharmaceuticals Inc., had spent five years working on copying Ortho-Tricyclen, the most widely prescribed oral contraceptive, and challenging J&J's patents on the drug in court.
But when Barr launched its product Dec. 29, it wasn't alone. A competitor, Watson Pharmaceuticals Inc., had cut a deal with J&J to put out an authorized copy of Ortho-Tricyclen, agreeing to share some of its revenue from the drug. The authorized generic drove down prices and cut into sales of the Barr drug, costing it hundreds of millions of dollars. "We were not too happy about it," said Barr's chief executive, Bruce Downey.
Such deals, while still somewhat rare, are growing in number and involving blockbuster products such as GlaxoSmithKline PLC's antidepressant Paxil. The trend is shaking up the generic-drug industry, pitting companies against each other -- and ultimately could reduce consumer access to cheaper copies of pharmaceuticals if generics makers challenge fewer drug patents.
As Wall Street debates the impact on high-flying generic-drug stocks, some analysts have already sounded the alarm. Michael Krensavage, a drug analyst at Raymond James & Associates, reckons that a generics company sees its profit in the six-month exclusivity period fall by more than half if the branded company allows an authorized generic.
"Not only does the generic lose half its market share, but it also has to sell its product at a reduced price," the analyst said. He thinks the phenomenon will seriously hurt the prospects of generic-drug companies. Other analysts say that while the deals hurt generics makers, they won't become the norm.
Authorized generics come about in two ways: as settlement of a case in which a generics company challenged a branded drug's patents, or out of a straight corporate deal between two companies under which they share revenue.
In the latter situation, the branded-drug maker often even makes the pills that the generics company sells. In effect, the generics maker serves as another distribution arm for the medicine, though it is sold under a different name.
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UNLIKELY ALLIES
Some drug companies are allowing generics makers to sell copies of their branded medicines as a way to undercut other generics makers.
DRUG/COMPANY Authorized Partner
Paxil/GlaxoSmithKline Par Pharmaceutical
Ortho-Trycyclen/Johnson & Johnson Watson Pharmaceuticals
Glucotrol XL/Pfizer Andrx Pharmaceuticals
Glucophage XR/Bristol-Myers Squibb Par Pharmaceutical
Source: the companies
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Recent patent-suit settlements that have resulted in authorized generics involved Paxil, which had sales of $2.2 billion last year; Pfizer Inc.'s diabetes drug Glucotrol XL, with annual sales of $345 million; and Wellbutrin SR, another Glaxo antidepressant, with sales of $1.6 billion. A recent corporate deal involved generics maker Par Pharmaceutical Inc., a unit of Pharmaceutical Resources Inc., and Bristol-Myers Squibb Co. for the diabetes drug Glucophage XR, which had sales of $450 million last year.
The roots of this new battle between the brands and generics extend back a decade to the Hatch-Waxman law, which governs how the rivals compete. The law tried to strike a delicate balance between speeding low-cost alternatives to market and maintaining enough patent protection to encourage creation of innovative branded drugs. One provision set up a big carrot to encourage the generics companies to challenge weak patents in court: The first generics company to file and win a suit against a branded-drug maker would get the exclusive right to sell its generic version for six months.
The payoff for a generics company is substantial: In 2002, when Barr successfully challenged the patent protection on Eli Lilly & Co.'s big antidepressant Prozac, Barr got revenue of about $368 million from the new drug, or 31% of its total for the year.
The authorized-generic deals gut the value of the exclusive sales period. It isn't illegal to launch an authorized generic on the same day, but some generics companies argue that it goes against the intent of Hatch-Waxman and recent changes to it. After all, generic-drug companies have to wage costly legal battles to introduce the first copy of a drug. Cutting the profits from being the first generic out of the gate makes it less appealing to wage those wars, they argue.
At least one generics maker, Apotex Inc. of Canada, has hired a Washington lobbyist to push for changes to the law that would force authorized generics to stay off the market until the exclusivity period lapses. Apotex spent five years and $13 million researching its copy of Paxil and mounting the first successful legal challenge to the drug's patents, only to launch the same day as Par's authorized generic.
Branded pharmaceutical companies contend they are turning to authorized generic deals because they are under relentless pressure from generics. The copycats grab a huge share of the market as soon as they are introduced. When Pfizer's Glucotrol XL lost protection in November, it took less than two months for 75% of prescriptions to go generic.
But if a branded company does an authorized generic deal it can hold on to at least some of the revenue going to generics. That's how Johnson & Johnson explained its deal with Watson involving Ortho-Tricyclen. "It's a way for us to recoup revenue on products at a time when they would be losing marketing exclusivity anyway," said Doug Arbesfeld, a company spokesman.
Authorized-generic deals are creating deep fissures in the always-competitive generic drug business. Some companies, such as Watson and Par, have courted the deals, pitching themselves as a partner to the branded companies. Others, including heavyweights Apotex, Barr, Teva Pharmaceutical Industries Ltd., and Mylan Laboratories Inc., see the deals as a threat, and say internal research and court challenges will bolster their profits.
Joseph C. Papa, president and chief operating officer of Watson, doesn't see the gambit as teaming up with the enemy or weakening the generics industry. "This is just one part of our overall corporate strategy," he said. "It's helping us to bring out additional new products."
Past efforts by big drug companies to thwart generics rivals raised the ire of the Federal Trade Commission, which scrutinized, and in some cases prosecuted, companies that entered into agreements that delayed generics. From a pure antitrust point of view, these authorized copies don't slow the entry of generics; in fact, they bring two generics to market instead of one.
But the FTC is said to be monitoring the deals, and could get more interested in them if they do in fact create a disincentive for generics makers to wage patent fights.
Write to Leila Abboud at leila.abboud@wsj.com
Updated January 27, 2004
online.wsj.com.
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