Rx Trends 2015: Generic drug prices rise

Generic drug prices are going up. Spurred by market opportunities, short-term market exclusivity for some newly launched single-source generics and rising costs for manufacturing, quality control and raw materials, me-too drug manufacturers have escalated a series of price hikes, some of them significant.



With copycat medicines now comprising roughly 86% of all prescriptions dispensed in the United States — and “generics ... now dispensed 95% of the time when a generic form is available,” according to IMS Health — the impact is significant. “We’re back to double-digit growth that we haven’t seen in 10 years ... because of specialty drugs and price inflation,” said Doug Long, VP industry relations for IMS Health. “There’s a lot of generic price inflation; it’s the No. 1 issue on the minds of many payers.”



Final figures for 2014 are not yet available, but it’s clear that generic prices began a steady upward march the previous year. In 2013, the IMS Institute for Healthcare Informatics reported, “generic growth contributed 5.1% to overall growth” in “primary care therapy classes with limited innovation and few [patent] expiries.” Nearly half that growth, IMS noted, “was due to generic price increases for single-source generics, which average 13.6% price increases, compared to 9% average price increases for generics in this segment.”



In a report, Morgan Stanley research analyst Ricky Goldwasser cited several factors for generic price inflation, including a crackdown by the Food and Drug Administration on generic suppliers in India — creating a potential disruption in supplies — along with the challenges of an increasingly complex manufacturing process and the shrinking in number of generic manufacturers through mergers and consolidation.



Whatever the cause, the steeply rising price tag for some generics has drawn the attention of both mainstream media and Congress. ABC News ran a report in November on rising generic costs, asserting, “The prices of some common generic drugs have skyrocketed in recent years, but the reasons remain murky.” And lawmakers in both the U.S. Senate and House have taken up the issue.



Concerns were raised at a hearing of the Senate Subcommittee on Primary Health and Aging on Nov. 20, 2014, where Vermont Independent Sen. Bernie Sanders announced he had launched an investigation, along with U.S. Rep. Elijah Cummings (D-Md.), into the rise in prices. Citing data from the Healthcare Supply Chain Association and other sources, Sanders charged that prices on many widely used generic medicines had quadrupled in the year prior to July 2014. He and Cummings sent letters in October seeking information to 14 major generic companies.



“We are conducting an investigation into the recent staggering price increases for generic drugs used to treat everything from common medical conditions to life-threatening illnesses,” Sanders, chairman of a Senate healthcare subcommittee, and Cummings, ranking member of the House oversight committee, wrote in letters to 14 pharmaceutical companies.

The Generic Pharmaceutical Association strongly disputes Sanders’ charges, citing generics’ massive contribution to the nation’s effort to lower healthcare bills over the past decade. “The world’s leading healthcare analytics firm, IMS Institute for Healthcare Informatics, found that generics saved $239 billion in 2013 ... and more than $1.46 trillion over the recent decade,” GPhA president and CEO Ralph Neas said. “That is why [GPhA] is disappointed at how some have mischaracterized the facts about generic drug prices.”



“Their data is missing one crucial element: perspective,” Neas asserted. “The examples cited by HSCA on recent purchases by group purchasing organizations focuses on 10 drugs in a marketplace of more than 12,000 safe, affordable generic medicines. In fact, thousands of generics have seen significant price erosion over time due to the competitive nature of the marketplace. One such example is that of Lipitor — for which generics have saved all involved an estimated $7 billion per year. In addition, many generic prices are so low that thousands of stores across the country offer them to consumers for $4 or even for free.”



“The most effective way to continue to keep prescription drugs affordable for patients is to increase competition,” added GPhA’s chief. “Millions of patients and the entire healthcare system would benefit from streamlining and expediting the approval process so that more generics can reach the market sooner.”



For pharmacy retailers, generic price inflation is a double-edged sword, offering higher top-line growth but potential snags both in bottom-line profitability and consumer and plan payer resistance. “If third-party payer reimbursements don’t keep pace with rising generic acquisition costs, the cost increases will squeeze pharmacies’ profits,” warned Adam Fein, president of Pembroke Consulting and CEO of Drug Channels Institute, in a recent report.



However, Fein added, “over time, pharmacies will benefit from these price increases because gross profit dollars per script will grow. If prices start declining again, pharmacies will benefit as reimbursement lags behind the lower acquisition costs. Higher generic drug prices are dampening the cash-pay, generic price war.”



“The biggest pharmacy losers are any chains that foolishly signed at-risk payer contracts, such as one with a fixed generic prescription payment to the pharmacy,” Fein asserted in his Drug Channels blog. “Such contracts are an un-hedged risk on generic deflation and superior sourcing. For these chains, generic inflation will pummel profits until contracts can be renegotiated.”



In a report on its 2014 fiscal results, Walgreens Boots Alliance acknowledged the challenge.



“Overall increases in the amounts we pay to procure generic drugs ... could have a significant adverse effect on our profitability,” the company reported. “In addition, our gross profit margins would be adversely affected by continued generic inflation to the extent we are not able to offset such cost increases.”



“We expect this generic inflation to continue in fiscal 2015,” Walgreens added. “Our existing reimbursement arrangements with payers generally provide us with only limited protection against cost increases in our generic drug procurement costs. We are seeking to address this through changes in our contracting strategies and negotiations with our vendors and payers.”



The upward momentum in generic drug pricing may be temporary. Given the inevitable fact that “generic small-molecule opportunities start to dry up” by the end of the decade as patent expirations on older branded medicines taper off, “price concessions” for me-too medicines “are expected to grow” through 2018, IMS predicted, “as generics companies compete with increasing intensity.”