Healthy Skepticism Library item: 1055

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Publication type: news

Harris G.
Bitter Pill: 'Branded Generics' Eat Into Drug Makers' Profits: Generic Drug Makers Use Altered Copies To Outmaneuver Patents in Legal Battles
Wall Street Journal 2003 Apr 17

Full text:

HYDERABAD, India — When the Indian drug company Dr. Reddy’s
Laboratories Ltd. decided to crack the U.S. pharmaceuticals market, it
didn’t simply wait for a patent to expire, as many makers of generic
drugs do. It turned to lawyers and asked them to exploit a loophole in
an existing patent.
Last December, that strategy paid off big. A federal court in Newark,
N.J., awarded Dr. Reddy’s the U.S. rights to sell a drug that’s nearly
identical to the blood-pressure drug Norvasc made by Pfizer Inc. — a
full three years before Pfizer’s exclusive right to sell it expires.
Pfizer, which is based in New York, is appealing the Newark court’s
ruling.
Dr. Reddy’s victory shows how the generic-drug industry is succeeding
with new tactics that out-maneuver active patents. That presents a big
threat to the lucrative profits of brand-name medicines. It also
promises to give patients more lower-price alternatives to brand-name
drugs — though only up to a point. In a new twist, the generics’ latest
tactics are helping them raise their own prices.
During the past two decades, generic-drug makers with U.S. operations
typically have sought permission from the Food and Drug Administration
to market knockoffs of a branded drug after all the patents on the drug
had expired. Generics, which don’t have to pass the rigorous testing
process of branded drugs, now make up more than 50% of all prescriptions
filled in the U.S.
But lately Dr. Reddy’s and others have gotten more aggressive. They are
filing legal challenges on a range of drugs that seemingly have years of
exclusive sales left. In a new strategy, these generics makers don’t
even challenge a patent directly. Rather, they argue that their product
doesn’t infringe on patent protection because it is made of different
ingredients, even though it has the same effect as a branded drug.
If the generics maker wins in court, its drug often has fewer generic
competitors, allowing the company to charge more. Sometimes the drugs
that result are called “branded generics.”
Traditional generics must contain the active ingredient of the branded
drug, and tests must show that the generic acts in the body in a way
identical to that of the branded drug. Pharmacists can substitute a
traditional generic for a branded drug in most cases without getting
permission from the patient, doctor or insurance company.
Branded generics, however, still contain the same active ingredient as
the original branded drug but often act somewhat differently in the
body. Some are longer-lasting; some contain a slightly different sister
compounds, or “salts.” Generics companies must market branded generics
more aggressively, often with sales representatives who visit doctors.
And, of course, the prices and profit margins among branded generics are
higher than those of traditional generics.
The total number of prescriptions for branded generics last year was
less than a third of the total for traditional generic drugs. But total
sales in the branded category, at $16.9 billion, exceeded those of
traditional generics, which were $15.4 billion, according to IMS Health,
a health-information company.
Generics makers are starting to use their legal savvy to push branded
generics into the U.S. market, while keeping traditional generics out.
Last year, makers of generic drugs filed 83 patent challenges, up from
just seven in 1992. They have little to lose in court because the cost
of litigating is dwarfed by the potential windfalls.
“It’s a numbers game,” says Cameron Reid, Dr. Reddy’s U.S. president. He
notes that the average profit over the life of a drug following a
successful court case can be more than 10 times the cost of litigation.
Big drug makers are fighting back by extending protection on aging
products through extra patents, covering everything from a drug’s color
to its coating. After Apotex Inc. filed in 1998 to sell a generic
version of Paxil, GlaxoSmithKline PLC filed for more than 100 patents on
the antidepressant. Analysts say the average number of patents
protecting branded drugs has increased to 12 from two in the past 10
years. The Federal Trade Commission released a report last year that
recommended legislative and regulatory changes that would make it harder
for branded companies to use patent and legal procedures to delay
generic competition.
The stage for the huge rise in litigation was set in 1997, when the FDA
created strong incentives for generic-drug makers to fight branded-drug
makers in court. In a bid to spur competition, the FDA granted the first
company to file and win a suit against a branded-drug maker a bonanza:
the exclusive right to sell the generic version for six months.
In 2001, Barr Laboratories Inc., of Pomona, N.Y., successfully
challenged the patent protection on Eli Lilly & Co.‘s big antideressant
Prozac, and booked $366 million in revenue from its six months of
exclusive sales. That was almost 75% of Barr’s revenue for the whole
previous year. Profits at Eli Lilly plunged during that same period as a
result. When the six-month period ended in January 2002 and other
generic versions came out, Prozac prices collapsed. In the next six
months, Barr booked just $4 million from Prozac sales.
Dr. Reddy’s, the only Indian drug company listed (through American
depositary receipts) on the New York Stock Exchange, for many years
acted as a state-sanctioned manufacturer of copycat medicines. Beginning
in the early 1970s, the Indian government encouraged local manufacturers
to make duplicates of big drugs and sell them cheaply in India. Dr.
Reddy’s was one of hundreds of companies over the years that knocked off
everything from the antibiotic Augmentin to the ulcer medicine Zantac.
Under pressure from global drug concerns, India now plans to begin
upholding international drug patents in 2005 — forcing Dr. Reddy’s and
other top Indian drug makers, such as Ranbaxy Laboratories Ltd., to find
new ways of making money. G.V. Prasad, chief executive of Dr. Reddy’s,
decided to try to crack the U.S. market and soon realized he needed
aggressive litigation.
If a generic company simply waits for a patent to expire and various
copies hit the shelves, says Mr. Prasad, the competition is tough and
the margins slender. “We want to get into the market early,” he says. So
litigation is “a necessary cost of doing business.”
Mr. Reid and his staff started looking not only at drugs whose patents
were set to expire, but also at all the patents relevant to any knockoff
drugs the company was already selling in India. One that drew his
attention was Norvasc, which brought Pfizer $3.8 billion last year but
whose patent wouldn’t expire until 2006.
At first, his lawyers told him the drug’s patent would be difficult to
breach. Then he noticed a wrinkle: The patent’s term had been extended
several years by a federal law compensating companies for drugs that
endured especially long FDA reviews. Mr. Reid had his lawyers photocopy
the law giving the extensions.
Paging through it, Mr. Reid and his staff found their loophole: Congress
hadn’t actually extended the original patents — just the exclusive
rights to sell the drugs themselves. As with many drugs, Norvasc’s
original patent protected both the chemical structure of Norvasc and a
host of sister compounds, or salts, that are nearly identical and work
equally well. What Mr. Reid’s lawyers realized was that the patent
extension didn’t protect these sisters, opening the door for lookalikes
that had the same effect but a different composition.
It was a crucial distinction, and one Mr. Reid knew Dr. Reddy’s
expertise could exploit. Mr. Reid asked the company’s scientists back in
India if they could concoct a workable facsimile of Norvasc using sister
salts. The scientists assured him that a Norvasc lookalike, one the
scientists knew Pfizer itself had used in extensive testing, could be
made. With that, Mr. Reid filed with the FDA to sell Norvasc’s
lookalike. Pfizer sued — standard practice when patent challenges are
filed — but lost the case in New Jersey late last year.
Pfizer’s lawyers declined to discuss the Norvasc case. Like many big
drug companies, however, Pfizer says lawyers for generic-making
competitors are too aggressive. “We’re dealing with premature and
unwarranted attacks on the validity of our patents, and … we end up
spending enormous time and money litigating,” says Peter Richardson,
senior assistant general counsel for Pfizer.
Dr. Reddy’s expects to receive final FDA approval to sell Norvasc’s
lookalike soon; Mr. Reid won’t say exactly when he’ll start selling. Dr.
Reddy’s hasn’t announced a price for its Norvasc lookalike, but it’s
likely to be higher than many consumer advocates are hoping. So far,
manufacturers that have won market access for their own generics but
kept out their competitors’ generics have set prices much higher than
generic drugs traditionally command.
A few years ago, several companies filed challenges with the FDA over
AstraZeneca PLC’s Prilosec, a heartburn drug. Once Prilosec’s main
patent expired, AstraZeneca tried to use patents on such things as the
drug’s coating and its interaction in the body to protect its exclusive
hold over the drug’s sales.
Last year, a judge in federal court in Manhattan decided that
AstraZeneca’s patent on Prilosec’s coating was still valid and that just
one generics maker, Schwarz Pharma AG, didn’t infringe it. That company,
a publicly traded firm based in Monheim, Germany, used a slightly
different coating. No other generics maker can launch an exact replica
of Prilosec until appeals by AstraZeneca and some generics makers kept
out of the market are resolved. That could take years.
Meanwhile, consumers are still paying high prices for Schwarz’s pill.
AstraZeneca’s price is $115.80 for 30 pills at Drugstore.com; Schwarz’s
is $99.99 — or just 16% less, a far smaller discount than traditional
generics usually carry. That’s even more expensive than Protonix, a
similar but branded drug sold by Wyeth, which sells for $94.99.
Schwarz’s pill is so popular the company can’t meet demand. It says
sales this year will probably exceed $1 billion from that pill alone —
more than twice the entire company’s sales in 2001. Its investment in
getting the drug to market amounted to no more than $10 million, says
Antje Witte, a spokeswoman.
Astra-Zeneca’s sales of Prilosec have dropped 62% as a result of the
pill’s launch, according to NDCHealth, a health-care-information firm.
Every major generics company is projecting that sales of its
higher-priced branded-generic drugs will become an important contributor
to future profits. This category of pills has grown so much that IMS
Health decided last year to begin analyzing branded generics separately
from traditional generics.
The average price of generics — branded and traditional — rose 8% last
year, twice the increase of branded drugs. As a result, generics
companies are thriving. Since they spend little on research and
development and almost nothing on marketing, profit margins in the
industry are approaching those of the branded industry. According to a
federal government report, the average 2001 profit margin for the top
generics companies was 16%. For branded companies, it was 20%.