Generic Drug Makers Face Long-Term Hurdles

Old habits die hard.

That’s seems to be the case among some doctors, especially the older ones. They’re much more likely to check the box “Dispense as Written” on a prescription, meaning the pharmacist must give the patient a brand-name drug instead of the far less costly generic version.

That’s good news for drug manufacturers such Pfizer (NYSE:PFE), Lilly (NYSE:LLY), Johnson & Johnson (NYSE:JNJ) and Bristol-Myers Squibb (NYSE:BMY). They and other of their Big Pharma brethren stand to lose an estimated $250 billion in sales between now and 2015 as many of their blockbuster drugs lose patent protection.

Unfortunately for the brand name drug makers, however, the percentage of doctors who shun generics is relatively small. According to a recent American Journal of Medicine article, out of a sample of 5.6 million prescriptions, only about 5% “were designated as dispense as written by physicians and patients.”

Still, if that percentage holds until 2015, that’s an extra $12.5 billion in the pockets of Big Pharma, which should soften the generics blow somewhat.

Generics, of course, are drugs no longer covered by patents, meaning they can be manufactured by any pharmaceutical company, not just the ones that invented them. A generic drug’s active ingredients are the same as those in the name-brand version, as are their dosage form, safety, strength, route of administration, quality, performance characteristics and intended use.

Study after study has shown that they’re just as effective as the brand-name version.

Generics have been a huge success, representing nearly 70% of all filled prescriptions. That’s bolstered the fortunes of the big generic manufacturers, including Teva (Nasdaq:TEVA), Mylan (Nasdaq:MYL), Watson Pharmaceuticals (NYSE:WPI) and the Sandoz unit of Novartis (NYSE:NVS).

Even with the 5% they can’t capture, generic firms stand to benefit in the short term by producing copies of some of the world’s biggest-selling medications. However, after 2015 they’re going to have to divvy up a smaller pie as fewer blockbuster drugs lose patent protection.

That’s going to be a huge challenge for them, according to the chairman and managing director of India’s most valuable drug manufacturer, Sun Pharmaceutical Industries. Dilip Shanghvi predicts the generic companies are going to be scrambling to find drugs to copy in a few years as fewer new treatments hit the market.

He emphasized that to sustain growth, generic companies need big-selling drugs to duplicate. Medicines with small annual sales are just not worth the risk. After all, even producing a copycat drug is no walk in the park.

Generic drug makers have to start preparing to launch a generic years before the patent on the brand name drug expires. This requires substantial investments in research and a long and stringent drug approval process in various countries. And sometimes the generic company must battle in courts with the original drug makers fighting to protect the market for their branded drugs. That’s expensive.

It’s clear that the dearth of blockbuster drugs that have come on the market in the past few years will not only affect Big Pharma. It also stands to make things tougher for the generics industry, too.


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