Generics still a profit stream as pharmacy margins trickle - generic drugs

Costs of generic drugs are going up on the supply side, say chain drug pharmacy executives, as competition dries up and multisource products shrink to a single supplier or handful of suppliers. But generics still represent an oasis of profit margin stability in the modern Sahara of prescription drug retailing, where overall margins have dried up amid third party reimbursement cutbacks and rising acquisition costs.

Pharmacy retailers and wholesalers who deal in generics report tighter gross margins in 2001 for some heavily dispensed products, largely because many generic makers have abandoned unprofitable multisource drug categories in favor of a more targeted approach to manufacturing and marketing. "A lot of the older generics are going to single source and being marketed as a brand name," noted Dan Connolly, director of pharmacy for The Bartell Drug Co. "You're getting to less and less companies manufacturing the same item, which is driving up the price on generics."

In some cases, he told Drug Store News, "There's no generic available anymore, whereas a few years ago there were 10 companies making them. They're back to being brands rather than generics."

The result, he said, is that acquisition costs "have gone up astronomically on some items."

Jody Stewart, director of pharmacy operations for California supermarket chain Raley's/Bel Air, agreed that prices are rising for some generics. "All these different companies are merging, and it's harder to get some of these generics," she observed, "and some are going up in price."

"I think the generic industry has done a very good job of making supply available to us," added Mike Bukach, director of pharmacy for Medic Drug, the 30-store chain based in Cleveland. "I think the issue will become bigger, though, as the generic industry consolidates and the generic companies start looking and saying, 'We can't afford to sell this product any longer at this price, so let's not manufacture it any more."

"There's a bunch of very old products that were very inexpensive at one time, but now the manufacturer can't afford to make it," Bukach explained. "And as the generic companies continue to merge as the brand guys have, I think there's going to be more of these situations."

Nevertheless, pharmacy executives were unanimous in their assessment of the relative profitability of brand vs. generic drugs: me-too products still offer higher margins.

"Absolutely," noted Bukach. "Generics are still a place where you can see a little silver lining on your margins."

"If it wasn't for generics," said one chain pharmacy leader, "we probably wouldn't be grossing at all. Third parties have so many minus15 [percent-off average wholesale price] contracts out there."

"The margins are probably still better, but I think the margins that were in generics aren't as much as they were, just because of all the MAC pricing," Stewart noted.

Scot Dyer, vice president of marketing and development for generic pharmaceuticals at McKessonHBOC, called the issue of generic gross margins "a double-edged sword," adding, "You've got third party payers determining reimbursement price. And you've got supply and demand determining sell price. Those are two conflicting environments."

With third party payers still putting pressure on prices, Dyer said, there is still "some drive downward" in generic margins. But those forces are tempered, he added, with "supply and demand somewhat stabilizing costs," thanks in part to continuing competition among generic suppliers in many product categories. "There is still competition out there; it's still very much alive and well."

The savings and higher gross margins inherent in generics also give pharmacy retailers a key opportunity to align themselves with prescription benefits management companies and third party payers, say chain executives. They do it by providing aggressive generic substitution programs and tracking the cost differentials and potential savings month by month for PBMs and their sponsors, and by marketing those capabilities.

"We have a lot of information that we bring to [third party plans], and we tell them, 'Here's a way we can help save you a little more,"' said Bob Halaska, president of Walgreens Health Initiatives in an interview. "In all our presentations, we talk to the PBMs and payers and at least give them the option, in terms of generics. We tell them, 'We analyzed all of your data, and if you have a program that steered your employee to the generic, this is what it would mean to you in dollars."'

The same goes for patients at the pharmacy counter, he said. "We want to make sure they know about generics and the savings that it means to them."

"You're being driven by third party," she added. "I don't think they're offering more incentives, but they're making it harder for the consumer [not to opt for a generic version of a multi-source drug]. Every year you see a higher copay on the brand. Of course, the generic [copay] is going up too. But if you go from $12 to $30, it's certainly an incentive not to use the brand when you have to pay the copay."

Third party payers, said pharmacy executives, are helping to drive generic substitutions--and should spur renewed growth in market share of me-too products as branded drug costs continue to rise sharply. "With third party, generics can't go anywhere but up in their usage, except for the ones being shorted," Stewart observed. "In third party, nobody's saying, 'OK, use all the brands you want.'

For instance, said the Raley's executive, "One plan will be $1 copay for the generic, and $5 for the brand. Or another might be $7 for the generic and double or triple that for the brand. So they make it quite a disincentive--if you're even given a choice. Some companies will not even give [their members] choices. You use the generic if it is available."

Medic Drug's Bukach agreed. "The thing the third party people have helped us to do is get more of the general public to accept generics, because they're forced into doing it. We have less and less [health plan membership] cards that offer the same copay for the brand as well as the generic, so there's becoming a greater and greater differential between the copays on the brand and the generic.

"Some third parties go as far now as telling the patient that if they want the brand, they have to pay the percentage difference, which is significant," Bukach added. "So our substitution rates across the board continue to rise, and the plans continue to help that."

The rate of generic substitutions at the nation's pharmacy counters should also get a big boost from an expected flood of branded-drug patent expirations in coming years. In the past two years, the FDA's Office of Generic Drugs approved a total of 89 first-time generic products, according to acting director Gary Buehler and that number could rise significantly as some 20 leading branded drugs face the end of their patent life and market exclusivity over the next five years. Among the first are big sellers such as Prilosec, Prozac, Vasotec and Mevacor.

"There are a lot of products coming off patent in the next five years--about $30 billion or so," said McKesson's Dyer. "It's an exciting time for the supply chain in terms of growth, profitability and opportunity. And it's an exciting time for consumers in terms of cost savings."