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To ensure low-cost generic drugs, manufacturers must find equilibrium

Headlines and politics have been focusing quite a bit of attention on the price of pharmaceuticals – particularly generic drugs. While manufacturers of generic drugs have been effective at keeping treatment costs down, pressure to trim costs further could have the opposite effect, particularly if it leads to unprofitable products.

Generics account for the vast majority of drug sales in the US, and growth in the segment is expected to continue. But sustainable growth is dependent upon the ability of manufacturers to generate enough profit to reinvest in bringing more generic products to market. When a drug becomes unprofitable – often due to steep discounts demanded by wholesalers, pharmacy benefit managers (PBMs), and health plans – manufacturers have a financial incentive to discontinue them. When fewer companies produce a drug, prices can be pushed higher. Finding an equilibrium that ensures low prices, competition, and profit will help to ensure that generic drugs remain available and affordable.

Consider this: Competition among manufacturers is the principal driver of generic drug pricing, according to an August 2016 report from the Government Accountability Office (GAO). If there aren’t enough competitors, prices can tend to rise. While generic drug prices collectively fell nearly 60 percent from the first quarter of 2010 through the second quarter of 2015, hundreds of established generic drugs experienced at least one substantial price increase – 100 percent or more – during that period, according to GAO. Much of overall price decrease is due to new generic drugs entering the market. The report, which examined Medicare Part D pharmacy claims, notes that there are nearly 2,400 generic drugs.

I see three main drivers impacting generic-drug pricing today:

  • Increased political and public scrutiny: The White House and Congress have been searching for ways to bring drug prices down, and are eyeing increased foreign competition as a possible solution. Political scrutiny, along with pressure from the public sector, has made it difficult for drug manufacturers to raise drug prices.
  • Increased competition: Competition among drug manufacturers has grown in recent years – even in the relatively high-margin category of complex generics. Some of this competition is being driven by companies based in India and China, which are making a bigger play in generics.
  • Increased consortium buying power due to channel consolidation: Consolidation among large distributors has created strategic alliances that are in a position to call for steeper volume discounts from manufacturers. Consolidation among some generic drug manufacturers has helped to improve their leverage during contract negotiations with the large wholesalers.

Are biosimilars the answer?

Generic drug manufacturers are typically proactive in filing for marketing rights and exclusivity ahead of patent expiries, which contributes to a competitive market. On the horizon, however, fewer drugs than usual are coming off patent – particularly blockbuster drugs – which results in low sales values.

With fewer opportunities to capitalize on patent expiries, some generic drug manufacturers are eyeing biosimilars. But they need to be cautious. This is an area where some manufacturers have gotten into trouble. We have found that few generic drug manufacturers are well positioned to produce biosimilars. Unlike chemical-based generic drugs, biosimilars require extensive research, and manufacturers need the ability to cultivate the live cells necessary to develop these therapies.

Manufacturers that do expand into biosimilars might need to establish a sales force to educate physicians and sell to them because they are bio-similar, not bio-equivalent. Chemical-based generic drugs, by contrast, essentially sell themselves, as they are bioequivalent. A typical generics company doesn’t have a sales force that calls on doctors, and instead relies on access through sales to distributors and retailers. Doctors tend to be cautious about prescribing biosimilars. Doctors who are comfortable prescribing biologics might not want to switch a patient to a biosimilar until they have a lot of experience with that biosimilar.

While biosimilars might represent a significant opportunity, legal, manufacturing, and regulatory requirements could add more hurdles. Manufacturers should carefully scrutinize the size of the specific biosimilar opportunity in light of these hurdles, and determine if it makes sense to venture into the space.

Four strategies to help generic drug manufacturers stay in the game

To remain profitable, generic-drug manufacturers need to determine which products they can continue to produce profitably and which ones need to be discontinued. This has created a precarious situation for the industry. Manufacturers should consider the following strategies:

  1. Look into complex generics: The generics industry has traditionally focused on simple formulations. Some manufactures have expanded into complex generics, which include a complex active ingredient, a complex formulation, a complex route of delivery, or a complex drug device combination. While these products could help to improve industry’s profitability, manufacturers face significant regulatory and clinical-trial hurdles when developing complex generics. Unlike simple generics that have a clearly defined development roadmap, complex generics often lack guidance from regulatory agencies. Moreover, there is increased and longer regulatory scrutiny for quality systems and data integrity, and development of complex generics might require clinical studies beyond what is typical of a simple generic product.
  2. Understand the impact of pricing, discounts and rebates: Pricing pharmaceuticals involves contracts that can include volume-based discounts and rebates. It seems that some generic (and branded) pharmaceutical manufacturers don’t always realize how much money they are giving back to the distributors through their contractual arrangements. Effective gross-to-net management can be a powerful lever to increase profitability. In addition, manufacturers should explore alternative contracting options that shift the discourse from volume to value. For example, exploring novel contracting options that incorporate value-based principles for biosimilars, or certain types of innovative “off patent medicines,” is something worth exploring.
  3. Investigate all cost savings opportunities: Manufacturers should review their cost structure and capacity and consider rationalizing their supply chain. They also should look across their operations to determine if plants and/or distribution facilities can be consolidated. Their product portfolio could contain additional opportunities to eliminate unprofitable products or operations.
  4. Carefully evaluate merger and acquisition opportunities: Some generic drug manufacturers are looking to pull out of the business and transition to specialty pharmaceuticals, which is sometimes seen as a more stable business. That could create merger and acquisition opportunities. Foreign companies, for example, might be able to break into the US market through acquisition at a fire-sale price. But before moving to acquire a manufacturer or product, companies need to look at their existing infrastructure and determine if the company can continue to run a lean operation.

What we have today is a precarious market where manufacturers are trying to decide which products will continue to be profitable, and which ones should be discontinued. The administration, Congress, the Food and Drug Administration, and the media have been paying close attention to the price of pharmaceuticals – particularly generic drugs.

Regardless of politics or headlines about specific companies and their products, generic drugs do tend to keep treatment costs down for patients. Creating an equilibrium among stakeholders will help to ensure that manufacturers continue to bring generics to market and ensure stable prices for treatments.

Author bio

Faith is a principal in Deloitte Consulting with more than 25 years of experience providing strategy and operations consulting services to global life sciences organizations. She currently leads our Generics practice where her work includes projects focused on helping companies develop strategies for growth. Faith also leads Deloitte’s relationship with the Association of Affordable Medicines in the US (formerly GPhA.)

Faith also is a thought leader in areas related to generics pharmaceuticals, such as our perspectives on consumer health and over the counter medicines, our work with distributors, and the emerging opportunities with biosimilars. She has helped generics companies expand their business through international growth and portfolio expansion. Faith has also helped these companies build capabilities as they develop expertise in new and emerging areas.

Faith has a MBA from the Harvard Graduate School of Business Administration and a BS in Business and Economics from Lehigh University.