Authorized Generics: Money Saver or Evil Strategy?

Back in the formative youth of the Drug Channels blog (three years ago!), I wrote about Merck's authorized generic (AG) strategy for Zocor (simvastatin) in Winners and Losers in the Zocor Wars. A brand-new FTC report (Authorized Generics: An Interim Report of the Federal Trade Commission) now quantifies the typical short-term savings from authorized generics. .

Back in 2006, Merck had decided to sell Zocor to major managed care companies as an authorized generic, but priced lower than the versions from generic manufacturers with 180-days of exclusivity (Teva and Ranbaxy). As a result, the market price of simvastatin declined more quickly than it might otherwise have.

BTW, my original post will seem oh-so-much-more hilarious after you remind yourself about the ending of the Pixar movie Cars.

Here are the headline numbers from Chairman Leibowitz's Statement on the new FTC report:

Retail prices are on average 4.2 percent lower, relative to the pre-generic brand price, as a result of AG competition during 180-day exclusivity, and wholesale prices are on average 6.5 percent lower than pre-generic entry brand prices as a result of AG competition during 180-day exclusivity.

On the other hand, AG competition substantially reduces the revenue of a single generic company in competition with that AG during 180-day exclusivity. Estimates of the average decline in this situation range from 47 to 51 percent, which could result in a generic's loss of millions in revenue.

The Generic Pharmaceutical Association (GPhA) obviously opposes AGs (per this statement) given the second finding. I am aware of at least two bills (H.R. 573 and S.501) that would prohibit the marketing of authorized generics.

Nonetheless, the key conclusions and questions from my original 2006 post are still valid:

The short-term effect of Merck's move is clearly beneficial because the market price of simvastatin will decline faster, consistent with FDA research showing a correlation between more generic competition and lower prices relative to a brand.

However, the real risk comes from the long-term competitive effect on future ANDA filings. Will generic manufacturers be deterred in the future by the threat (real or implied) that the brand name competitor will reduce the value of the 180-day exclusivity period?

PBMs have been able to deliver substantial value to payers through generic substitution and estimate that each 1 percentage point increase in generic fill rate decreases plan sponsors' pharmacy spend by 1 percent. Gun-shy generic manufacturers will do long-term harm to PBM's ability to keep delivering savings.

So, is a dollar of savings today worth more than the chance that there won't be a dollar tomorrow?

The FTC will apparently address my key questions in a future report. Stay tuned in 2012?