Ranbaxy Makes Three: The Battle for Generic Lipitor Profits

The generic Lipitor story got even more interesting yesterday with the news that Ranbaxy would enter the US market after all. See Ranbaxy’s Lipitor Copy in U.S. Stores Threatens Pfizer Sales.

Atorvastatin now becomes a three horse race between Pfizer’s heavily-discounted brand-name product, an authorized generic from Watson, and the first-to-file generic Ranbaxy.

The claims and counterclaims about savings are hard to sort out. But Ranbaxy’s presence in the market will most likely boost profits for pharmacies, PBM, and wholesalers.

The controversy over atorvastatin stems from Pfizer’s strategy for retaining brand sales. The USA Today has a unexpectedly lucid summary in Pfizer maneuvers to protect Lipitor from generics:

• A $4 discount card available at www.LipitorForYou.com
• Building brand awareness with direct-to-consumer advertising
• Providing discounts so that the branded version is less expensive for payers than the generics during the first 180-days

Pfizer’s discount strategy for the first 180-days works because pharmacies and wholesalers make more money from the generic during the first 180 days of a generic launch.

The intuition is straightforward. Pharmacy prices (and reimbursement) typically drop by only 10-15% during the first 180 days following a generic launch. However, pharmacy acquisition costs drop much faster, especially when there is an authorized generic in the market. Thus, the drug channel sees higher gross profits from the generic vs. the brand.

In Pharmacy Profits from Authorized Generics, I provide data showing that pharmacy gross profits per prescription almost double during the 180-day exclusivity period. Here's the summary table from that article:

If you need further proof, here’s a slide from McKesson’s (NYSE:MCK) June analyst day meeting. As you can see, the wholesaler told Wall Street that it makes 2-3 times as much money from a generic during the 180-day exclusivity period.

Pfizer has gone after these economics by cutting its own price, undermining the channel profit story. Perhaps this explains why Pharmacists United for Truth and Transparency, a new lobbying group of pharmacy owners, has been so critical of Pfizer’s strategy. PUTT positions themselves as the self-appointed "advocates" for self-insured employers, but there is also a healthy dose of economic self-interest behind their actions.

PUTT initially claimed that Pfizer’s strategy would cost more for employers and health plans, although many payers unequivocally claim that the brand will be cheaper than the generic, per the quotes in Facing Generic Lipitor Rivals, Pfizer Battles to Protect Its Cash Cow. Even so, some PBMs and plans are reportedly rejecting Pfizer’s offer and sticking with the generic. Ranbaxy’s entry alters the economic calculation even more.

As I told the New York Times yesterday, this battle is just taste of what’s ahead as the drug channel fights for the incremental profit in the generic wave:

“You have over $80 billion in drugs that are going to go generic. Say $80 billion settles to $10 billion eventually. That’s $70 billion savings. But during that period going from 80 to 10 there’s going to be a lot of money made by the various channel intermediaries, and they all want a piece of that pie.”

Stay tuned for a dramatic photo finish!