They haven’t been able to come up with enough new drugs to replace revenue from an unprecedented number of blockbusters, drugs with annual sales topping $1 billion, that are losing patent protection. The industry has shed tens of thousands of jobs in the last several years to compensate for that revenue loss, but for some that hasn’t been enough to keep profits from falling.
So they’re trying a new tactic to temporarily slow the loss of billions of dollars in sales to new generic competition.
“It’s not a game changer, but with drug sales every little bit helps because they’re so high on profit margin,” says Les Funtleyder, health care fund manager at private equity fund Poliwogg. “It’s good for consumers, because they don’t bear the cost and they can stay on the brand.”
WINNERS AND LOSERS
Developing drugs is very expensive. It requires up to a decade of laboratory research and then patient testing, costing $1 billion or more, to win government approval to sell a drug. In return, the drug’s maker gets the exclusive right to sell the drug for about 10 to 15 years, until the patent expires. That allows the companies to recoup those costs and hopefully turn a profit.
After that, generic copycats sold by other companies flood the market, costing just a fraction of the brand-name drug’s price.
Generic drugs are chemically identical to the original brand-name ones, and work the same in nearly all patients. But their names are chemical terms unpronounceable for most patients. Generic Plavix, for example, is called clopidogrel bisulfate.
Often, one generic drugmaker has the exclusive right to sell its copycat version for the first six months after the branded drug’s patent expires. In those cases, the generic’s price is only about 25 percent lower than for the branded drug.
Other times, there are multiple generics right away. Either way, once several generics are on sale, their prices usually plummet to about 90 percent below the brand-name price. Nearly all patients then switch to a generic.
Brand-name drugmakers say they don’t just cut their prices when generics arrive because insurance plans would get all the benefit. Coupons instead give loyal patients savings of as much as $100 a month — often even if they don’t have insurance. That makes the brand more affordable for patients who want to stay on it.
For example, a month’s supply of brand-name Lipitor costs about costs about $175 without insurance. For insured patients, the copayment is typically $25 to $50, well above the average copayment of about $10 a month for a generic drug.
Under Pfizer’s Lipitor For You coupon program, Pfizer absorbs up to $75 of the patient’s out-of-pocket cost. Insured patients pay only $4 a month — less than a generic drug copayment — unless their copayment is higher than $79 a month; the insurer pays the remaining cost. Uninsured patients get the $75 off each prescription and then pay the remaining $100 or so.
While the deal slashes Pfizer’s profit, the company still makes more money than it would if all its customers defected from Lipitor to a generic. Ian Read, CEO of New York-based Pfizer, recently said the strategy on Lipitor alone brought the company hundreds of millions of dollars in extra profit. He called the program “a great success.”
The coupons only work with private insurance, though. Patients with Medicare or other government health insurance are barred from using them.
Not surprisingly, commercial insurers don’t like the coupons, because their share of the cost for a brand-name drug is much higher than for a generic pill. Virtually all prescription plans automatically switch patients to a new generic drug the next time they refill their prescription, and they usually bumped brand-name drugs that have just gotten generic competition up to the plan’s highest copayment level, which can be $75 or more.
The coupons throw a wrench into insurers’ strategy of getting as many patients as possible to take generic drugs, which account for about 80 percent of all prescriptions filled in the U.S.
A study late last year by the Pharmaceutical Care Management Association, a trade group for prescription benefit managers, estimated copay coupons could raise prescription drug spending by $32 billion over the next decade.
“That’s adding to overall healthcare costs,” says Robert Zirkelbach, spokesman for another industry group, America’s Health Insurance Plans, and “is going to ultimately mean higher premiums for everybody.”
Many insurers are fighting back.
Express Scripts Holding Co., the largest U.S. prescription benefit management company, says more than half the insurance plans its services have policies requiring patients to pay an extra fee for staying on the brand-name drug. The fee amounts to all or at least most of the difference between the total cost for the brand name over a generic drug, enough to make use of coupons unattractive.
Many of those insurers have had such a policy for years, but with the advent of coupons for blockbusters just going off patent, more insurers are likely to institute similar policies, says Everett Neville. He’s head of pharmaceutical strategies at Express Scripts, which processes prescriptions for about 100 million Americans.
Drugmakers have offered coupons for several years on brand-name drugs that don’t have generic competition. Those were meant to attract patients taking a rival brand or just starting treatment for a new condition. The coupons are usually prominent on the drug’s official website, and many Internet sites offer coupons for an array of drugs.
Now the companies are offering coupons for drugs facing generic copycats for a simple reason: In the decade through 2020, drugs with more than $110 billion in annual U.S. sales have patents expiring, according to IMS Health, a huge health-care research firm. So holding onto customers for even a few extra months can mean many millions of dollars in additional revenue.
Pfizer, the world’s largest drugmaker, started the strategy because generic competition was looming for several of its big sellers, particularly Lipitor. The cholesterol-lowering medicine had reigned for a decade as the world’s top-selling medicine ever. Sales peaked at $13 billion a year, about half in the U.S.
Lipitor’s U.S. patent was set to expire at the end of November, and everyone expected its sales to plunge immediately. So well before then, Pfizer began offering coupons giving patients $50 off each Lipitor prescription in hopes of keeping many of them loyal.
Pfizer also signed unprecedented deals with dozens of insurers that reduced their portion of the cost of Lipitor to what a generic would cost them — if they covered only branded Lipitor for six months.
That meant both patients and insurers had a big financial incentive to stick with Lipitor for a while.
On Nov. 30, two slightly cheaper generic versions hit pharmacies, one from India’s Ranbaxy Laboratories and an “authorized generic.” That pill is manufactured by Pfizer and sold by its partner, generic drugmaker Watson Pharmaceuticals Inc., of Parsippany, N.J.
Pfizer’s strategy worked. The “Lipitor For You” program, which includes support such as lifestyle coaching, health tips and heart-healthy recipes, signed up more than 750,000 people.
“We never expected that,” said Albert Bourla, head of the Pfizer unit that sells off-patent medicines.
Data from IMS Health show generics grabbed about two-thirds of Lipitor’s prescriptions within five months — a big loss but far less than what would have happened without the coupon program.
“What Pfizer did was something amazing,” says Praful Mehta, senior health care analyst at industry consultant IHS Global Insights in London. By courting patients and accepting lower profit margins, “they made sure they kept their revenue.”
On May 30, three more generic Lipitor versions hit U.S. pharmacies. Prices for all the generics plunged overnight to around $15 a month. Pfizer then ended its subsidies to insurers because it would be too costly to make up the difference between that amount and the $175 price of Lipitor.
But the company hasn’t given up on retaining some patients.
Pfizer extended Lipitor For You through December 2014 and raised its maximum subsidy from $50 to $75 per month. That means most insured patients using the coupons still can get Lipitor for less than their monthly copay for a generic drug, unless their insurer charges that extra fee to make up the difference between the brand and generic costs.
By the end of June, about 85 percent of Lipitor users had defected to a generic. Without the coupons, nearly all would have done so. Read, the Pfizer CEO, said the company maintained three times the usual market share after generics hit.
Because pills generally cost only a dime or so to make, Pfizer still profited. It reported about $300 million in U.S. Lipitor sales in the second quarter, down from $1.2 billion a year earlier, plus another $1.1 billion in sales in other countries
Pfizer now offers $4 co-pay coupons for five other drugs: breast cancer pill Aromasin, antidepressant Effexor XR, bipolar disorder treatment Geodon, Revatio for high blood pressure and Caduet, which combines Lipitor with blood pressure medicine Norvasc.
Other companies are following Pfizer’s lead.
Switzerland’s Novartis AG is offering coupons to patients with commercial insurance valid through December 2013 for $4-a-month copays on its Diovan and Diovan HCT, with the company covering the next $50 in out-of-pocket costs. They are world’s top-selling blood pressure medicines, with $5.7 billion in sales last year.
Diovan retails for around $100 a month and the Diovan HCT combo pill costs about $50 more, depending on dosage and pharmacy. When their U.S. patents ends on Sept. 21, two slightly cheaper generic versions of each should hit pharmacies.
Bristol-Myers Squibb, based in New York, began offering copay coupons for stroke-preventing pill Plavix when its U.S. patent expired in mid-May. As the world’s second-bestselling medication, Plavix brought in about $9 billion last year for Bristol and partner Sanofi SA of France.
Bristol-Myers spokeswoman Laura Hortas says the company is offering coupons because market research showed some patients wanted to stay on the brand.
The “Plavix Choice” program lets U.S. patients who pay cash or have commercial insurance get Plavix for no more than $37 a month. That’s far below the retail price of about $215, but above some online pharmacy prices for generic Plavix.
Because seven generic versions, rather than just one, hit drugstores in May, the generic price fell right away to as low as $15, reducing the impact of the coupons.
Bristol’s Plavix revenue, nearly all from U.S. sales, plummeted 60 percent to $741 million in the April-June quarter, even the generics were only available for half that time.
Several analysts said sales would have been a little lower without the coupon strategy.
In another twist aimed at retaining revenue, some drugmakers are offering discount coupons for successor drugs to their blockbusters that have gone off patent. The successor drugs usually bring small improvements and may be approved for slightly different conditions or patient groups. The strategy appears aimed at keeping customers who otherwise would take a generic version of the older drug.
But some companies whose blockbusters are getting many generic rivals at once have chosen not to offer coupons, figuring the rock-bottom prices of those generics would prevent the company from retaining enough patients to make it worth their while.
One example is Merck. Its Singulair asthma and allergy pill, the world’s 11th-best-selling drug last year at about $5.5 billion, went off patent on Aug. 3. The company said it expects about 90 percent of sales to evaporate within two months.
Whatever companies decide to do, analysts say it’s clear that the coupons are much more effective when there are only one or two generic rivals costing only a little less than the brand-name drug’s price.
Analyst Erik Gordon, a professor at the University of Michigan’s Ross School of Business, says coupons do help drugmakers retain significant revenue from their blockbusters going off patent, but only in the short run.
“On a big drug, every day that you can delay the sales drop is a happy day at the drug company,” Gordon says.