Tuesday, February 19, 2008

Generic Drugs: Still a Growth Market?

Is there enough money in generic drugs?

That’s the question generic manufacturers might start asking themselves once IMS Health releases its official market growth numbers for 2007. A glimpse at the preliminary figures suggests there is, but the money may be getting harder to find.

Growth in the generic drug market slowed considerably last year, to 3.8%—the same rate as the overall prescription drug market, according to IMS Health corporate director of market insights Diana Conmy. She gave a preview of the 2007 data at the Health Industry Group Purchasing Organization’s National Pharmacy Forum last week. You can find her analysis of the branded industry in our earlier post.

Conmy found the low-single digit growth rate for generics “surprising” given the segment’s past performance. “I checked this number and checked it twice, because historically, we have seen generics growing over the last couple of years somewhere between 10% and 20%,” she said. “So to come in at the end of the year at quite dramatic.”

Not surprisingly, the cause behind that slowdown is an increased level of price competition in the generic drugs market, Conmy said: “It has become an extremely competitive place to earn a profit and keep profitable within this segment."

“The generic erosion curves are much steeper. There is more of a willingness by generic manufacturers to enter the market 'at risk.' And there are just more players getting into the very large and meaty primary care markets that are going off patent,” she said. Indeed, one such product, Merck’s osteoporosis drug alendronate (Fosamax), saw competition from three generics (including a Merck-authorized product) last week.

Given that level of competition, is there a point at which the price for a generic is too low? IMS Health's 2007 numbers indicate the generic drug market may have already reached that threshold. The second half of the year was essentially the antithesis of the economic rule of supply and demand, Conmy said: a “tremendous reduction” in the price of generics in the marketplace without a corresponding increase in volume levels.

Instead, growth within the generic market is solely coming from new approvals, and any exclusivity that manufacturers can scrape together. That, in turn, is why generic manufacturers are becoming more aggressive in terms of “at risk” launches--launches like generic clopidogrel (Bristol-Myers Squibb's Plavix). The end result, Conmy said, is that while generic utilization continues to increase, the brands are still holding onto the dollar share.

But there are some bright spots: branded generics (like in the pain and ADHD markets) are still doing quite well: branded generics rose 11.1% last year, according to IMS Health. And there's still room for growth under Medicare Part D: despite the Center for Medicare & Medicaid Services' interest in increasing generic use under the drug benefit, generic utilization was no higher than in the general population in 2007, Conmy said.

And last year could turn out to be a one-year blip on the growth chart--especially given tough comparisons over the high-flying year of 2006. But for generic manufacturers looking at the 2007 data, it's still not a comfortable place to be. How the generic industry responds will determine who comes out on top in an increasingly competitive market.

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