Expiring drug patents to plunge

As sources to copy dry up, makers of generics look to redefine themselves

A lab technician works with sterile products during drug manufacturing at a plant owned by Teva Pharmaceuticals Industries Ltd.’s factory in Godollo, Hungary, in October. Teva is the world’s largest maker of generic drugs.
A lab technician works with sterile products during drug manufacturing at a plant owned by Teva Pharmaceuticals Industries Ltd.’s factory in Godollo, Hungary, in October. Teva is the world’s largest maker of generic drugs.

— They call it the patent cliff.

Brand-name drugmakers have feared it for years. And now generic-drug makers fear it, too.

This year, more than 40 brand-name drugs — valued at $35 billion in annual sales — lost their patent protection, meaning that generic companies were permitted to make their own, lower-priced versions of well-known drugs like Plavix, Lexapro and Seroquel — and share in the profits that had exclusively belonged to the brands.

Next year, the value of drugs scheduled to lose their patents and be sold as generics is expected to decline by more than half, to about $17 billion, according to an analysis by Credit Agricole Securities.

“The patent cliff is over,” said Kim Vukhac, an analyst for Credit Agricole. “That’s great for large pharma, but that also means the opportunities theoretically have dried up for generics.”

In response, many makers of generic drugs are scrambling to redefine themselves, whether by specializing in hard-to-make drugs, selling branded products or making large acquisitions. For example, in October the large generics company Watson acquired a European competitor, Actavis, vaulting it from the fifth- to the third-largest generic-drug maker worldwide.

“They are certainly saying either I need to get bigger or I need to get ‘specialer,”’ said Michael Kleinrock, director of research development at the IMS Institute for Healthcare Informatics, a health-industry research group. “They all want to be special.”

The approaching cliff, executives for generic-drug companies say, is that they will no longer be able to rely as much on the lucrative six-month exclusivity periods that follow the patent expirations of many drugs. During those periods, companies that are the first to file an application with the Food and Drug Administration that successfully challenges a patent — and shows they can make the drug in question — win the right to sell their version exclusively or with limited competition.

Such exclusivity windows can give a quick jolt to companies.

During the first nine months of 2012, sales of generic drugs increased 19 percent over the same period in 2011, to $39.1 billion from $32.8 billion, according to Michael Faerm, an analyst for Credit Suisse. Sales of branded drugs, by contrast, fell 4 percent during the same period, to $174.2 billion from $181.3 billion.

But those exclusive periods also make generic-drug makers vulnerable to the patent expiration cycle.

“The only issue is it’s a bubble, too,” said Kleinrock. He said next year, the generic industry expects to enter a drought that is expected to last about two years. And of the drugs that are becoming generic, fewer have exclusivity periods dedicated to a single drugmaker.

In 2013, for example, the antidepressant Cymbalta, sold by Eli Lilly, is scheduled to be available in generic form. But more than five companies are expected to share in sales during the first six months, according to a report by Vukhac.

Heather Bresch, the chief executive of Mylan, the second-largest generics company in the United States, said Wall Street analysts are obsessed with the matter.

“I can’t go anywhere without being asked about the patent cliff, the patent cliff, the patent cliff,” she said. “The patent cliff is one aspect of a complex, multilayered landscape, and I think each company is going to face it differently.”

Jeremy M. Levin, chief executive of Teva Pharmaceuticals, the largest global maker of Industries Ltd., generic drugs, agreed.

“The concept of exclusivity — where only one generic player could actually make money out of the unique moment — has diminished,” Levin said. “In the absence of that, many companies have had to really ask the question, ‘How do I really play in the generics world?”’

For Teva, Levin said, he believes the answer will be both its reach — it sells 1,400 products, and one in six generic prescriptions in the United States is filled with a Teva product — and what he says is a reputation for making quality products. That focus will be increasingly important, he said, given recent statements by the Food and Drug Administration that it intends to take a closer look at the quality of generic drugs.

Levin also said he planned to cut costs, announcing in late November that he intends to trim from $1.5 billion to $2 billion in expenses over the next five years.

Both Levin and Bresch said that generic companies could gain an edge by expanding into global markets. While use of generic medicines is widespread in the United States — an estimated 80 percent of prescriptions are filled with generics — they are less popular in places like Europe and Japan, although that is changing.

Mylan made a big international push in 2007, when it bought the generics business of the German pharmaceutical company Merck KGaA, and this summer it entered into a deal with Pfizer to market and distribute generic drugs in Japan.

Watson’s recent purchase revealed a similar goal. It plans to take the name Actavis, which is unfamiliar to American ears but is better known internationally.

Business, Pages 67 on 12/23/2012

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