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PHARMACY BUYING GROUPS HAVE SQUEEZED MARGINS ON GENERIC DRUGS

Executive Summary

PHARMACY BUYING GROUPS HAVE SQUEEZED MARGINS ON GENERIC DRUGS, United Research Labs VP-Sales & Marketing Kenneth Roberts told the Wilkerson Group annual business and medicine symposium September 17-19 in New York City. While emphasizing that the buying groups have led to a rapid erosion of generic profits, Roberts at the same time acknowledged that the price decreases would have occurred anyway through competition in the marketplace. "The buying groups basically made it happen overnight," he said. Buying groups, however, may be doomed unless they can offer additional services besides price to their members. "Inevitably, these groups will self-destruct once the prices reach the bottom level," Roberts predicted According to Roberts, the buying groups, which represent roughly 10-25% of the pharmacies in the U.S., need to examine other member services such as third-party payment or computerization if they are to survive once drug prices stabilize at their lowest level. Declining profit margins for generic products may also deter brandname firms from shifting their business focus far beyond the boundaries of traditional discovery and detailing activities, Roberts added. "Generic pharmaceuticals, may in the long run, constitute a small part of their program," he said, "but the bottom line is that the profits probably won't be there." This price competition in generics, Roberts continued, "constantly creates decreasing profits on old as well as new products alike, forcing the major drug companies to consider whether their time and efforts are worth the possible decreasing percentage we would see in the profit margins. My guess on this is no, the national brand companies would like to see something that would maintain their margin." Instead, Roberts contended, the small, volume competitive companies will tend to dominate a market in which prices can drop as much as 200% over a period of weeks. Despite the competition the market is growing significantly. Roughly one-third of the $21 bil. U.S. pharmaceutical industry will be subject to generic competition by 1990. Observing that a growing number of small firms are entering the generics business, Roberts maintained that the trend will continue to put downward pressure on prices, making generic drugs "almost a commodity" in the future. "Profit structure in this industry simply does not lend itself to the large sales forces and the huge infra-structures of today's national brand companies," he emphasized. Contributing to cost pressure on generic pharmaceuticals, Roberts noted, are FDA approval policies, whereby up to eight companies can receive simultaneous ANDA approval for a given drug, and buyer sophistication. Roberts also pointed out that the generic industry shows substantial interdependence. "The unique characteristic of this industry, especially for the full line supplier, is that no full line supplier can make his full line," Roberts asserted. He estimated that a typical full line supplier manufactures 100-400 of the 1,000-2,000 skus offered to customers.

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