The War on Generics - Part I

Generic drug companies are riding high after the largest generic launch ever (Zocor) and arguably the cleverest (Plavix). But brand companies are fighting back, and they may succeed in taking away the biggest incentive fueling patent challenges.

Generic drug companies are riding high after the largest generic launch in history (Zocor) and arguably the cleverest (Plavix). But brand companies are fighting back—and they just might succeed in taking away the big incentive fueling patent challenges.

Ramsey Baghdadi

It seems like the best of times for the generic industry. June saw the largest generic launch in history—Teva Pharmaceutical Industries Ltd. ’s version of Merck & Co. Inc. ’s simvastatin (Zocor). And Teva is poised to follow-up with another blockbuster launch, the first generic version of Pfizer Inc. ’s antidepressant sertraline (Zoloft).

And then there’s Plavix. Apotex Inc. ’s unexpected "at risk" launch of a generic version of Bristol-Myers Squibb Co. ’s clopidogrel made headlines across the country, thanks to the drama injected into the legal maneuverings over the Plavix patent by a Federal Bureau of Investigation raid on Bristol’s headquarters.

On the policy front, generic drug companies continue to be a popular, bipartisan answer to concerns about rising prescription drug costs. They are making progress battling what they see as anticompetitive tactics by brand companies. Their grievances continue to receive sympathetic hearings from Congress.

The result has been some legislative tweaking, but more importantly, it has brought continued pressure on regulators to do everything in their power to encourage rapid generic competition.

But the Plavix case could change all that. The immediate impact of the launch is to shine the spotlight on Bristol, as everyone wonders what prompted the Justice Department’s raid on the company.

But, in the long run, the Plavix case could end up working against the generic industry. Although it is impossible to predict how the legal battle will ultimately play out, one thing is certain—it will force Congress to take another close look at how the brand/generic balance is set in the US.

"Something will come out of this," promises one senior official at a large brand drug company.

While the Plavix case so far is playing out in the media as the story of a feisty generic company outfoxing a big, bad pharma company, it could end up having a decidedly different impact on Capitol Hill.

Some in the brand industry see an opportunity to push for changes in the patent challenge process that would profoundly affect—and arguably even eliminate—the incentives for generic companies to launch challenges in the first place.

The debate over incentives for patent challenges centers on an increasingly common strategy employed by brands: the sale of an "authorized" generic during the 180 days of market exclusivity awarded to a generic drug company that successfully challenges a brand name patent. Many of the largest generic drug companies want that practice eliminated—and they are certain to use the Plavix dispute as an opportunity to push that agenda.

But it will not be a one-sided debate. You can’t talk about eliminating authorized generics without talking about the 180-day exclusivity period. And plenty of brand companies are ready to argue that the answer is to take that away too.

That would make life a whole lot easier for brand name companies—and fundamentally reshape the nature of the generic drug sector.

Brand Companies as "Kingmakers"…

"We are the kingmaker," GlaxoSmithKline PLC CEO J.P. Garnier declared during a February 2004 earnings call with investors. "We can make a generic compete."

The GSK chief executive was referring to the ability of brand companies to sell "authorized" generics—granting a license to a third party (or even an in-house subsidiary) to sell the brand’s own product in generic packaging to counter a first generic launch.

Garnier knows a thing or two about "authorized" generics. When Apotex launched a generic version of Glaxo’s $3 billion dollar-a-year blockbuster depression drug paroxetine (Paxil) in 2003, the company hit back by introducing its own generic paroxetine through a partnership with Par Pharmaceutical Cos. Inc. GSK’s strategy probably cost Apotex half a billion dollars in sales during its time as the only outside generic.

Mylan Laboratories Inc. SVP-corporate strategic development Heather Bresch recalled Garnier’s remarks during her testimony before the Senate’s Special Committee on Aging at a July 20 hearing. The hearing was put together to discuss barriers to entry of generic drugs—and as is typical of hearings into generic drug issues these days, the witness list tilted heavily against the brands.

"‘Kingmaker’ doesn’t sound like the competitive balance intended by Congress when enacting Hatch-Waxman"—the law that created the modern-day generic drug approval process, Bresch told the committee.

Mylan has been leading the charge against "authorized" generics. And Congress has taken action, passing legislation in 2005 that will force brand companies to include any authorized generic prices in their calculation of "best price" for the purposes of Medicaid rebate payments. (See "Mylan’s War on Authorized Generics," The RPM Report, March 2006 (Also see "Mylan's War on Authorized Generics" - Pink Sheet, 1 Mar, 2006.).)

In one sense, though, Garnier is absolutely right. The brand companies are kingmakers when it comes to the exclusivity period. They hold what generic drug companies and industry stakeholders call the "trump card" in any kind of negotiations.

Typically, the innovator company promises not to launch an "authorized" generic in exchange for a later launch date from the generic drug company, giving the brand a longer time on the market without generic competition.

"When [the generic firm] is about to launch their own product, the brand will say, ‘Why don’t you do a deal with us?," attorney and generic drug advocate Tim Gilbert says. "They’ll say: you’ll have a certain date when you’re going to enter, plus even if you do win in court, we’re going to launch an authorized generic. We’re going to destroy your market exclusivity.’"

…Or Do Generic Drug Companies Hold All the Cards?

Eli Lilly & Co. SVP and general counsel Robert Armitage says critics of "authorized" generics have it backwards.

In fact, he says, all the advantages are on the side of generic firms who use the patent challenge process to "shakedown" innovators.

Because the payoff is so big—180 days as the sole generic version of a blockbuster drug—generic companies have an incentive to launch challenges that have virtually no chance of succeeding, Armitage says. From the perspective of the brand company, even a tiny chance of a defeat in patent litigation over a blockbuster drug is terrifying. And generic companies know that perfectly well.

"Their trump card is, ‘Look, you’re going into litigation in an area of the law that is complicated and arcane. We’ll do discovery and get several million pages of documents. We’ll find something in some of those documents that will give us some finite probability of success in litigation."

So, the Lilly attorney says, brand companies are under tremendous pressure to settle and are willing to give up "something significant" to make the generic company "go away." Armitage goes so far as to call authorized generics a "first step in balancing the playing field."

As Bristol’s recent experience with Plavix demonstrates all too clearly, the consequences to the brand company of a long-shot generic victory are dire.

The day of the raid on Bristol, the company’s stock price lost 7.5% of its value. And, since Apotex launched its generic, the picture has gotten much worse, with Bristol shedding approximately 20% of its market cap (or more than $11 billion in value) during the first weeks of August.

So it is a fact: brand companies have every reason to cut a deal with even the most frivolous patent challenger.

An Explosion in Authorized Generics

One thing is clear: the use of authorized generics is increasing. Since September 2003, the Generic Pharmaceutical Association (GPhA) says, 17 authorized generics have hit the market during the 180-day period. In effect, every major exclusive generic launch was countered by authorized competition from the innovator.

Brand companies experimented with authorized generics in the 1990s, but "it is really a recent phenomenon, where virtually every time a generic comes out during the 180-day period, it is met with an ‘authorized’ generic," Gilbert says.

The impetus for the change came with passage of the Medicare Modernization Act in 2003. The law, which created the new Part D prescription drug benefit, also included language clarifying the rules governing 180-day exclusivity.

The changes helped eliminate cases where a generic was fully approved and ready for launch—but blocked by exclusivity awarded to another company that was not yet ready to market. And the changes also led brand companies to conclude that authorized generics are a good strategy to use to maximize profitability during the difficult post-patent expiration period.

Now, generic companies are becoming increasingly worried about the number of attacks on the small monopoly window they have to get a return on their investment in patent challenges. And they should be.

Consider the generic launch of Lilly’s blockbuster anti-depressant fluoxetine (Prozac) in 2001. Barr Laboratories Inc. spent roughly six years in court challenging Lilly’s patents on Prozac, which generated approximately $2.6 billion in sales in 2000.

Barr eventually won and launched fluoxetine, the biggest generic launch of its day. Almost all of Barr’s profits on the drug were made during the exclusivity period. After the six months were up, multiple generics entered the market, driving prices down so low that it almost became unprofitable to produce the drug anymore.

The same can be said for any generic drug launch. Analysts and government officials estimate that an "authorized" generic introduction during the 180-day exclusivity period can cut profits during that time in half. In other words, half of a generic’s projected total profitability is at stake in the brand company’s decision about whether to launch an authorized generic.

For brand companies, on the other hand, the profits from an "authorized" generic are negligible in the context of their overall product lines.

So why are brand companies launching "authorized" generics? There are sound economic reasons: the strategy does help maximize revenues during the incredibly difficult period surrounding the loss of a blockbuster brand, both by giving the company at least a slice of the generic market and by keeping manufacturing operations running closer to full capacity.

But, skeptics say, the practice is really part of an offensive strategy against generic companies, intended to convince them not to pursue generics, or at least delay a generic launch. That, at least, is the heart of the generic industry’s argument that authorized generics should be banned during the 180-day exclusivity period.

Not everyone is convinced. The Federal Trade Commission, for example, has looked at the issue repeatedly and always determined that authorized generics are pro-competitive. After all, two generics mean lower prices for consumers. GPhA is working to counter that argument, and hopes that FTC will reach a different conclusion after completing another study of the topic. (See "PhRMA vs. GPhA: Who Do You Believe?" in this issue.)

Another argument focuses on the well-publicized backlog of generic drug applications sitting at the FDA waiting to be reviewed. If authorized generics are destroying the incentive to develop new generics, those critics say, then why is FDA receiving more generic drug applications than ever?

GPhA President Kathleen Jaeger says that point of view is shortsighted, since there is a lag between when companies decide to pursue a generic and when an application is filed.

"A number of these applications are already in the hopper," Jaeger says. "Our companies have been working diligently on those applications [for years], so of course they’re going to submit them."

Attorney Brian Liang, MD/PhD, executive director of the Institute of Health Law Studies at California Western School of Law—who has conducted research projects to help GPhA fight authorized generics—says the decision by a generic company to enter a market usually takes place four to seven years before the ANDA is actually filed. So the influx of generic drug applications FDA is experiencing today are the result of decisions made between 1999-2001—before the explosion in authorized generics.

"It’s hard to pull back once you’ve invested all of the money in bioequivalence studies and litigation, to say, ‘Well we’re not going to launch the product,’" Gilbert explains. The real question facing generic companies today is, "Does it make sense to continue to invest in an industry without indication from Congress that they’re not going to take ["authorized" generics] seriously?"

Be Careful What You Ask For

But if Congress takes authorized generics "seriously," it could backfire on the generic drug industry—at least if Lilly’s Armitage has any say in the matter. The arguments against authorized generics can be addressed quite simply, he says: by doing away with the 180-day exclusivity period altogether.

"We ought to go back to Congress and call out the 180-day exclusivity for what it is," Armitage says. "It’s an anti-innovative, anti-consumer piece of legislation that needs to be substantially reformed—if not repealed."

The generic drug industry says exclusivity is critical as an incentive to launch patent challenges in the first place. However, the counter argument would be that there should be open and fair competition among all generic companies. Why should one company receive a lucrative monopoly just because it happened to be the first to file an ANDA ? The more competitors, the more the price per drug is driven down, and thus, the more consumers benefit.

"If you get rid of 180-days, you would get rid of ‘authorized’ generics, and you would thereby get rid of this impediment to follow-on generics to come to market," Armitage says. "FTC’s work clearly establishes that consumers benefit from generic competition when multiple generics come to market and compete on price."

While that position may sound radical, it will be heard on Capitol Hill. Armitage, who has served as chairman of the Pharmaceutical Research & Manufacturers of America patent committee in the past, was asked by Utah Republican Senator Orrin Hatch to testify before the Senate Judiciary Committee on "authorized" generics and other related patent issues.

"I was the only witness, because no generic witness would even show up to testify largely because what they were trying to do was so outrageous and would have cost consumers so much money," he says. Armitage is also highly regarded by FTC lawyers and worked closely with the agency on its first authorized generics report, issued in 2003.

GPhA is taking the threat seriously. When asked whether the top priority for GPhA is getting rid of authorized generics, Jaeger says the issue is broader than that. "The number one issue for GPhA is to restore and maintain the value of the 180-day exclusivity," Jaeger says.

Although it would seem that "authorized" generics would put GPhA in an awkward position, considering so many of its large members engage in the practice, Jaeger says that’s not true. "Our members realize that ‘authorized’ generics are just another unintended legal loophole in Hatch-Waxman that needs to be fixed," she contends.

"Our board, our industry, is very supportive of fixing this issue. They understand the long-term, dire consequences for the generic industry. At the same time, they have a fiduciary duty to their shareholders and to Wall Street, and so while it's legal they will still be pursuing these arrangements."

But "authorized" generics and the 180-days are inexorably linked: where one goes, so goes the other. For most generic companies, except for the very biggest, the battle to preserve the 180-days represents a fight for their lives.

Plavix Lights the Powder Keg

Apotex’ introduction of generic Plavix, more than anything else, may have accelerated a decision on "authorized" generics—and more broadly on the fate of the 180-day exclusivity provision.

If nothing else, the bizarre deal that Bristol struck with Apotex will provide plenty of fodder for those who argue that something has to change in the world of patent settlements.

And there’s nothing like an FBI raid to focus attention on an issue. On July 27, FBI agents raided Bristol’s Manhattan headquarters, including the office of CEO Peter Dolan. The FBI was acting on behalf of the Department of Justice’s antitrust division, and Bristol reported that the raid involved a criminal investigation related to the patent settlement.

For Bristol, things certainly fell apart with astonishing speed. When the company (and Plavix innovator Sanofi-Aventis ) reached a deal to settle patent litigation with Apotex in March, everything looked great. A big uncertainty surrounding Bristol’s biggest drug seemed to be taken off the table, giving the company much needed momentum to continue its recent turnaround.

There was just one problem: the settlement agreement seemed to contain some red flags that would make it difficult for the deal to meet with the approval of the FTC and other antitrust authorities. (See "Unsettling Developments for Plavix," The RPM Report, May 2006 (Also see "Unsettling Developments for Plavix" - Pink Sheet, 1 May, 2006.).)

So plenty of people thought the deal might need to be changed, or even that it would fall apart and Bristol would have to take its chances in court.

It turns out the deal was much worse than that for Bristol, because the company agreed to three seemingly unwise—and some would say absurd—provisions as part of the deal if Apotex launched:

they waived the right to get immediate injunctive relief

they waived the right to treble damages

they waived the right to compensatory damages beyond 50% of the generic selling price

So, when Bristol failed to get antitrust approval by July 31, Apotex was essentially free to launch its generic (which was already approved by FDA in January). On August 8, Apotex did just that.

Bristol has filed for injunctive relief, but it may be too late. Apotex has flooded the market with roughly a billion dollars in generic Plavix, and investigators continue to look into criminal activities surrounding the deal.

Ripple Effects Certain

The collapse of the Plavix settlement is clearly a catastrophe for Bristol, and it immediately put investors on the lookout for other patent settlements on similar shaky ground. The immediate focus is on a patent settlement struck by Cephalon Inc. related to the firm’s sleep disorder drug modanifil (Provigil). (See "The Provigil Vigil," in this issue. (Also see "California Court’s Inaction On TiO2 Prop 65 First Amendment Case Breeds New Lawsuits" - HBW Insight, 24 Apr, 2024.))

But the fallout from Plavix is also certain to bring more scrutiny of the settlement process in general. According to Bristol, DoJ is investigating whether Bristol and Sanofi-Aventis hid information that was part of the original agreement from regulators.

And, according to the New York Times, Apotex CEO Barry Sherman negotiated the deal with Bristol and Sanofi-Aventis knowing that FTC and the state attorneys general would never approve it. In July, while the agreement was under review, Sherman secretly sent letters to members of Congress to support his case.

One top executive at a large brand pharmaceutical company claims there is more to the deal than meets the eye. "I don’t believe if [the published terms of the deal] are true, that this was an accidental agreement," the executive says. "Both parties are smart enough to contemplate the impact of those three provisions. I don’t think this is one party outsmarting the other."

One possibility: Bristol thought Apotex had dirt on the company and decided to make a bad deal rather than risk Apotex showing its cards.

"If you’re walking down the street and someone puts an automatic weapon to your head, and you don’t know if it’s loaded or not, you may well conduct yourself in a way that is radically different than if you had assurances that at the end of the day, [they] could pull the trigger and nothing would happen," the executive speculates.

But Apotex apparently decided to show its hand anyway—to DoJ and Congress, no less. Any large-cap pharmaceutical company has to worry about liability from illegal activity that it may not be aware of, but in Bristol’s case, the stakes are significantly higher. In June 2005, the company entered into a deferred prosecution agreement with the US Attorney’s Office for the District of New Jersey.

The district office filed a criminal complaint against Bristol alleging conspiracy to commit securities fraud, but deferred prosecution for two years. The complaint will be dismissed if Bristol meets all the requirements of the deferred prosecution agreement.

But the US Attorney’s Office can move forward with prosecution if Bristol engages in any criminal conduct. "Criminal conduct" refers to any crime related to the company’s business activities committed by one or more of Bristol’s executive officers or director; securities fraud, accounting fraud, financial fraud, or business fraud "materially" affecting the company’s books and publicly filed records; or obstruction of justice.

Bristol’s most recent earnings filing with the Securities & Exchange Commission notes the possibility that the issues raised in the Apotex settlement could expose the company to liability under the deferred prosecution agreement.

But while generic companies can be forgiven if they are basking in the perception that Bristol was made a laughingstock by Apotex, they may want to heed Isaac Newton’s Third Law of Motion: for every action, there is an equal and opposite reaction. The controversy over Plavix could unify innovator drug companies to go after the 180-day exclusivity period as a source of anti-competitive practices and questionable patent settlements.

If what Armitage is calling for actually happens, the termination or blunting of the 180-day incentive would permanently alter the dynamics of the generic industry and, even more importantly, could change the way the health care system works. There’s no question that early patent challenges precipitated by the 180-day incentive result in lower costs. (See Exhibit 1).

Gilbert says Big Pharma has been remarkably creative and aggressive in going after the exclusivity period. "It’s a compelling shareholder value story in a way to have different strategies in place and to say that ‘we’re prepared to protect our patent monopolies as long as possible,’" he maintains. "As long as the government allows it, you can see companies saying ‘gee, what am I? Some kind of Boy Scout? Am I not going to license an authorized generic? This is the problem."

Generic drug companies have become accustomed to their grim reality of competing in an "authorized" generic environment. Teva says it now expects to compete with an "authorized" generic on every launch.

For example, the Israeli drug maker is readying for a launch of another blockbuster: Pfizer’s antidepressant sertraline (Zoloft), which accounted for $3.1 billion in US sales in 2005. In late June, Pfizer announced it would launch an "authorized" generic of Zoloft through its Greenstone Ltd. subsidiary. That caused a commotion on the Street: Teva’s stock price was depressed temporarily, but the company appeared publicly to be unperturbed.

Make no mistake, the brand pharmaceutical industry is waging war on their generic counterparts. Companies are carefully—and cleverly—implementing strategies that capitalize on "authorized" generics. "It’s really one little front on a multi-front battle over how the Hatch-Waxman law really ought to work," Lilly’s Armitage says.

If the rules for 180-day exclusivity and "authorized" generics remain unchanged, the pharmaceutical industry will continue to launch third-party generics to compete during the monopoly period.

The bottom line is there isn’t much separating the competitive world the generic industry finds itself in today and a world that looks vastly different if a few critical changes are made to the incentives that drive growth for generic drug makers. Plavix may be the catalyst that brings those two worlds together.