The End of an Era: Lipitor, Blockbuster Drugs and the Waxman/Hatch Model

Pfizer’s Lipitor goes generic—albeit with some decidedly unusual wrinkles. The biggest generic launch in history is a good moment to take stock of the transition away from the blockbuster model. The reaction to the milestone suggests that the industry’s critics may be having a harder time letting go of the old model than industry is.

If you want to pick a date to mark the end of the blockbuster drug era, December 1, 2011 is probably the right choice.

That is the day when Ranbaxy Pharmaceuticals Inc. launched the first “true” generic version of Pfizer Inc.’s cholesterol lowering drug Lipitor (atorvastatin). A generic actually became available the day before, when Watson launched an “authorized” generic supplied by Pfizer. For that matter, generic-level pricing began even earlier, with Pfizer trying creative contracting and consumer discount models to encourage brand-loyalty through the loss of exclusivity period.

Still, December 1 is the day when someone else began supplying atorvastatin, and that is probably the best date to commemorate the passing of the top-selling drug of all time. The significance of that moment was captured perfectly by Forbes’ Matthew Herper, in “Why There Will Never Be A Drug Like Lipitor Again.” The headline says it all: the long predicted death of the blockbuster is upon us at last.

But the blockbuster isn’t the only thing dying with Lipitor; we are also nearing the death of the generic drug model ushered in by the landmark 1983 Waxman/Hatch model.

The two go hand-in-hand: the first blockbusters were just getting going in 1983, and that may just be a coincidence of timing. But the reality of generic drugs, that patent expiration means a commercial death sentence, drove an ethos of making hay in the brand sector: new products needed to get very big, very fast in order to maximize the return before generics came. That reality in turn meant huge sales forces, direct-to-consumer ads, and countless other hallmarks of what, for better or for worse, defined Big Pharma.

But it also made the generic drug industry what it is. And that is bound to change too.

Think about it. Not only is atorvastatin the biggest generic launch to date, it will most likely be the biggest that ever happens.

There will someday be brands that surpass Lipitor’s $10 billion per year peak. But the odds are that when it happens it will be a biologic therapy, like say Abbott Laboratories Inc.’s Humira. And that loss of exclusivity will evolve differently, driven by the emerging pathway for biosimilars in the US. While the details are very much unsettled, it is safe to say that the first non-interchangeable biosimilar of Humira will not have quite the impact of the first generic Lipitor.

Granted that there are still some huge generic opportunities coming (like Plavix early next year). But the supply of multi-billion dollar pills that fit the ANDA model is rapidly running out.

It is hard to let go. Goodness knows, the pharmaceutical industry didn’t let go of the blockbuster model without a fight (or maybe a suicide pact).

But, at least based on the reaction to the loss of exclusivity of Lipitor, it sure looks like Pfizer has come to terms with the end of the era—while it is the industry’s critics who are having trouble letting go.

Unprecedented Circumstances

It is safe to say there has never been a generic drug launch like the Lipitor generic drug launch. That statement would have been true regardless of the actual circumstances based solely on atorvastatin’s status as the best selling propriety drug of all time. However, the actual circumstances of the launch itself were unprecedented. As Ranbaxy CEO Arun Sawhney put it during a meeting with employees Dec. 6, it was “nothing short of a thriller.”

Ranbaxy was the first-to-file generic challenger to atorvastatin, and, after settling patent litigation with Pfizer in 2008, had the right to launch on November 30—after the first key patent on Lipitor expired in June, but well before a number of other patents Pfizer claimed protect the brand were set to expire. As the first filer, Ranbaxy was entitled to 180-days of exclusivity, meaning it would have the largest generic opportunity ever for a period of six months.

Pfizer subsequently settled with several other generic manufacturers, granting one (Cobalt Pharmaceuticals Inc., subsequently acquired by Watson Pharma Inc. ) the right to sell an “authorized” generic version of Lipitor supplied by Pfizer also starting Nov. 30.

In the world of generic drugs, that level of complexity counts as normal.

What made this launch unique was the added wrinkle of good manufacturing practices violations cited by FDA at Ranbaxy’s India facilities. Those violations were so significant that FDA prohibited shipment of products from the affected facilities to the US and then put Ranbaxy on the agency’s rarely used “application integrity policy” list—essentially an assertion of fraudulent activity severe enough to preclude approval of applications altogether pending resolution of the issues.

But, as 2009 turned to 2010 and then 2011, no resolution came.

The uncertainty prompted Mylan Pharmaceuticals Inc. to sue FDA, seeking an order directing the agency to reject Ranbaxy’s application, or—failing that—to at least clarify the status of a potential launch. (Also see "The Lipitor Wars: Who Gets a Piece of a $7 Billion Drug?" - Pink Sheet, 1 May, 2011.) Not surprisingly, Mylan’s attempt failed, with the DC federal court declining to step in to FDA’s decision-making process.

Then, as Nov. 30 loomed, news reports highlighted Pfizer’s efforts to maintain the brand in the months ahead, including at least a couple of agreements with health plans to maintain use of the Lipitor brand even after generic availability. Those initial reports appeared to overstate the scope of the agreements, but they nevertheless contributed to the sense of unusual circumstances around this generic launch.

Then came the launch of Watson’s generic, which required nothing but the turn of the calendar. The launch was announced Nov. 29, and then everyone waited for news about Ranbaxy’s ANDA.

And waited. And waited.

But then, at last, after 8 pm, the official announcement came: Ranbaxy’s ANDA was approved after all and ready to launch; shipments began the next day.

As if to underscore the overall weirdness of the event, some reporters received a news release announcing the approval of the ANDA a couple of hours early. That was followed immediately by a retraction—then the reissuance of the same press release a couple hours later.

Last but not least came the news that Teva would receive a portion of the profits from Ranbaxy’s launch, part of a previously undisclosed agreement that Ranbaxy later described as akin to an “insurance policy” in the event that it couldn’t launch.

The Waxman/Hatch Era

Collectively, those plot twists—and the reaction they provoked—are much more than just a “thriller.” They are also an unmistakable sign that the traditional brand/generic model is wearing out fast.

The Waxman/Hatch Act is one of the most important laws ever enacted for the US pharmaceutical industry, quite literally creating a business model (generic drugs) and quite probably explaining why the US has largely eschewed the types of price controls on brands throughout the developed world.

But in the nearly 30 years since enactment, a lot has changed, and the Lipitor generic launch suggests it may be time to declare the Waxman/Hatch era at an end. There are at least three important factors in its passing:

1. The rickety structure of the Waxman/Hatch framework itself. After three decades, the accumulation of precedent, regulation, court rulings, legislative fixes and fixes-of-fixes has rendered the generic drug approval process almost Dickensian in its complexity.
2. The tension between the need for relentless manufacturing efficiency improvements (including the globalization of the supply chain) necessary to deliver high-volume, cheap generics and the desire to enhance product quality in the 21^st Century; and
3. The transformation of the Big Pharma model itself, where the end of the blockbuster also changes expectations for profit margins and allows for a transformation in pricing tactics upon patent expiration.

Each of those three factors was on display with the genericization of Lipitor—and all three will not go away with Pfizer’s billion dollar sales line.

A Byzantine Regulatory Process

On paper, the Waxman/Hatch model is perfectly simple: generic drug companies can conduct abbreviated bioequivalence studies to prove that their medicines are the same as an innovator, and launch the day the patent expires. To encourage generics to challenge patents, the first to win a patent challenge gets six months as the sole generic, before any other versions can be approved.

That system is now such a mess. A series of court decisions and legislative fixes have created a whole host of unintended consequences evident in notions like “parked exclusivity,” “reverse settlements” or “pay-for-delay” deals, and “authorized” generics.

In today’s world, generic drug launches typically amount to negotiated competition, with the date of generic entry set by terms of a settlement, rather than any particular intellectual property rights. That in turn creates an odd symbiosis between the blockbuster brand and the first generic, with a huge portion of the generic sectors’ profitability tied to six-month exclusivity opportunities—even as the vast majority of generic products are sold at commodity level prices.

So, even a “normal” generic launch now seems odd.

But consider these specific wrinkles in the Lipitor case:

• Two sets of exclusivity rules. Because Ranbaxy filed its ANDA before the 2003 Medicare Modernization Act changed the rules governing exclusivity, there was no clear way for the company to license its exclusivity to a third party. MMA changed the Waxman/Hatch rules to avoid circumstances where a sponsor with first-to-file exclusivity can’t or won’t launch, thereby potentially holding up all generic competition. But, at least in theory, the fact that Ranbaxy filed before MMA removed one solution that might have worked well for all parties: a simple ability for Ranbaxy to sell its exclusivity to a manufacturer that didn’t have any manufacturing problems. Except…
• Not as Clear Cut? It may be that Ranbaxy and FDA had found a way around that problem: all indications are that Teva would have launched a “first generic” under its agreement with Ranbaxy if in fact Ranbaxy had been uable to come to market. That at least appears to be the structure of the “insurance policy” between the two companies. (Also see "Ranbaxy-Teva Atorvastatin Mystery Deal Decoded: Many Likely Scenarios Aimed At “On Time” Launch" - Pink Sheet, 13 Dec, 2011.) No one knows the terms, but apparently Ranbaxy believed it could in fact have transferred its data to Teva to allow for a launch during the exclusivity period. That would surely have provoked more litigation from other would-be generic companies. Except….
• Nothing Tentative About It. The Mylan court case was dismissed on the grounds that Mylan lacked standing, in part because its application was not yet “tentatively approved.” It still isn’t. While the ruling stopped well short of a black-and-white declaration to this effect, it now appears that FDA has no reason to grant “tentative” approvals in any circumstance where it fears being sued to force a determination on exclusivity that it isn’t ready to make. And, perhaps as a result…
• Whose on Second? As of mid-December, Teva is the only “tentatively” approved ANDA applicant. There are at least two more pending, including Mylan’s. That suggests that there may yet be unresolved scientific or exclusivity issues blocking the second wave of applicants. FDA, certainly, indicated that Mylan’s application was not as close to approval as the company asserted when it sued to seek clarity on Ranbaxy’s exclusivity. Or it could mean that FDA was engaged in a bit of creative deal-brokering of its own: by tentatively approving just one applicant, it makes much clearer who Ranbaxy should work with as a back up sponsor in the event it cannot supply the market itself. That may also explain why Ranbaxy CEO Sawhney says “it is my hunch that we will remain the dominant generic atorvastitin player in the US even beyond the 180 day exclusivity.”

With all those complexities on top of the “normal” issues surrounding a blockbuster generic drug opportunity, you might be tempted to say it can’t get any more complicated for future launches. But that is not the history of Waxman/Hatch law: each layer of complexity seemingly begets still more the next time there is a lot at stake for potential litigants.

And bear in mind that Plavix is among the expected generic launches next year, though it won’t technically be a “first” generic since Apotex Inc. already launched a version of clopidogrel—briefly but, for Bristol-Myers Squibb Co., catastrophically – in 2006. (Also see "The War on Generics - Part I" - Pink Sheet, 1 Sep, 2006.)

The bottom line is that no one would have designed a system quite like this on purpose—and no one is likely to lament the passing of what has become a byzantine process for ending brand monopolies.

A Pointed Ommission

Of all the twists and turns in the Ranbaxy atorvastatin review, the most surprising may be one thing that did not happen: Ranbaxy did not reach a formal settlement of the investigation into its manufacturing practices (and, presumably, related fraud or False Claims Act issues).

Less surprising, but still noteworthy, was the lack of any mention of the manufacturing issues in the announcement of the approval by FDA. While the approval of the application is sufficient indication that the agency is convinced of the quality of the production process for atorvastatin, the widely publicized past issues weren’t overlooked in reporting on the launch.

That in turn makes the Lipitor generic launch potentially even more important for the future of the generic sector.

Make no mistake: the approval of atorvastatin represents a risk for the agency and the generic drug industry overall. Any percieved quality issues that emerge with Ranbaxy’s product will open up FDA to second guessing over its decision to approve the application given the past questions about the firm. The attention could undermine confidence in generic drugs overall.

But this is also a case where FDA was stuck between a rock and a hard place: rejecting the application would potentially have delayed generic competition to Lipitor for months, and opened up the agency to a whole host of second-guessing of a different kind: how could you allow the world’s largest brand to avoid generic competition a day longer than absolutely necessary?

Indeed, the entire Lipitor generic saga underscores the conflicting demands placed on the agency in the generic drug space. On the one hand, there is intense pressure to encourage wider availability and use of generic drugs—and especially the conversion of brand premiums to commodity level pricing once multiple generics are available. On the other hand, the demands to assure product safety are higher than ever, with the added complexity of a deeper understanding of individual variability in responses to medicines lending strength to the view that generic drugs may not, in fact, be equivalent to brands (or each other) for every patient.

The tension is apparent in the intense but diffuse political response to the recent spate of drug shortages, with stakeholders all struggling to understand how come so many highly effective and widely used therapies are no longer commercially available. (Also see "The Next “Surge”: Drug Shortages" - Pink Sheet, 3 Nov, 2011.)

Last but not least, FDA’s public health priorities aren’t the only factor in how aggressively it acts in enforcement actions. As has always been the case, settlement agreements involve coordination with the Department of Justice as well as an increasingly broad group of sister agencies within HHS. And at a time when the Obama Administration is highlighting fraud recoveries as a key element of its deficit reduction activities, the dynamics of a settlement negotiation are that much tougher. (Also see "The Era of Big Pharma Fraud Cases Is Ending, Former US Attorney Loucks Says, But It May Go Out With A Bang" - Pink Sheet, 1 Mar, 2010.)

In a case like Ranbaxy’s, the tension is clear: for DoJ and the HHS leadership, a large dollar settlement is a very attractive outcome—but such a settlement is almost impossible for Ranbaxy to pay without generic atorvastatin. That dynamic became apparent early in the year, when business media reports cited a potential $1 billion settlement amount to resolve all the claims. More recent reports (apparently coming out of India) cite a more realistic amount on the order of $350 million.

Assuming those amounts are on the table, rejection of atorvastatin would likely have to be off the table.

The demand for higher product quality is especially acute in the context of globalization, where old stereotypes coupled with new anxieties about economic insecurity, have generated considerable interest in FDA’s ability to oversee the quality of product sourced from India and China in particular. (Also see "FDA's Forecast for Globalization" - Pink Sheet, 1 Jul, 2011.)

FDA finessed that issue by allowing Ranbaxy to transfer its application to the US, at its Ohm Labs site in New Jersey, and citing that as the source of the product in announcing the approval.

But across the ocean, the news played very differently and is clearly a good symbolic milestone for the globalization of the industry. As Ranbaxy’s Sawhney told his executive team, the approval is not just a proud day for Ranbaxy, but “a matter of pride for India.”

Pfizer’s Controversial Price Cut

So you have the world’s largest product going generic, amid truly unusual circumstances that seem ripe for questions from Congress.

First, you have the largest generic drug launch in history entrusted to a company based in India facing unresolved claims of fraudulent practices.

Second, the sole outside generic was approved only after considerable uncertainty, despite the fact that the application was pending for almost a decade and the potential launch date was known for more than two years.

Finally, only one other generic has even been granted “tentative” approval status—and that company is taking a share of the generic profits under an undisclosed and hard to fathom agreement with the original sponsor.

Yet, none of those issues has raised much concern in the political sphere. What did? News reports highlighting Pfizer’s strategy to compete against generics with Lipitor.

In part, that focus is a predictable and eminently deserved reaction to past practices by brandname manufacturers. It was all-too-easy to lump Lipitor in with calls to end “pay for delay” agreements, even though this deal seems not to fulfil either the “pay” or “delay” concerns:

• There is no apparent “payment” as part of this settlement; Ranbaxy got the right to launch on a date certain and does not seem to have received any additional compensation; and
• The “delay” in the end was a function of Ranbaxy’s ability to satisfy FDA on manufacturing, not on any Pfizer patent claims.

Still, it is part of the legacy of Waxman/Hatch that almost every generic drug launch now looks bizarre, and the traditional narrative of Big Pharma protecting fat profit margins still comes into play.

But in this case, Pfizer clearly took the lead in price cutting on the ingredient, initiating an aggressive discounting strategy over several years that picked up steam heading towards the end of November. Pfizer’s strategy involved concessions to payors but also direct appeals to consumers in the form of a Lipitor $4 co-pay card.

Pfizer apparently planned the aggressive approach assuming (correctly as it turned out) that Ranbaxy would indeed launch on time. But the uncertainty about the timing may have helped Pfizer preserve even more brand loyalty than it would have otherwise.

Indeed, it may have worked too well, after the New York Times wrote a widely circulated article highlighting agreements that included directives to pharmacists to “block” generics in favor of the brand. That counter-intuitive message caught the attention of lawmakers, and several called for investigations into Pfizer’s tactics.

Adapting to the New Era

One of those legislators, Aging Committee Chairman Herb Kohl (D-Wisc.) raised the topic directly with two CEOs of pharmacy benefit management companies, Express Scripts Holding Co.’sGeorge Paz and Medco Health Solutions Inc.’s David Snow, during a December 6 hearing focusing on the proposed merger of the two firms.

Kohl cited the Times article and asked “Aren’t you deterring generics?”

Snow replied by characterizing the article as “very much in error,” noting that what at first was described as a “Medco” policy was in fact a client’s policy.

“We always prefer generics first,” Snow said. “There are occasions where specifically a health plan customer will negotiate their own arrangement and ask us to administer it. For Medco and 99% of our book of business, we dispense generics.”

Paz was characteristicly more direct. “Pfizer has a deal on the table,” he said, indicating that the pricing was so attractive that there was “a period where the brand product was cheaper than the generic.” However, “the world has changed a little bit because Ranbaxy was able to get its approval…now the generic is coming down.”

While the New York Times coverage apparently exaggerated the circumstances somewhat, it still underscored the disconnect between perception and reality when it comes to contemporary generic launches. Many of the industry’s critics remember the old model—where brand companies would raise prices post-patent expiry, in hopes of maximizing revenues from an ever smaller share of brand-loyal customers.

However, that strategy was long ago supplanted by a greater willingness to compete via third-party authorized generics, in-house generics or straight out brand price cuts.

In that sense, Pfizer’s aggressive pricing on Lipitor is only a logical extension of the industry’s overall willingness to accept lower margins as it emerges from the current wrenching phase of restructuring. Pfizer says it hopes to retain as much as 40% of theatorvastatin market for the brand during the six-month generic exclusivity period, and the company will keep another big slice via the agreement with Watson for the “authorized” generic.

That will come at a price: it will be a much lower margin than before patent expiration. But Pfizer, like most brand name companies, can no longer turn up its nose at relatively large sales numbers that come with low margins.

So far, there are no indications that Pfizer is likely to stick with Lipitor once the truly commodity pricing starts: Pfizer is telling investors that the aggressive support is planned for the six month generic exclusivity period only.

But there are other signs that Pfizer has indeed made peace with the end of the blockbuster era. Consider the company’s newest product launch: the targeted cancer therapy Xalkori. While it addresses a potentially huge market opportunity—lung cancer—the drug was studied and approved with a companion diagnostic to select out the roughly 5% of patients with the right tumor profile to benefit from therapy.

The efficacy in that subset is apparently extreme. So is the price—like many of the new cancer therapies, it lists for something north of $100,000 per year. In other words, it almost a perfect anti-Lipitor, the type of medicine likely to define the new era now beginning.

There are also indications that the generic sector is preparing for the new era. Several of the players in the atorvastatin drama—including Mylan and Ranbaxy—were busy on December 1 in a decidedly unusual capacity: appearing as “sponsors” during an advisory committee review of the Risk Evaluation & Mitigation Strategy for the acne therapy isotretinoin.

In that market, the brand name—Accutane—is no longer marketed, leaving the “generics” in the role of managing a still valuable market with unusual restrictions to prevent pregnancy. The challenge is very different from those involved in flooding the trade with knock-off pills—but likely to be a fact of life in an era of personalized medicine and biosimilars.

The timing of the REMS advisory committee was a coincidence, but perfect to signal a new era. After all the attention on how Pfizer was playing in the generic drug space via its agreement with Watson and its aggressive pricing on Lipitor, several generic companies addressed a complex regulatory and commercial system that is very much a branding model.

In other words, the traditional line between “brand” and “generic” just doesn’t fit anymore. That is an apt way to describe the new era that began December 1.