Why We May Lose Generic Drugs

Why We May Lose Generic Drugs

The mood at the annual generic drug industry confab in Orlando in February was especially somber. The discussion during one panel was all about plunging drug prices, consolidation among drug-buying groups, and the increasingly cutthroat nature of the business. A top executive at Israel-based Teva Pharmaceutical Industries Ltd., the No. 1 supplier of generics in the U.S., which is laying off 14,000 employees and shuttering about half its 80 manufacturing plants, tried to lighten the mood with gallows humor: “Teva certainly has no challenges,” said Brendan O’Grady, the executive vice president who heads its North American commercial business. The joke hit the mark, perhaps because it landed so close to home.

The generic drug industry, which supplies almost 9 of 10 drugs prescribed in the U.S., is in crisis. These companies aren’t the superstars making cutting-edge cancer and hepatitis treatments that are priced through the roof. They’re the producers of bread-and-butter pills consumers often take for granted: antibiotics, arthritis treatments, medicines for diabetes and high blood pressure. With the profitability of these prosaic pills fading fast, companies are exiting important parts of the business. “We’re one of the companies that continues to make antibiotics, and we’ve asked ourselves for years why we continue to still make them,” O’Grady said at the conference.

The industry’s woes can be summed up in two words: plummeting prices. Far removed from the pharmacy pick-up counter is an arcane world of supply chains ruled by a tightknit band of players forcing prices for most generic drugs lower and lower, both with their increasing purchasing clout and because they’re able to select from an ever-growing universe of generic drug suppliers.

The top three manufacturers—Teva, Mylan, and the Sandoz generic drug division of Novartis AG—control only about a third of the market by sales. That leaves lots of smaller players vying for business. Industry executives say new entrants have been popping up—sometimes small outfits led by former managers of other generics companies who hire contract manufacturers around the globe to make their drugs. They elbow into the market by offering lower prices.

That flies in the face of the public perception that all medical costs are spiraling upward. While many health-care products, including branded drugs—those still under patent—routinely command big price hikes, that’s not the case with most generics. A deflation tracker developed by researchers at Evercore ISI Research shows generic drug prices are falling about 11 percent a year, while brand-name drugs are rising about 8 percent a year.

About five years ago middlemen in the drug-delivery supply chain started to form buying consortia to gain more leverage over drugmakers. The consolidation has since become so extreme that just four groups now control 90 percent of drug buying in the U.S. And two of those four are joining forces to purchase generics, which likely will lower prices further.

Read more at Bloomberg Business