Regulation and Competition in
the Pharmaceutical Industry
Session 6: Lifecycle management
Product lifecycles
• 8-10 years in clinical trials
• 5-10 years with “market exclusivity”
• No generic competition
• Then patent expiration....
• In some countries, followed by generic competition
• Firms manage this by using:
• Authorized generics
• OTC “switches”
• New formulations
Why important?
•
•
Patents grant monopoly power
•
•
•
Policy needs to balance static and dynamic
efficiency
•
•
•
-> bargaining power when negotiating price
-> market power
-> higher prices than in a perfectly competitive market
Dynamic: sufficient incentives for innovation
Static: not too much deadweight loss from high prices
What is the social value of incremental innovation,
like new forms and OTC versions?
Policy levers
• Length of patent term, or market exclusivity
• Entry barriers for generic firms
• Costs of approval
• Mandatory substitution
• Demand-side interventions
• Reference pricing, tiered co-pays
Industry view
1980’s
1990’s
Launch
rapid
generic
erosion
Patent Expiry
pricing
pressure
delayed time
to reach market
Sales
Expenses
increased
costs of
marketing
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
Industry view
Average 1st
generic entry
(updated)
●
Average 1st
generic entry
(prior)
●
Loss due to shorter MEP and
increased generic erosion
Reduction
in MEP
Drug
development
costs
Drug
launch
30
Years
Background on generics (US)
•
Historically, patent expiration wasn’t a huge event
•
•
Generic firms could manufacture the same chemical, but
still needed to run clinical trials for FDA approval
Not much generic competition
•
Major change: Hatch-Waxman Act (1984)
•
Post-patent generic drug market entry
•
•
Before Hatch-Waxman: 3 to 5 years
Now: often the day patents expire
HW competition incentives
•
Bolar provision: generic firms can start developing
and manufacturing before patent expiration
•
ANDA: Abbreviated New Drug Application (also
AADAs for Antibiotics)
•
•
•
Waives clinical trials for bio-equivalents
•
Absorption rate & concentration level needed for therapeutic effect
Preparation still requires multiple years, $$
Bio-equivalents available for ~75% of drugs
ANDA/AADA Patent Certification
Options: Paragraphs I to IV
I. No patent information on the drug product that is the
subject of the ANDA has been submitted to the FDA
II. There was a patent which has expired
III. A patent will expire on a particular date
IV. A patent is invalid or will not be infringed by the
manufacture, use, or sale of the drug product for
which the ANDA is submitted
•
Now 20% or more of applications
PIV rationales
• Standard language: “Invalidity, noninfringement,
or unenforceability related to a patent listed with
respect to a reference drug product”
• Examples
•
•
•
Faulty registration
Initial patent was invalid (prior art)
“Double/extension” patenting (e.g., Prozac)
• Note: FDA does not review patents submitted to
Orange book
How does a PIV challenge work?
•
•
•
Patentee has 45 days to initiate a patent infringement suit
(75% of cases), or the FDA review proceeds
If an infringement suit is filed within 45 days, ANDA
approval delays until the earliest of
•
•
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First-to-file P. IV challenge (against any patent) gains 180
days exclusivity if successful
•
•
The date the patents expire
Litigation finds no infringement, or
30-months after patentee receives P-IV notice -> almost always litigate
Huge incentive to challenge!
Examples: Ranbaxy-Pfizer (Lipitor), Apotex-Sanofi (Plavix)
HW innovation incentives
• Proprietary addition
• Up to 5 year patent extension due to IND & NDA
•
•
periods (beyond 20-year post-filing life)
5 years exclusivity for new compounds
3 years exclusivity for extensions (dosages, e.g.
Prozac Weekly)
• OTC: 3-year market exclusivity with
“Supplemental NDA”, if extension (new
clinical trials)
Outcomes
Bigger markets get more generic entry
30.0000
22.5000
15.0000
7.5000
0
0
500.00
1000.00
1500.00
Actual # Generics 12 Months Later
Predicted # Generics 12 Months Later
2000.00
Market size = $200m pre-patent expiration, then 7 generics
Market size = $1.2b, then 14 generics
More entry drives down generic price
80%
Pg / Pb
60%
40%
20%
0%
0
500.00
1000.00
1500.00
2000.00
Market Size
Actual Generic Price to Branded Price
Predicted Generic Price in Linear
Predicted Generic Price in Log-Log
Average number of generic entrants within 1 year increases with sales and has
increased steadily over time
(All drugs)*
* All drugs includes both NMEs and new formulations.
Recent work (Grabowski, Kyle,
Mortimer, Long & Kirson 2009)
•
•
•
Average MEPs for new molecular entities (NMEs) was between 12 and 14
years for the period 1999 to 2008
•
Between 1999 and 2008 average MEPs for all NMEs varied from a high of 14.1 years in 2000 to a
low of 12.3 years in 2008
•
During this same period, average MEPs for NMEs with over $250m in sales were in the range of
10 to 13 years, with a high of 13.0 years in 2002 and a low of 9.7 years in 1999
Generic manufacturers are more likely to challenge brand patents and to
do so sooner following brand launch
•
In recent years over 60% of NMEs faced patent challenges, with the first challenge occurring
approximately 8 years following brand launch
•
Over 90 percent of NMEs with sales exceeding $250m faced patent challenges in recent years,
with the first challenge occurring less than 8 years following brand launch
Generic erosion of brand sales has been extensive in recent years, with
brand NMEs maintaining only a 19.7% share of units during the first year
following generic entry
•
Brand share for all drugs was 17% in the 12th month following initial generic entry in 2007-08
(down from 43% in 1999-00)
•
Brand share for drugs with over $250m in sales was 11% in the 12th month following initial generic
entry in 2007-08 (down from 34% in 1999-00)
Likelihood of a Paragraph IV challenge has increased seven-fold since 1995,
while the average time to a challenge has declined by more than half
(All NMEs, 3-year moving averages)
The average time to Paragraph IV challenge continues to decrease -- for challenges filed in 2008, the average time
from brand NDA approval to Paragraph IV challenge for NMEs was 7.5 years
The rate of brand share erosion following generic entry has
increased substantially over time
Key findings
•
Brand revenues, both prior to and following generic
entry, are more compressed than a decade ago
•
•
•
From 1999-00 to 2007-08, average MEPs for NMEs declined by
approximately a year, from 13.5 to 12.4 years (8.5%)
From 1999-00 to 2007-08, the average brand unit share of sales
over the 12 months following first generic entry declined by twothirds from 52% to 20%
May reduce the ability of brands to earn market rates
of return and fund investments in new drug
development
•
We don’t have good estimates of how much R&D responds
Controversial responses
• Paragraph IV challenges are now
widespread
• Lottery ticket for generic firms
• Various strategies by pharma firms to deal
with this
• Anticompetitive?
“Cork in the bottle”
•
Pay first PIV filer to stay out of market
•
Constrained by FTC challenges in early 2000s
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•
•
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Competitors can’t enter if first to file waits, so 180 day exclusivity
doesn’t start
Zeneca-Barr: Nolvadex (tamoxifen)
Abbott-Geneva: Hytrin
Hoechst (Aventis)-Andrx: Cardizem CD
SP-UpshurSmith & SP-ESI Lederle: K-Dur
BMS–American Biosciences: Taxol
2005 change: Generic firm loses exclusivity if don’t
introduce after winning PIV challenge
Authorized generics
•
•
Launch “authorized generic” before 180 day exclusivity
begins, to compete with PIV winner
•
Examples
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•
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Often co-marketed with a different generic firm
2003: GSK Paxil via Par: Cut Apotex (PIV winner) sales ~$400m
•
•
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Paxil: $3.37 a dose
GSK-Par generic paroxetine: $2.88
Apotex paroxetine: $2.97
2004-2005: P&G Macrobid via Watson (vs. Mylan); J&J Duragesec via
Sandoz (vs. Mylan; kept +50% share)
2006-2008: Merck Zocor via Proscar (vs. Dr. Reddy); S-A Ambien via
Prasco (v. Ranbaxy); AZ Prilosec via Ranbaxy
FDA listing, 09/2008: 286 AGs (~140 distinct drugs) since
2004
Generic delays
•
Feb 2008, FTC filed lawsuit against Cephalon Inc.
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Alleges illegally delayed generics for Provigil (narcolepsy)
Paid $200m to 4 generics: Teva, Ranbaxy, Barr, Mylan to push
entry to 2012
7-year (orphan) market exclusivity expired 2006; patent expires
2015
Cephalon says patent settlements are legal and benefits
consumers because 2012 rather than 2015
Cephalon CEO Frank Baldino in conference call with analysts:
“We were able to get six more years of patent protection. That's
$4 billion in sales that no one expected.”
Provigil sales = $800m per year
Source: WSJ Feb 2008
Effect (Goldman Sachs study)
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•
Authorized generic now common
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PIV share down: 62% v. 42% at 24 wks
G-S expects most off-patent drugs to have authorized
generics
•
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Reduced value of Para IV by 45%-50%
Bigger discount: 50% v. 35% at 24 weeks
Exceptions: Difficult-to-formulate drugs, with few competitors
poised to enter
Note the role of authorized generics:
•
•
Less to generate profits directly (because more generic competition
lowers generic prices faster -> more erosion of brand profits)
More to make generic entry less attractive
Generics in the EU
• Generics have a high market share in
•
Germany and the UK
But much lower elsewhere
• Fewer mandatory substitution laws
• Price controls make entry less attractive
• No Bolar provision
• Strategic behavior by pharma firms?
• “Patent thickets”
Recent issue in generic policy
• What is a “generic biologic”?
• Problem: biologics are much harder to
manufacture than small-molecule drugs
• Lots of learning by doing
• Even originators have trouble with consistency
(J&J and EPO)
• Should policy be different? Should existing
policy change?
Generic biologics: ↑ fixed costs → ↓entry & ↑prices
Source: Grabowski, Ridley, & Schulman, 2007
Obama projects $9b savings over 10 years
from generic biologics
Savings
Payment Shift
($b),
2010-201
$176.6 Establish competitive bidding for Medicare Advantage
9
$37.1 Change Medicare home health payments
$23.9 Reallocate Medicare and Medicaid Improvement Funds
$19.6 Increase and extend rebates on drugs purchased by
Medicaid
$17.8 Bundle
Medicare payments for hospital & post-hospital care
$12.1 Create quality incentive payments for hospitals
$9.2 Allow FDA approval of generic biotech drugs
$8.4 Drive down hospital readmission rates for Medicare
$2.0 Ensure Medicare pays accurately
$0.6 Correct Medicaid coding through NCCI
$0.3 Use radiology benefit managers for Medicare
$0.2 Expand family planning for Medicaid
Data exclusivity
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Cannot use innovator's clinical trials for specified time
•
Ensures reward for clinical trials even if
•
•
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Concurrent with patent
Patent expired
Patent narrow (especially true for biologics where generics are “similars”)
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New indications
•
Economic analysis of optimal exclusivity
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Ever-greening: new period of exclusivity? Proposed 1-2 years
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Buckley, Golec and Vernon: break even > 17 years
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Brill: optimal is 7 years (assumes continued branded sales, cost of capital 10%,
contribution margin, i.e. revenue – variable cost, = 60%)
Henry Grabowski: break even = 13-16 years
Not surprising 13-17 years because that’s probably what manufacturers expected
when entered market
Shorter data exclusivity -> less innovation at the margin
•
But how much less?
Surprising entrants in generic
biologics
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Branded drug firms!
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Relevant skills: clinical trials, FDA approval, marketing to
physicians
High prices make the markets attractive
Low opportunity cost (due to weak pipelines)
Who?
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Novartis (Sandoz)
Merck: 1st U.S. branded manufacturer to declare; 6 new generic
biologics by 2017
Eli Lilly
AstraZeneca: 2006 acquired Cambridge Antibody Techonologies;
2007 acquired MedImmune; 2008 declared interest (Financial
Times, Dec 22, 2008)
Who will have advantage in
generic biologic market?
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Amgen and Merck (branded) expertise
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Ranbaxy and Teva (generic) expertise
•
What about a company doing both: Novartis/Sandoz?
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Science
Marketing
Challenging patents
Speed to market (1 month delay matters)
Low-cost production
Sandoz scientists can talk to Novartis scientists
Less aggressive? Over 2 years Sandoz filed 8 challenges vs. Teva
filed 24
Examples of “switches”
Lifecycle management: OTCs
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“Over-the-counter” switches
Possible for particular disease classes
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But headache, allergies, heartburn....
Advantages for firms:
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Not cancer, AIDS
Exploit brand name capital developed through direct-to-consumer
advertising
Expansion of market
But perhaps a more competitive market, with returns dragged down
by advertising expenses
Advantages for patients/society:
•
•
Expanded access?
Lower prices or just cost-shifting?
OTC Sales Growth ($b)
Source: Reuters Business Insights 2003
Global market $100b
U.S. market $20b
$B

Drivers: 

Manufacturers applying for OTC to extend product life
after patent expiry
Regulators approving OTC due to pressure from payers
(inc. governments)
Consumers using more OTC due to DTC ads
View of insurers
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Support OTC because shifts costs to patients and
decreases physician visits
Step therapy or prior authorization (PA) required by
some insurers...example:
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Try Claritin OTC
Then other prescription non-steroidal anti-inflammatory (NSAs):
Allegra(Aventis), Zyrtec(Pfizer=>JNJ), Clarinex(SP)
Then steroidal sprays: Flonase(GSK), Nasonex(SP)
Then asthma drugs: Singulair(Merck) approved in Jan 2003 for
allergy
Other insurers less aggressive but use PA threat in
bargaining with manufacturers
Some insurers will reimburse for OTC
Source: http://www.rxsolutions.com/c/pbi/pbi_view.asp?docid=339
Traditional Criteria for OTC
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Safe
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Not habit forming
Wide safety margin to cover overdose
Acceptable side effects
No serious adverse experiences
Not mask serious underlying disorder
Easily administered
Therapy, not preventative
Non-serious
Symptomatic (so easy to identify)
Heartburn OTC
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Prilosec OTC approved June 2003, launched Sep 2003
Proton pump inhibitor (PPI) for short-term treatment of heartburn
and other symptoms of gastroesophageal reflux disease (GERD)
Gastrointestinal OTC market $2.3B (3rd biggest)
Competition?
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H2-antagonist OTC (e.g., Pepcid, Zantac)
Prescription PPI (e.g., Nexium, Prevacid)
No other PPI OTC (unlike Claritin & Alavert)
AstraZeneca manufactures, but Procter & Gamble sells. Are
incentives properly aligned?
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AstraZeneca also sells Nexium
Write contracts (with big penalties) to penalize shortages
Price?
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Drugstore.com: $20 for month’s supply < less than most co-pays for PPIs
Allergy OTC
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2006: JNJ acquired Zyrtec from
Pfizer
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$16B for Pfizer’s consumer unit
JNJ is world’s biggest maker of
OTC (including Tylenol at $1B per
year)
2007: Zyrtec approved OTC
Zyrtec prescription patients:
Where they went
Allegra
Flonase
Claritin
Zyrtec
27% of Zyrtec Rx patients switched to Zyrtec OTC
Source: Nielsen (OTC) and Wolters Kluwer Health (Rx) 2008
Zyrtec OTC patients:
Where they came from
Flonase
Claritin
Most of Zyrtec OTC’s patients came from other OTC
Source: Nielsen (OTC) and Wolters Kluwer Health (Rx) 2008
Additional OTC competition

Wyeth’s OTC experience:
–

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Advil, Robitussin, Centrum,
Caltrate, Dimetapp, Anacin,
Dristan, Chapstick,
Preparation H, Primeatene
Claritin did not have 3-year
exclusivity (no new study)
Wyeth launched OTC (same
active ingredient as Claritin)
Interaction with Rx market
•
GSK’s ad campaign:
•
Flonase (steroidal spray) has
preferred status on formularies,
including Aetna & CIGNA
•
If unhappy that insurance no
longer covers Claritin then switch
to Flonase
Source: http://www.rxsolutions.com/c/pbi/pbi_view.asp?docid=339
Future OTC Sales Growth?
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Acne
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Erectile dysfunction
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Allergy
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GERD
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Antifungal
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Growth hormone
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Antivirals
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Migraine
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Asthma
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Muscle Relaxants
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Cholesterol
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Contraceptives
OTC for statins in US?
US market shares for statins
Zocor
Mevacor
Pravachol
Lipitor
Others
Source: WSJ 11/11/03
Merck
(+J&J):
Zocor &
Mevacor
High cholesterol is under-treated
Rx Eligible Americans
(Millions)
26 million
25
18 million
Rx treated
20
Rx focus
15
10
OTC
Option
5
0
3-5 million
Moderate Risk
10-20% 10 yr CHD Risk
Primary Prevention
9-11
million
High Risk
Secondary Prevention/
CHD Risk Equivalents
Source: 1.NHANES 1994, 2.IMS 2003, 3. Matt Taliaferro
Anti-Cholesterol OTC
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1987 Mevacor US patent expired
2004 UK launch of OTC “Zocor Heart Pro”
2006 Zocor US patent expired
2007 Merck made 3rd attempt to get FDA to switch
Mevacor to OTC
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FDA agreed to accept foreign data in support of application
GSK would market it
Rejected over concerns that consumers not follow instructions
What about (below-the counter) BTC?
Weight loss OTC (Alli)
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2000s: prescription orlistat low sales, in part because diet drugs
rarely covered by insurance
2004: GSK paid Roche $100m & undisclosed share of future
revenue for OTC rights to orlistat
Jan 2006: FDA advisory committee recommended approval
April 2006: GSK received “approvable” letter from FDA
Jun 2007: Alli launched as 1st FDA-approved OTC diet. Price:
$1.80/day
Late 2007: Request permission for Europe, Canada, Australia, New
Zealand, China, Latin America
•
Oct 2008: European Medicines Agency recommended OTC for
60mg dose
OTC in Europe
•
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Last year, Pfizer abandoned bid to make 50-milligram
Viagra available OTC in Europe
European Medicines Agency's Committee for
Medicinal Products for Human Use concerns:
•
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No medical supervision which could delay diagnosis of overt
and silent cardiovascular disease, of which ED can be an early
marker
Recreational use
Would have been only 2nd EU-wide approved switch
Rx to OTC
OTC in UK
•
Medicines & Healthcare products Regulatory Agency (MHRA)
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Zocor Heart Pro (cholesterol)
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Erectile Dysfunction
•
Oral contraceptives
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Prescription only medicine (POM)
Pharmacy without prescription, supervision of pharmacist (P)
General sale (GSL)
Migraine (Imigran Recovery from GSK)
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Switched to P in 2007
P pilot in 2007: Alliance Boots selling Viagra in 3 retail locations
Criteria: men 30-65, provide medical history to pharmacist, evaluated blood
pressure, cholesterol and glucose levels. After meeting with a pharmacist, men will
be able to purchase 4 tablets for 50 pounds ($97) without a prescription, but will
be required to see a doctor should they want a refill.
Considering move to P
Concern: will pharmacists verify that patients are not vulnerable to thrombosis?
Lifecycle management: new
formulations
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Improved versions of existing treatments
•
•
Better dosing, fewer side effects
New indications, pediatric versions
Require new clinical trials for additional exclusivity years
•
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Provision of the Hatch-Waxman Act
Exclusivity only for new formulation
Advantages for firms:
•
•
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Exploit existing relationships with prescribers who are comfortable with
the product
Expansion of market
But a weaker bargaining position with insurers, governments
Advantages for patients/society:
•
Better product?
Examples of follow-ons
Policy on follow-ons
• It’s tempting to dismiss new formulations as
marginal improvements
• Some “new uses” are questionable
• But:
•
•
Botox can be used to treat crossed eyes, migraines,
and many spastic disorders like Parkinson’s
How can policy preserve incentives to find these new
uses?
Key points
• Patent expiration has a huge impact on
revenues for drug firms
• Which affects R&D financing cycles when credit is
•
tight
Which means pharma firms have a number of
approaches to managing the impact
• Policymakers should anticipate these strategic
responses
• What incentives are created by legislation?
• What is required to encourage generic competition?
Kaletra case
• Under what circumstances do you think
compulsory licensing is justified?
• What diseases?
• What countries?
• Do you think compulsory licensing will be
effective in providing access to treatments
in the long run?