THE RISE IN GENERIC DRUG PRICES: HOW WILL PAYERS FACE THIS CHALLENGE?

ORANGEPAPER

expedited and less costly process to bring generic medications to the market. It established an abbreviated new drug application (ANDA) process whereby generic drug companies are to provide proof of bioequivalence.2 The latter is established in order to demonstrate that the effects of the generic are similar (but not necessarily identical) to those of the originator drug. The Act also allows applicants to initiate testing before the brand patent expires. Importantly, generic drug manufacturers are also granted a 180-day exclusivity period for the first ANDA filing.

Since the enactment of the Hatch-Waxman Act, the generic industry has grown consistently and generics have become a significant majority of the prescription drug market, in volume, in the United States. To date, there are more than 1,600 generic products available in the marketplace. Five pharmaceutical companies dominate the generic drug market: Teva Pharmaceuticals, Sandoz (generic division of Novartis), Actavis, Aspen Pharmacare, and Mylan. Altogether, these companies account for 47 percent of global market share.3 In 2013, the bestselling generics in the United States included analgesics (hydrocodone/acetaminophen), metabolic drugs (levothyroxine, metformin), and cardiovascular drugs (lisinopril, metoprolol, simvastatin, amlodipine).

The generic industry is influenced by several factors including; economic, political/regulatory and demographic. The cost of generic drugs is the main growth driver. As generic drugs are less costly to develop than branded drugs, these drugs are sold at substantial discounts from the original branded drug price. Prime Therapeutics, the fourth largest Pharmacy Benefit Manager (PBM) in the nation recently released the net ingredient cost per prescription. In 2013, Prime Therapeutics’ net ingredient cost was as low as $19.84 for a generic prescription, in comparison to $161.15 for a brand name drug prescription

THE RISE IN GENERIC DRUG PRICES: HOW WILL PAYERS FACE THIS CHALLENGE?

The enactment of the Hatch-Waxman Act in 1984 triggered an unprecedented rise in the supply of generics. The ever-increasing pressure on managed care organizations (MCOs) to contain healthcare costs resulted in a concomitant increase in the demand of low-cost generic drugs. Over the past decades, generics have become a valuable and powerful tool to mitigate high prescription drug expenditures in the United States as a method to use cost-effective generic drugs as therapeutic alternatives to costly brand drugs. In 2013 alone, generics saved federal and state programs, consumers, taxpayers, businesses and others $239 billion. However, the price of certain generic drugs has been on the rise over the past year. This may be attributed to a decline in competition within the generic industry that may have led the remaining companies to increase the price of their products. Higher cost generics represent a new challenge faced by payers who have to ensure that patients continue to have access to safe and affordable medications. This paper provides an overview of the current generic drug market and the challenges faced by the generic industry. It also addresses the impact of the rise in generics prices and payers’ strategies to mitigate this trend.

OVERVIEW OF GENERIC DRUG MARKETA generic drug is a copy of an “originator” drug marketed after the expiration date of commercial protection (patent, exclusivity rights) granted to the innovator manufacturer. According to the United States Food and Drug Administration (FDA), generic drugs (hereafter, generics) are similar to the originator drugs in dosage form, safety, strength, route of administration, quality, performance characteristics and intended use.1 In the United States, the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, created an

1. Understanding Generic Drugs. U.S. Food and Drug Administration, Silver Spring, 2012. http://www.fda.gov/Drugs/ResourcesForYou/Consumers/BuyingUsingMedicineSafely/ UnderstandingGenericDrugs/default.htm

2. Guidance for Industry: Bioavailability and Bioequivalence Studies for Orally Administered Drug Products – General Considerations. U.S. Department of Health and Human Services Food and Drug Administration, Center for Drug Evaluation and Research (CDER). March 2003. Available at: http://www.fda.gov/downloads/Drugs/Guidances/ucm070124.pdf

3. World Preview 2014, Outlook to 2020. EvaluatePharma®. June 2014. Available at: http://www.evaluategroup.com/public/reports/EvaluatePharma-World-Preview-2014.aspx

and $3,149.25 for a specialty drug prescription.4 Generics represent a significant source of financial savings for society. A report from the Generic Pharmaceutical Association indicates that generics saved federal and state programs, consumers, taxpayers, businesses and others $239 billion in 2013, alone. This savings represents a 14 percent increase over cost savings achieved in 2012.5 In their efforts to contain healthcare costs, the government and private payers adopted various strategies to encourage the utilization of generics by physicians, pharmacists and patients. In 2013, generics constituted 86 percent of all prescriptions filled in the United States. Generic spending grew by $5.8 billion in 2013, compared to the $8.5 billion increase in 2012.6 This trend is expected to continue. The expansion of healthcare insurance coverage to over 30 million uninsured Americans is anticipated to increase utilization of pharmaceuticals including generics. The United States Department of Health and Human Services reported that more than 8 million individuals enrolled in Health Insurance Exchanges, and 4.8 million additional individuals enrolled in Medicaid and CHIP through the end of March 2014.7 Prescription drug spending is projected to increase by 6.5 percent, annually, partly attributed to an increased pharmaceutical usage from the elderly (over 65 years old), who will account for 22 percent of the population by 2020.8

The generic industry is reliant on expiration of patents protecting brand name pharmaceuticals. Drugs worth an estimated $103 billion lost their patents between 2009 and 2012. These include Lipitor® (Pfizer), Plavix® (Sanofi), Seroquel® (AstraZeneca), Singulair® (Merck), and Zyprexa® (Eli Lilly). The patent cliff continues to challenge branded pharmaceutical companies, while driving the growth of the generic industry. Table 1 presents a sample of blockbuster drugs that lost patent protection in 2013 and 2014.9, 10 IMS Health estimates the value of pharmaceutical products (excluding biologics) exposed to generic competition, as a result of loss of exclusivity between 2013 and 2019, at $94 billion. Generic drug makers may not reap much benefit from patent expiration in 2015. Four out of the top ten drugs losing patent protection in 2015 are biologics–Lantus® (Sanofi), Copaxone® (Teva), Neulasta® (Amgen) and Synagis® (AstraZeneca). These drugs account for $17.7 billion in global sales.11

4. Looking Back Moving Forward – 2013 Report on Prescription Drug costs. Prime Therapeutics. Available at: http://cdn2.content.compendiumblog.com/uploads/user/220a4eb2- dd7f-4520-ab96-7cfb9e87326b/8e648f20-2a6c-4610-9b15-849b37ce4f51/File/c8ea45ca5f37f3c8048bd8e82779c650/5476_k_reportrxdrugcosts_2014.pdf

5. Generic Drug Savings in the U.S. Sixth Annual Edition: 2014. Generic Pharmaceutical Association. Available at: http://www.gphaonline.org/media/cms/GPhA_Savings_ Report.9.10.14_FINAL.pdf

6. Medicine Use and Shifting Costs of Healthcare, a Review of the Use of Medicines in the United States in 2013. IMS Institute for Healthcare Informatics. April 2014. Available at:http://www.imshealth.com/deployedfiles/imshealth/Global/Content/Corporate/IMS%20Health%20Institute/Reports/Secure/IIHI_US_Use_of_Meds_for_2013.pdf

7. Enrollment in the Health Insurance Marketplace Totals over 8 Million People. The U.S. Department of Health and Human Services. News Release. May 1, 2014. Available at: http://www.hhs.gov/news/press/2014pres/05/20140501a.html

8. National Health Expenditure Projections 2012-2022. Centers for Medicare and Medicaid Services. Available at: http://www.cms.gov/Research-Statistics-Data-and-Systems/ Statistics-Trends-and-Reports/NationalHealthExpendData/downloads/proj2012.pdf

9. Top15DrugPatentLossesof2013.FiercePharma.November1,2012.Availableat:http://www.fiercepharma.com/special-reports/top-15-patent-expirations-2013

10.Top10DrugPatentLossesof2014.FiercePharma.October28,2013.Availableat:http://www.fiercepharma.com/special-reports/top-10-drug-patent-losses-2014

11.Top10PatentLossesof2015.FiercePharma.December17,2014.Availableat:http://www.fiercepharma.com/special-reports/top-10-patent-expirations-2015

Table 1: Sample of Drug Patent Losses of 2013 and 2014

Brand Name Drug Generic Name Indication Manufacturer Expiration Date Global Sales 2012

(Billion)

SMALL MOLECULES

Cymbalta Duloxetine Anxiety, Depression Eli Lilly Dec. 2013 $4.9

Humalog Insulin lispro Diabetes Eli Lilly May 2013 $2.52

OxyContin Oxycodone Pain Purdue Pharma Aug. 2013 $2.35

AcipHex Rabeprazole Gastroesophageal Eisai, Johnson May 2013 $1.93 efflux disease and Johnson

Xeloda Capecitabine Breast and Roche Dec. 2013 $1.62 colorectal cancer

Zometa Zoledronic acid Cancer-induced Novartis Mar. 2013 $1.26 bone damage

Nexium Esomeprazole Gastroesophageal AstraZeneca May 2014 $3.994 magnesium efflux disease, heartburn

Micardis/Micardis HCT Telmisartan Hypertension Boehringer Jan. 2014 $2.217 Ingelheim

Sandostatin LAR Octreotide acetate Cancer Novartis Jun. 2014 $1.512

Exforge/Exforge HCT Amlodipine/ Hypertension Novartis Oct. 2014 $1.352 Valsartan

Nasonex Mometasone Respiratory allergies Merck Schering Jan. 2014 $1.268 furoate Plough monohydrate

Trilipix Fenofibric acid Cholesterol, Abbvie Jan. 2014 $1.098 triglycerides treatment

BIOLOGICS

Avonex Interferon beta 1a Multiple Sclerosis Biogen Idec Dec. 2013 $2.9

Rebif Interferon beta 1a Multiple Sclerosis Merck Dec. 2013 $2.3

Procrit Epoetin alfa Anemia Johnson and Aug. 2013 $1.41 Johnson

Neupogen Filgrastim Neutropenia Amgen, Kirin, Dec. 2013 $1.29 Roche

CHALLENGES FACING THE GENERICS INDUSTRYGeneric drug manufacturers are faced with various challenges. The government is placing increased pressure on drug prices. The Patient Protection and Affordable Care Act (PPACA) increased the minimum rebate amount paid by generic drug manufacturers to Medicaid from 11 to 13 percent of the average manufacturer price (AMP). These rebates are paid under the Medicaid drug rebate program, established to offset federal and state costs of most outpatient prescription drugs dispensed to Medicaid beneficiaries.12 In addition, the government is imposing more regulations on generic drug makers. The FDA recently proposed a new rule allowing drug manufacturers to update product labeling to reflect data obtained through post-marketing surveillance. This rule is intended to improve the communication of important drug safety information about generic drugs to both prescribers and patients.13 If finalized, the rule may increase generic drug manufacturers’ liability risk, resulting in higher manufacturer costs and generic prices attributed to higher insurance premiums and greater use of resources to monitor safety-related issues.14

Scientific challenges such as methodologies to evaluate therapeutic equivalence and post-approval assessment of generics can also hinder the development and commercialization of generics. To address these issues and foster innovation in the generic industry, the FDA leverages the user fees collected from manufacturers, in accordance with the Generic Drug User Fee Amendments (GDUFA), to fund initiatives designed to develop guidance for the industry and provide access to safe and effective generic drugs. Post-market evaluation of generic drugs, quality-by-design,

bioequivalence and pharmacokinetic evaluation of complex products, and computational and analytical tools count among the topics that warrant further study.15

Generic drug manufacturers operate within a highly competitive industry. By making a generic drug’s entry to the market easier and less costly, the Hatch-Waxman Act led to an increase in the manufacturers producing the same drug. These companies rely on economies of scale and manufacturing to compete on prices. Compounding the problem is the rise of “pay-for-delay” agreements to settle patent litigation between brand name and generic pharmaceutical companies. These agreements allow brand name drug manufacturers to pay a generic competitor to hold its competing product off the market for a certain period of time; thereby delaying generic competition. The Federal Trade Commission reported that these anticompetitive deals cost consumers and taxpayers $3.5 billion in higher drug costs every year. While “pay-for-delay” agreements were deemed automatically per se illegal in 2005, the misapplication of the antitrust law resulted in their re-emergence. A pay-for-delay jury trial over Nexium® (AstraZeneca) was recently initiated. Purchasers of the drug including drug wholesalers, consumers and insurance companies claimed that AstraZeneca, TEVA Pharmaceuticals and Ranbaxy conspired to keep generic versions of Nexium® off the market for six years.16 Brand name pharmaceutical companies use other strategies to maintain their market share and limit losses from patent expirations. For example, Teva Pharmaceuticals developed a new formulation for its blockbuster biologic Copaxone®, which generated $4.328 billion in global sales in 2013 and lost patent protection

12.MedicaidDrugRebateProgram.Medicaid.http://www.medicaid.gov/medicaid-chip-program-information/by-topics/benefits/prescription-drugs/medicaid-drug-rebate-program.html

13. Examining Concerns Regarding FDA’s Proposed Changes to Generic Drug Labeling. The U.S. Food and Drug Administration. News and Events. April 1, 2014. Available at: http:// www.fda.gov/NewsEvents/Testimony/ucm389606.htm

14. Brill A. FDA’s Proposed Generic Drug Labeling Rule: An Economic Assessment. Matrix Global Advisors. February 2014. Available at: http://www.gphaonline.org/media/cms/ Economic_Impact_Study_FDA_Labeling_Rule_-_MGA.pdf

15. GDUFA Regulatory Science. U.S. Food and Drug Administration. Updated 10/27/2014. Available at: http://www.fda.gov/ForIndustry/UserFees/GenericDrugUserFees/ucm370952.htm

in May 2014. The FDA approved the company’s supplemental new drug application (sNDA) for three-times-a-week Copaxone® 40 mg protected until 2030.17 The company is currently engaged in a patent litigation process to shield Copaxone® from generic competition. A ruling is expected by the end of the year. In the meantime, generic drug makers including Mylan and Momenta Pharmaceuticals/Sandoz have submitted ANDA for generic versions of Coapxone® (20 mg and 40 mg). The applications are currently under review by the FDA.

GENERICS IN THE MANAGED CARE MARKET The government and MCOs have introduced various measures to encourage prescribing, dispensing and utilization of generics by doctors, pharmacists, and patients, respectively, in an effort to drive cost-effective medication prescribing where clinically appropriate. The main strategies utilized to increase generic drug utilization include generic substitution, a process whereby an expensive brand drug, which no longer has patent exclusivity, can be substituted with a less expensive AB-rated generic drug, which is therapeutically equivalent to the branded drug. This can be performed by prescribing physicians and pharmacists according to federal and state laws. Generic drugs are dispensed based on multiple elements, including the FDA Orange Book rating (and whether a rating is available), and how the prescription was written by the physician and state regulations. Presently, the majority of states permit and often mandate generic substitution by pharmacists, unless specifically indicated on the prescription by the prescribing physician.

Therapeutic interchange represents an additional mode of generating savings from generics utilization. In this case, the prescriber switches a branded drug to a generic in the same therapeutic class. Various

drug utilization management tools are employed by health plans and PBMs to promote this practice. These include generics-first step therapy programs, which encourages the use of generic drugs before trying a brand name drug, and prior authorization, which ensures the appropriate use of selected prescription drugs. Additionally, many health plans offer financial incentives to entice physicians to prescribe generic medicines. This practice remains highly controversial—presently, financial incentives are indirect and can be accounted for in a pay-for-performance.

PBMs promote the use of Dispense as Written (DAW) codes by pharmacists to dispense a generic drug when no party requests the branded version of a multi-source product (DAW 0). Payers and PBMs optimize the design of benefit plans to promote the utilization of generics by members. Generic drugs are associated with lower out-of-pocket payment (co-payment or co-insurance) levels than brand name drugs. Out-of-pocket costs may also be waived for generic versions of maintenance medications used for chronic conditions like hypertension and diabetes. Payers and PBMs also use communication strategies to promote the adoption of generics by healthcare providers and patients. They develop educational programs, or offer coupons or vouchers for generics to patients.

It is important to note that the adoption of generics has a considerable impact on brand name pricing. In the face of the generic competition, brand name pharmaceutical companies offer better discounts through rebates to PBMs and payers, further reducing prescription drug spending. Additionally, consumers pay a reduced average price for brand name drugs.

16. Lipman M. Nexium Pay-For-Delay Jury Told Size Of Settlement Is Key. Law360, New York. October 21, 2014. Available at: http://www.law360.com/articles/589136/nexium-pay- for-delay-jury-told-size-of-settlement-is-key

17. Teva Announces U.S. FDA Approval of Three-Times-a-Week COPAXONE® (glatiramer acetate injection) 40mg/mL. Teva Pharmaceutical Industries. News. January 28, 2014. Available at: http://www.Tevapharm.com/Media/News/Pages/2014/1894510.aspx

RISE IN GENERICS PRICESDespite the positive impact of generics on overall healthcare expenditures, additional strategies must be implemented to maintain and/or maximize the function of generics in the managed care market. This is highlighted by reports indicating that the price of certain generics has been on the rise over the last year, starting in October 2013. The price increase ranges from 388 percent on average for a 50 mg-vial of nitropress, up to 8,281 percent on average for a bottle of 500 tablets of doxycycline hyclate (100 mg).18 To gain some insight into the underlying causes of this phenomenon, two members of Congress issued letters to 14 drug manufacturers; including Teva, Mylan, and Actavis. Information and documents requested by lawmakers included the total gross revenues from the company’s sales of the drug of interest, purchasing information for all sales of the drug, and sales contracts or purchase agreements for active pharmaceutical ingredients for the drug since January 2012.

In recent developments, two generic drug manufacturers (Lannett and Impax Laboratories) disclosed that employees had received grand jury subpoenas from the Justice Department, demanding any information on pricing discussions with their competitors. These companies are suspected to have engaged in criminal antitrust conduct in the form of price-fixing or customer allocation. A recent article shed some light on potential reasons underlying the jump in generic prices. The decline in competition within the generic industry may have led the remaining companies to increase the price of their products.20 A Senate panel convened on November 20, 2014, to investigate the current context of generic price increases. However,

generic drug manufacturers invited to testify (Lannett, Teva and Marathon) declined to respond or attend. The Senators introduced a new bill that would require generic drug companies to provide a rebate to Medicaid if their drug prices rise faster than inflation.21

IMPACT OF HIGHER COST GENERICSHigher cost generics can negatively affect patients, as they may see a significant increase in their co-payment, possibly hindering their access to vital medications. Pharmacies may also suffer from high priced generics, as they may not have the bargaining power to negotiate and secure better prices. If the rise in generic prices becomes a trend, payers would have to expand efforts to design solutions to mitigate the increased expense. A practice that may arise from high-cost generics is a formulary tiering for generic drugs with a tier 1 for low-cost preferred generics and a tier 2 including high-cost non-preferred generics. Payers and PBMs may also utilize more aggressive negotiation tactics with generic drug manufacturers to secure better drug prices. Another option may be to exclude certain high cost generic medications in closed formularies, to drive use of the more cost-effective generic versions.

On the other hand, the government may intervene to regulate the marketing and pricing of high-cost generics. Additional steps could be taken to ensure that the society continue to reap the cost-savings benefits of generic drugs. Among these is the creation of reimbursement policies and discount negotiations, and to establish policies that further encourage the development of generics by drug manufacturers.

18. Congress Investigating Why Generic Drug Prices Are Skyrocketing. Bernie Sanders United States Senator of Vermont. Newsroom. October 2, 2014. Available at: http://www.sanders.senate.gov/newsroom/press-releases/congress-investigating-why-generic-drug-prices-are-skyrocketing

19.StatonT.Genericsmakers,execsfacepotentialcriminalchargesinU.S.pricingprobe.FiercePharma,November17,2014.Availableat:http://www.fiercepharma.com/story/ generics-makers-execs-face-potential-criminal-charges-us-pricing-probe/2014-11-17

20. Alpern JD, Stauffer WM, Kesselheim AS. High-Cost Generic Drugs - Implications for Patients and Policymakers. 2014. N Engl J Med. 371:1859-1862.

21. Sanders seeks generic drug bill as he ponders 2016 run. November 20, 2014. Available at: http://www.usatoday.com/story/news/nation/2014/11/20/senators-seek-generic- drug-price-limits/70020626/

CONCLUSIONOver the past decades, payers have placed generics in the core of their strategies to control healthcare spending. The increase in adoption of generics coupled with the rise in generics development has contributed to substantial savings. Current changes in the generic drug market, resulting in price surge, represents an additional challenge faced by public and private payers. The need for novel strategies to manage generics is imperative to continue offering patients access to affordable medications. In the event that the rise in generic pricing becomes a longer-term trend, more drastic measures will need to be taken to control drug pricing and to re-evaluate the overall place of generics in the economy.

If you would like to learn more about how to manage pharmaceuticals trends, Optimity Advisors has the practical knowledge and experience to guide your organization. Our Pharmacy Advisory team is comprised of a team of advisors with extensive managed care pharmacy experience across the entire pharmacy value. Our advisors have built and implemented clinical programs, formulary management strategies, and Specialty Pharmacy programs for both payers and PBMs.

ABOUT OPTIMITY ADVISORSOptimity Advisors is a rapidly growing, multi-industry strategy, operations and information technology advisory firm with multiple locations throughout the United States, United Kingdom and Europe. We specialize in the critical set of services that sit between high-level strategy and delivery and execution. We provide a strategic outlook through proven methodology, knowledge and instinct, helping to craft an actionable future vision that aligns with your long-term goals and objectives. We bring an end-to-end industry understanding to help you rise above the day-to-day, focus on the opportunities ahead and align your organization for success.

ABOUT THE AUTHORKadija AbounitDr. Kadija Abounit has over 10 years of experience in the health care industry spanning biomedical research, regulatory affairs, and managed care. She has proven ability to combine scientific knowledge and business practices to collaborate across organizational business units to identify, design and implement strategies to control costs and improve health outcomes. Kadija’s areas of expertise include developing clinical programs and strategies for Specialty Pharmacy and Medication Adherence improvement, designing and leading research projects, developing managed care pharmacy services (e.g., Fraud Waste and Abuse and pharmacy audits, Managed Care Pharmacy workshop for Pharmaceutical companies). She earned a PhD in Pharmacology from Wayne State University and a MBA from Loyola University Maryland.

PARTNER CONTACTKenneth Barretteken.barrette@optimityadvisors.com1600 K St. NW, Suite 202Washington, DC 20006Direct: 202.341.2651Main: 202.540.9222Fax: 202.540.9223www.OptimityAdvisors.com

Washington, DC | Brussels | London | Los Angeles | New York | Zurich

www.OptimityAdvisors.com