The general – understandable – obsession of the generics industry with low prices tends to obscure the fact that some generics are actually quite expensive. This is particularly noticeable in the US, where pricing is effectively free and is constrained only by the need to retain some kind of formulary coverage and to give rebates to the state programmes, Medicare and Medicaid. Where there are multiple suppliers, the customers call the shots and prices – at the ex-factory level, at least – are very low. Where supply is limited, prices rise dramatically. The same situation is true in the UK, which also has free pricing for generics. In the UK, the BGMA* has spent long hours convincing officials at the Department of Health (DoH) that this is a manifestation of the overall success of the pricing system, which delivers massive savings on high-volume products while tolerating some additional costs on a few low-volume items. In the US, no attempt to justify price rises has ever been needed, at least to date. In Europe outside the UK, price inflation is generally not such an issue as prices are usually capped at some percentage of the innovator price irrespective of supply/demand considerations in the marketplace. Of course, since net selling prices are frequently well below the cap, this doesn’t stop upwards movement, but it prevents a monopoly supplier exploiting its position in the same way as in the UK.
In European markets where the price of more commoditised generics are particularly low, it has become the norm for larger companies to rely on a handful of more profitable drugs to carry the rest of the portfolio: smaller companies try to avoid more competitive products altogether. As a result, most businesses are actually dependent for their success on a relatively limited number of drugs. The situation is somewhat different in the US, where even very competitive products tend to have much higher margins than in Europe, but even here, most companies have a couple of gems that play a disproportionate role. Think of Copaxone’s contribution to Teva’s bottom line for so many years, or Mylan’s success first with fentanyl patches and now with Epipen.
We have argued previously that cross-subsidies within a portfolio are not a great idea because they leave companies’ profits overly concentrated, not to mention giving health authorities a false impression of what levels of commodity product pricing are sustainable over the longer term. As noted above, in the UK, the BGMA has made an explicit link between the continued availability of very cheap drugs and the ability of manufacturers to price others expensively. This is probably justified, although it clearly only holds at the level of the industry as a whole and not at the level of the individual firm, since not every company sells both types of drug. Consequently, the BGMA is unlikely to have been particularly pleased by the recent press coverage of Pfizer and Flynn Pharma, who are currently being investigated by the Competition and Markets Authority after Pfizer sold its brand of phenytoin to Flynn and Flynn – which does not sell any of the high-volume medicines on which the NHS relies – then put the price up by some 2,400%, passing some of this increase back to Pfizer in the supply price.
On the other side of the Atlantic, a similar story is being played out. Buying old brands and then putting up prices has long been a tactic employed by a certain type of US company, but the size of those increases has been growing as it has become apparent that health insurers don’t really care, provided that the total sales of the drug are not that great. This is even true where the product has plenty of generic competition, as there will always be patients who, for whatever reason, prefer to stick with the innovator drug and health insurers will therefore tend to keep this on formulary, albeit on the most unfavourable tier. Nor are insured patients usually affected very much, as their co-pays are generally fixed and people with several co-morbidities will almost inevitably use up their deductible irrespective of the price of any one of their medicines.
The situation is different for the uninsured, of course, and it is partly this that has led to a backlash in the US, triggered by a small (but now notorious) company called Turing Pharma buying up the rights to an obscure drug used to treat toxoplasmosis and then raising the price by 5,500%. At least two of the 2016 presidential hopefuls have proposed various mechanisms to limit – or even reduce – drug prices and there have been numerous studies published showing how much more Americans pay for their medicines than citizens in other countries. The chance of any of these ideas actually making it into law near term appears to be low, as the US pharma lobby is very strong and legislators appear largely indifferent to the opinions of the population at large. Even so, there has been something of a stockmarket rout, with the share prices of some of the most egregious operators (Valeant, for instance) falling sharply. Back in the UK, the DoH is taking a more oblique approach by suggesting that it might tweak the so-called statutory scheme, which regulates the prices of those branded products that are not included in the ‘voluntary’ PPRS. What this will actually means remains to be seen. The statutory scheme was last revised only two years ago, at which point prices were cut by 15% (as of Jan 2014). This time, the DoH is looking at imposing a further 0-10% price cut vs the price at the end of 2013 and it also appears to be considering including individual products that that have been taken out of the PPRS, not just whole company portfolios. Potentially – although this is not clear – this could mean that products that have been de-branded since the end of 2013 could have their prices pushed back to the 2013 level, which would have a significant impact on some drugs.
It is worth noting that a contributory component to the US situation is the incredibly slow rate at which the FDA is approving new generics. The average time taken for a dossier to get through the regulators has now reached about four years, which means that the natural market mechanism whereby drugs whose sales have suddenly increased are then attacked by generics is not really working. This is not true in the UK, where generics will generally arrive on a more timely basis, albeit constrained by the need to develop a dossier and get it registered.
So far, most of the complaints about price are posturing. Ultimately, some form of controls may be put in place even in the US and in the meantime the authorities may choose to attack companies for abusing a monopoly position, which will increase legal fees all round. However, the bigger impact for companies that make a living from serial acquisitions of stable or declining assets is going to be on their ability to raise debt finance. If the banks start to believe that the end is nigh for price increases, they will factor this into their forecasts and this will reduce the amount that they are prepared to lend to fund new deals. Couple this with lower share prices, which makes it tougher to issue new equity, and the end result could be fewer bidders at the table when companies or products come up for sale. More positively, a reduction in the pool of potential purchasers and in their leverage potential will also help to bring asset prices down from their current stratospheric levels, which would at least be good news for those buyers who still have plenty of cash. Time to buy, then?
‘* Local generic industry association