Why Are Some Generics Prices Rising?
Business and Operations
Rising Generics Prices Confound Conventional Wisdom. What’s Going On?
Use of generics continues to grow, and most prices are holding constant or declining. But those generic drugs where the prices are increasing are getting a great deal of attention, and are begging the question, “What’s going on?”
Continued Growth of Generics
The story of generics is well known: they are lower-cost alternatives to branded drugs that improve the access to drugs, while lowering the cost.
In general, this story is continuing to play out. A study by the Health Care Cost Institute found that the use of generic medications grew by 8% in 2012, while the use of branded drugs fell by more than 20%.1
The use of generics continues to grow in community pharmacies. According to the 2013 NCPA Digest, community pharmacists dispensed generic drugs 77% of the time in 2012, up from 72% in 2011.2 The increased dispensing of generics is driven by more branded drugs coming off patent and continued efforts by pharmacists to help customers switch to lower-cost alternatives. NCPA found that 94% of independent pharmacies recommend switches to generic drugs when appropriate, and the recommended switch is accepted 81% of the time.3 With other major branded drugs coming off patent in the next few years, including Nexium, Cymbalta, Lunesta, Celebrex, and Crestor, several industry analysts estimate that within five years, generics will approach 90% of all prescriptions.4
For retail pharmacies, generics have helped with margins. An IMS executive was quoted in Drug Store News as saying that pharmacy retailers “generally make more margin for a generic product than they do for a branded product.”5 Also, one of the large chains reported a “positive effect of generic drug sales” that helped bolster pharmacy margins.6
Generics Pricing
Different analyses of generics pricing yields slightly different findings:
- Health Care Cost Institute found that the average price for generic prescriptions rose 5.3% in 2012, compared to a 25.4% increase for branded prescriptions.7
- Drug Channels, by industry expert Adam Fein, analyzed National Average Drug Acquisition Cost (NADAC) data collected by CMS. He found that the median price of generic drugs declined by 3% from November 2012 to November 2013. He also found that about two-thirds of generic drugs declined in price during this time, with most declines between 0% and 25%. About one-third of generic drugs increased in cost during this time, with most increases between 0% and 25%.8
- Research by the McKesson OneStop Generics® team found that in 2012, 83% of generic items had constant or decreased prices (64% were constant and 19% were decreased), compared to 2004 when 88% were constant or decreased (45% were constant and 43% decreased). That means in 2012, 17% of items had price increases, compared with only 12% that had price increases in 2004. Further, the amount of the price increases was higher in 2012, with an average price increase in 2012 of 20% versus an average increase in 2004 of 11%; and the amount of decreases was lower, with a 13% average decrease in 2012 compared to an 18% average decline in 2004.9
Interestingly, Drug Channels’ analysis also found that while most instances where there have been price increases have been moderate, 6% of generic products had price increases of more than 100% and 12 drugs experienced changes in the NADAC per unit of more than 2000%.10
Drug Channels wrote, “In theory, pharmacies should also benefit, because gross dollars per script grow. However, some pharmacy owners complain that third-party payer reimbursement aren’t keeping pace with these increases. The profit squeeze appears most intense when the payer uses a Maximum Allowable Cost (MAC) approach.”11 NCPA’s president-elect recently said that in several cases the PBM reimbursement does not cover the community pharmacy’s cost to purchase the drug.12
Why Are Prices Increasing for Some Generics?
Even though there are relatively few generics experiencing large price increases, the impact of those that are can be significant. Commonly cited reasons for these price increases are:
- Industry consolidation. There has been a consolidation of generic manufacturers and buyers, including the acquisition of Watson by Actavis, and the acquisitions by Sandoz (part of Novartis) of Fougera. Fewer suppliers means less competition, which can mean higher prices.13
- Delays with regulatory approval. Increasing the costs of generics and delaying new competitive entries into the market is a slow regulatory approval process. Before a manufacturer can market a generic drug, it must submit to the FDA’s Office of Generic Drugs (OGD) and have approved an Original Abbreviated New Drug Approval (ANDA). But in 2012, a record of 1,059 ANDAs were received while only 516 were approved, contributing to a record backlog of 2,933 pending ANDAs; this compares to a backlog in 2005 of just 891.14 In addition to the increased number of ANDA submissions, reasons for the backlog include:
- Slower approval. In 2005, the median approval time was 16.3 months, which rose to 29.5 months for those ANDAs approved in 2012.15
- Multiple sites. Many ANDAs have two sites that must be inspected, including a primary manufacturing site and the manufacturing site of the active pharmaceutical ingredient (API) supplier. But many ANDA applications involve multiple API suppliers, multiple packaging sites, alternate manufacturing sites, and outside testing labs, which may also need inspection. Thus, one expert believes that the 1,000 ANDAs submitted in 2012 may require inspections of 3,000–5,000 sites. And, when multiple sites have to be inspected, the average approval time increases to about 34 months.16
- Plant shutdowns. When manufacturers — both in the U.S. and abroad — aren’t able to meet the FDA’s quality standards, they may have to shut down to resolve these issues.17 Also, if a manufacturer isn’t achieving adequate levels of profitability, it may simply decide to voluntarily discontinue making a product. These actions all limit supply, which can result in increased prices.18
- Import bans. International companies experiencing quality issues may find their products banned until these issues are resolved, as is highlighted by the Indian examples of Wockhardt19 and Ranbaxy.20
These factors all deal with supply limitations, which lessen the amount of competition in a particular area, resulting in higher pricing. As the approval backlog is reduced and the number of approved manufacturers increases, competition may prevent or reduce further price increases for particular generics.
Future Outlook
Experts within McKesson and across the industry believe that price increases for generics could continue in the short term, with uncertainty over the longer term. Price increases will continue to be affected by industry consolidation, slow ANDA approval, continued FDA compliance scrutiny, and market dynamics that discourage new entrants.
However, other longer-term factors could limit price increases, such as more branded drugs going off patent and pressure among payers to control costs. Also, ANDA approvals are expected to accelerate due to the passage and implementation of GDUFA (Generic Drug User Fee Amendments). However, while GDUFA is expected to accelerate the ANDA approval process, significant improvement is not expected for some time.
To learn more about actions your pharmacy can take to navigate this environment, speak with your McKesson representative about the McKesson OneStop Generics program.
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