Generically Speaking

Aside from the ubiquitous practice of healthcare insurance companies pushing cheap, often-not-quite-as-effective (and sometimes not the right treatment at all and sometimes a perfectly acceptable substitute) generic drugs on policy-holders in lieu of the brand names, there is another tough side to life that the big pharmaceutical companies fear most of all: expiration of a patent. U.S. patents are generally issued for 20 years (there are certain reasons they can be longer… such as a delay in the filing process caused by the Patent Office), and the U.S. is the only nation that recognizes the first to invent requirement (verses the first to file). If you have a valid patent, you literally control any and all rights to that invention, which, of course, includes new medical pharmaceuticals. When the patent expires, anyone on earth can make and sell your invention without the slightest obligation to the inventor.

Given the billions of dollars of research the pharmaceutical industry pours into creating new drugs and the exceptionally costly testing and filing process required by the Federal Food and Drug Administration for certification, successful drugs often generate unbelievably high gross profit margins (the cost of making the product deducting the cost, without reference to items like general overhead, payroll, taxes, and a fair share of the other general operating costs of the company), very frequently above 80%. More average, non-pharma company gross profit margins are in the 30% range, but most companies don’t have the new product development costs that the pharmas do.

The pharmas argue that developing and then producing a new major FDA-approved drug for the marketplace usually takes between 10 and 15 years and costs about a billion dollars. Not everyone agrees with those figures, but the pharmas push those figures and add that for every one drug that breaks out, 5-10,000 drugs have to be discovered and processed at least part of the way through the system.

TheDeal.com (January 25^th) presented a list of major drugs whose patents are set to expire in the next couple of years. The analysis is fascinating and provides insight into the fervor and pitch of pharma industry lobbying on Capitol Hill. Some big companies are about to have huge revenue-generators “fall off the cliff,” as theDeal.com describes. If you are a patient taking any of the drugs described below, prepare for a cost reduction and being required to buy that drug from a much cheaper supplier.

Pfizer’s cholesterol-reducing Lipitor has generated over $80 billion dollars around the world, accounting for 28% of their revenues and making Pfizer the biggest pharma in the group. The patent on Lipitor will expire at the end of November 2011. TheDeal.com: “Pfizer's eventual loss of Lipitor revenue dwarfs the expected losses on other individual drugs losing patent protection in the next three years, but the company is hardly alone in feeling the pinch. All told, IMS Health Inc., which collects marketing data for the pharmaceutical and healthcare industries, says that more than three dozen drugs producing $137 billion in revenue are expected by 2013 to fall off the patent cliff, the apocalyptic term the industry likes to use in describing the coming end to the brand-name exclusivity that laws across the world granted their medications.” This is huge increase in revenue drops to pharmas from patent expirations as compared with the $103 billion that occurred between 2005 and 2008.

“There are numerous other best-selling drugs that in relatively short order will be off patent, such as GlaxoSmithKline plc's Seretide, an asthma drug also sold as Advair, with $7.7 billion in annual sales; AstraZeneca plc's anti-psychotic drug Seroquel, with $5.4 billion in sales; Merck & Co.'s asthma drug Singulair, with $4.7 billion in sales, and blood pressure drug Cozaar with $3.4 billion; and Pfizer antidepressant Effexor, with $4.3 billion in sales, which the company acquired when it took over Wyeth in a $68 billion acquisition in early 2009.” theDeal.com

In the end, the cost of prescription drugs is one of the most difficult issues on the healthcare agenda, no matter when that reform may occur (some now might argue “if”), and since most countries in the world with national healthcare systems effectively limit the cost of prescription drugs, the highest gross profit margins are almost always relegated to U.S. consumers. We literally bear the greatest amount of the relevant research and development costs, not just because of the volume of consumption, but because we literally have least number of restrictions on prescription drug costs. If we are to understand how to put pressures on pharmas to get those costs down, to deal effectively with our place in the schema of global pricing practices, we also have to understand how the pharmaceutical industry justifies itself to Congress and what pressures it faces to survive and prosper. We also have to understand that most nations with national healthcare have not actually bought those justifications.

I’m Peter Dekom, and the more you know, the better you will vote.