Big Pharma’s Big Headache

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We may be witnessing a slowly developing economic recovery, but that’s little consolation to the pharmaceutical industry. This year, according to the New York Times, drug companies will see annual sales of almost $50 billion evaporate. Why? Because the patents for more than 10 major drug brands will expire.

It’s a reality that has lingered for years. A drug company invests huge amounts of money in R&D and finally wins approval to bring a drug to market under a brand name.

But that drug can only be protected by a patent for a certain number of years; when the patent expires, generic versions of the drug can be sold, almost always at a cheaper price. Take Tylenol, for example, one of the brand names for acetaminophen. [more]

Today, consumers can buy the generic version of acetaminophen, which often sits on a store shelf right next to Tylenol. By law, the generic version must contain the same active ingredients as the brand name, but the generic drug costs less.

While consumers may exhibit some amount of brand loyalty, there aren’t many compelling reasons to keep buying the name brand if a generic works just as well at a lower price. Typically, the price difference in prescription drugs versus generics is even greater, so when a brand name prescription medication “goes generic,” the impact on a drug company can be enormous.

Part of the reason consumers may be less loyal to a brand name drug could be the fact that, oftentimes, the name is nonsensical. This is largely due to regulators, particularly in the United States, who restrict names from being too promissory or suggestive of what the drug can accomplish.

Coming up with a distinctive, easily remembered name — such as a Prozac or Viagra — isn’t as easy as the consumer might think. There are also so many drug names in the marketplace that it is difficult to come up with anything new.

As a result drug companies are likely to propose brand names that are less than meaningful. As Bill Flook commented in Washington Business Journal, “The Food and Drug Administration subjects proposed drug names to intense scrutiny, and drugmakers take pains to make sure a product’s name doesn’t end up delaying its trip to the market.” 

Patent expirations and nomenclature are two of the many problems facing a pharmaceutical industry “that just a few years ago was the world’s most profitable business sector but is now under pressure to reinvent itself and shed its dependence on blockbuster drugs,” writes Duff Wilson in the New York Times.

Drug companies are also feeling the heat from insurance companies and the government who, in an effort to control health care costs, want them to keep drug prices reasonable. Recent health care legislation in the US was supported by the pharmaceutical industry, but calls for government price controls.

In addition, the drug companies are not having the kind of success with major drug introductions that they had in the past; the cost associated with testing new drugs is sometimes prohibitive and, in the US, fewer new drugs are being approved. And there’s also some consumer uncertainty in the wake of recalls.

Kenneth I. Kaitin, director of the Center for the Study of Drug Development at Tufts University in Massachusetts, told the New York Times, “This is panic time, this is truly panic time for the industry. I don’t think there’s a company out there that doesn’t realize they don’t have enough products in the pipeline or the portfolio, don’t have enough revenue to sustain their research and development.

What’s the answer? For now, drug companies seem to be trying to solve the problem by buying their way out of it, “essentially paying cash for future revenue as their own research was flagging.” That explains the industry consolidation that has taken place in recent years. Examples include Merck buying Schering-Plough, Pfizer buying Wyeth,  Roche buying Genentech, and Sanofi-Aventis buying Genzyme.

Still, “75 percent of all prescriptions in the United States are now low-price, low-profit generic drugs,” and drug companies are under pressure globally to lower the prices of their name brand medications.

This year seems to be just the beginning of a long-term migraine for the pharmaceutical industry.

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