The U.S. healthcare system presents a paradox: It’s the most expensive system in the world, and yet it produces among the worst results among developed countries. According to the most recent report from the National Health Expenditure Accounts, spending on health care reached $2.6 trillion in 2010, or more than $8,400 per person and around 18% of the country’s gross domestic product.
Because these costs are expected to rise as more Americans retire and live longer, which will result in a greater number of people with chronic conditions, it’s as imperative to find a way to reduce the costs of health care in the long term as it is to ensure that everybody has adequate access to it. Specialty drugs for such conditions as cancers and autoimmune disorders are among the most expensive drugs in the world and already account for a rising share of drug costs overall — about 17% of global drug spending will come from biologics by 2016. Because of the unavoidably high costs of specialty drugs, one important way to reduce the cost of health care is to increase the use of generic drugs.
Generics have saved consumers and the healthcare system $1 trillion over the past decade, according to a new study released earlier this month by the Generic Pharmaceutical Association. Between 2002 and 2011, generics saved the country $1 billion every other day, totaling $193 billion in 2011.
“The remarkable findings demonstrated in this report are a testament not only to the generic industry’s tremendous accomplishments over the past decade, but [also] to the even greater achievements that are still to come,” GPhA president and CEO Ralph Neas said. “The ‘Generic Drug Savings’ study shows conclusively that, as Congress and the White House gear up for the fiscal challenges facing them in the coming year, generic and biosimilar utilization are the best places to go for the ‘offsets’ that everyone will be desperately seeking. The sustainability of the healthcare system and the national economy depend in significant measure on the availability of affordable medicines.”
The study, commissioned by the GPhA and conducted by IMS Health’s research division, also found that 2011 had the highest year-over-year increase in savings from generics since 1998, as savings increased 22%, compared with 2010. Savings from generics that have entered the market since 2002 have increased as well, totaling $481 billion over the decade. Meanwhile, 57% of the annual savings came from generic drugs for central nervous system disorders, such as antidepressants and anticonvulsants, as well as cardiovascular drugs. Nearly 80% of the 4 billion prescriptions written in 2011 were for generics, while accounting for only 27% of drug spending.
The trend seen in the GPhA’s study has been happening for some time now. But it’s also accelerating, and that means a lot for drug makers and policy-makers alike.
According to a study last month by IMS Health, global spending on generics is expected to rise from $242 billion in 2011 to more than $400 billion by 2016. Much of that will come from volume growth in emerging-market countries, but a lot of it is also due to the transition to generics in developed countries like the United States. The report noted that limited savings from expiring patents are prompting policy shifts to encourage more use of generics. And this has been going on for some time: Last year, another report by IMS found that while spending on branded drugs decreased by 0.7% in 2010, spending on branded and unbranded generics rose by 4.5% and 21.7%, respectively. That report also found that on average, more than 80% of a brand’s prescription volume is replaced by generics within six months of the expiration of the branded drug’s patent.
As analysts like IMS VP industry relations Doug Long have said before, the blockbuster model of drug development is coming to an end. While drug companies might still develop new treatments for widespread disease states like cholesterol and gastroesophageal reflux disease, new drugs to treat those conditions are unlikely to see the kinds of sales achieved by the likes of Pfizer’s cholesterol drug Lipitor (atorvastatin), whose sales reached $7.7 billion in 2011 but which lost patent protection in November 2011. Instead, many drug companies are shifting their focus to more expensive drugs to treat disease states with smaller patient populations, like cancers and autoimmune disorders. Meanwhile, the more common conditions will be treated more and more with cheaper generic drugs.
For policy-makers, the move toward generics means drug therapies will become cheaper, which will go a long way toward making health care overall cheaper. For that reason, it behooves them and also healthcare providers ranging from physicians to pharmacists to make sure patients know when a generic drug for their condition is available so that neither they nor their payers have to spend an arm and a leg to keep them healthy.
Though specialty drugs will account for a greater share of drug spending overall, biosimilars will help mitigate the costs of those as well. On July 10, President Barack Obama signed what some called a “historic” reauthorization of the Prescription Drug User Fee Act. Starting Oct. 1, the generic drug industry will pay $299 million per year in user fees over the next five years, which will help pay for more Food and Drug Administration staff and help clear a backlog of some 2,500 generic drug applications and inspections of more manufacturers’ production plants. But there’s another important part of the law: It creates a user fee program for companies that make biosimilars, for which the Patient Protection and Affordable Care Act created the country’s first ever regulatory approval pathway.
Federal officials and drug makers are still working on regulations for biosimilars, with the FDA releasing draft guidance on biosimilars in February 2012, but once those are done and in place, they’ll make available cheaper knockoff versions of biotech drugs. Currently, Teva Pharmaceutical Industries, Sandoz and Hospira are the main manufacturers of biosimilars for the European market, but other companies have been looking into the game also. In June 2012, Indian generic drug maker Dr. Reddy’s Labs and German drug maker Merck KGaA — which operates in the United States under the name EMD to avoid confusion with American drug maker Merck — signed a deal to develop biosimilars, mostly monoclonal antibodies, for cancer.
And the generic wave is good news for pharmacy retailers as well. According to an analysis by the Federal Trade Commission, generics tend to generate higher profit margins for retailers, and an analysis by Credit Suisse showed that the generic wave could add 6% to 7% to their earnings this year. The nearly 40 drugs expected to lose patent protection through 2016 will help that figure along in the years to come as well. They also have a multiplier effect because though a 30-day supply of a generic drug can cost as little as $4, a customer who comes in to pick up a prescription may also be tempted to buy supplements, makeup or soft drinks before heading out the door.