The Federal Trade Commission's decision to study the practice of authorized generics could become moot if the marketing of such products by brand companies becomes financially unattractive due to a potential change in Medicaid "best price" reporting requirements.

Language in congressional budget reconciliation packages would require authorized generics to be included in "best price" calculations for brand drugs (¹ Also see "Drug Safety Funding To Increase By $10 Mil. Under FDA Appropriations" - Pink Sheet, 7 November, 2005., p. 6).

If the provision becomes law, it could eliminate the incentive for brand companies to market their own generic products, or to license their NDAs to companies that specialize in marketing authorized generics.

"I think you could potentially see a number of authorized generic companies go away" if the best price language in the reconciliation packages becomes law, Greenstone President William Kennally said Oct. 24 at the Pharmaceutical Care Management Association annual meeting in Palm Springs, Calif. Greenstone is Pfizer's in-house generic division.

"Destroying" The Authorized Generics Industry

The potential change in best price reporting requirements could "destroy" the authorized generics industry, Prasco Labs' Steven Hoffman asserted during an American Enterprise Institute program Oct. 31.

Hoffman serves as an advisor to the chairman of Prasco, which markets authorized generics including unbranded versions of Sanofi-Aventis' Allegra and Arava .

The Generic Pharmaceutical Association "has gone to the courts on a number of occasions over the last two years, and every court decision has basically said 'go away,' that this is not a violation of Hatch/Waxman," Hoffman said. "Now that they've failed in that strategy, they're running to Congress, and they've convinced a few senators to get the FTC to do a study."

"But they're not happy with the FTC doing the study, they have to lobby to get Congress in the reconciliation bill to try to destroy the industry by requiring best price through Medicaid," Hoffman said.

GPhA said that it is "encouraged" that FTC is conducting the study.

"This study puts us one step closer to closing the unintended loophole that has allowed these products to infiltrate the healthcare system," the association said Nov. 9.

Short-Run And Long-Term Impacts

In a Nov. 4 letter to Senate Finance Committee Chairman Chuck Grassley (R-Iowa), FTC Chairman Deborah Majoras announced that the commission would undertake a study on the impact of authorized generics.

In May, Sens. Grassley, Patrick Leahy (D-Vt.) and John Rockefeller (D-W.Va.) requested FTC conduct a study (² Also see "FTC Should Study Competitive Impact Of “Authorized” Generics, Senators Say" - Pink Sheet, 16 May, 2005., p. 3).

In her letter to Grassley, Majoras explained that the study will analyze "how competition between Paragraph IV generics and authorized generics during the 180-day exclusivity period has affected short-run price competition and long-run prospects for entry by Paragraph IV generics."

It will also "build on the economic literature about the effect of generic drug entry on prescription drug prices."

Majoras noted that since the time that the senators requested the study, she has "been working with commission staff to assess what we already know about authorized generics and whether they have been on the market long enough to render a study worthwhile."

Grassley called the study "good news for consumers."

"I'm concerned that the practice of 'authorized' generics might give reason for the generic industry to stay away from investing in generic drugs as well as possibly jeopardize the vitality of the industry in the long term," Grassley said in a press release.

FTC Expects Two-Year Timeline

FTC said the study should take about two years to complete, with at least nine months dedicated to securing Office of Management & Budget approval.

The commission issued its landmark study on patent listings and generic drug competition in July 2002, slightly less than two years after the agency initially released details about its plans for the study.

However, the study took about a year longer than initially anticipated (³ Also see "FTC To Testify On Generic Reform; Agency Report May Be “Months” Away" - Pink Sheet, 22 April, 2002., p. 10).

FTC held hearings and surveyed approximately 30 brand firms and 60 generic firms for the study. The agency initially estimated that it would cost each company between $55,700 and $98,000 and take between 90 and 400 hours to prepare a response (⁴ [A#00620420001], p. 4).

The specific details of FTC's forthcoming analysis of authorized generics remain unclear, although the commission does not expect to hold workshops or hearings as part of the study.

Brand Companies Conduct Their Own Studies

In a sign of brand companies' heightened interest in the profitability of authorized generics, Johnson & Johnson and Pfizer have sponsored their own studies on the economic and competitive impact of such products.

The companies' studies examined whether authorized generics would decrease the number of Paragraph IV certifications filed and the expected profitability for ANDA filers - the same issues that FTC intends to study.

The J&J-sponsored study, "Authorized Generic Drugs, Price Competition and Consumers' Welfare," analyzed data for 29 drugs that had generic entrants between 1999 and 2003.

"Authorized generic entry has been increasing since" 1998, but it "does not appear to affect the number of Paragraph IV certifications," study co-author Ernst Berndt (MIT Sloan School of Management) said at the AEI forum in October.

The study found that the short-term effects of authorized generics included additional competition and lower drug costs for consumers, Berndt said.

Citing as an example Teva's "at risk" launch in September of generic Allegra under Barr's exclusivity, Berndt asserted that the presence or threat of authorized generics may accelerate independent generic entry.

According to Berndt, the threat of authorized generics also may make ANDA filers reconsider submitting Paragraph IV certifications in those cases where they are unlikely to prevail.

"Filings with the least [likelihood] of success will most likely be deterred, thereby avoiding litigation costs, and freeing up some money for R&D," Berndt said.

Berndt's study found that long-term effects of authorized drugs on price were ambiguous, and that "any changes in the long-run number of generics are unlikely to affect generic price and share for many drugs with more than four or five generic entrants."

However, economist Tomas Philipson (University of Chicago) suggested during the AEI forum that the J&J-sponsored study does not settle the question of whether authorized generics are pro-competitive or anti-competitive.

Philipson formerly served as a senior economic advisor at FDA and the Centers for Medicare & Medicaid Services.

Pfizer Studies Break-Even Points

At the Sixth Annual Generic Drugs Summit in Washington, D.C. Sept. 30, Greenstone's Kennally said Pfizer conducted a study beginning in January 2003 that examined all Paragraph IV tablet and capsule launches, excluding contraceptive products, over an 18-month period.

The study determined the "break-even" point for ANDA companies, assuming a $10 mil. investment for the Paragraph IV filing and litigation costs. In instances where authorized generics were present, generic companies needed a brand product with sales of $89 mil. to begin to make a profit, in contrast to brand product sales of $50 mil. without the presence of an authorized generic.

Pfizer determined that for a brand product with $500 mil. in sales, the ANDA filer's return on investment without a separate authorized generic launch was 941%. That figure became 461% with a separate authorized generic launch.

"As to whether authorized generics create a disincentive for patent challenges due to reduced profitability, I would suggest the answer to that is no," Kennally said.

Authorized Generics Noose Tightens With “Best Price” Proposal, FTC Study

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