Pfizer’s Lipitor Strategy Changes the Generics Game

Lipitor, the best-selling drug of all-time, off patent in the US

Pfizer’s patent on the cholesterol-lowering medication Lipitor expired on Wednesday, opening the door to generic competitors in the US.

Lipitor came on the market in 1997, and has yielded nearly $100 billion for Pfizer, which according to CNBC represents about a quarter of Pfizer’s total revenue over the past decade.

When a drug’s patent expires, the first generic company to file is usually granted a six-month period of exclusivity to offer the generic version of the drug. Following the initial six-month exclusivity period, additional generics companies are allowed to also offer the drug and the market quickly becomes commoditized.  Typically, the exclusivity period results in prices 25% below the original brand price, followed by continued price erosion to as much as 80% or more as multiple generics enter the market.  In the past, upon patent expiration, the original drug maker would often raise the price of the brand to offset some of the volume decline and usually shift commercial focus to its newer products.  Ultimately the brand would retain less than 10 percent of the market share by volume (usually 3-5% after a few years).

However, Pfizer – in an effort to preserve the value of the Lipitor brand – has implemented a new, aggressive post-patent strategy to maintain as much of the Lipitor market as possible. Pfizer claims more than one-third of its Lipitor patients prefer to stay on Lipitor.

Pfizer’s strategy includes:

—Offering insured patients a discount card to get Lipitor for $4 a month, far below the $25 average copayment for a preferred brand-name drug and below the $10 average copay for a generic drug. Pfizer is promoting this heavily through ads, direct marketing to patients and its http://www.LipitorForYou.com site.

—Paying pharmacies to mail Lipitor patients offers for the $4 copay card and to counsel patients that Lipitor lowers bad cholesterol more than rival drugs.

—Keeping U.S. marketing spending nearly level through the patent expiration date.

— Negotiating never-before-seen exclusive deals with some insurance plans (e.g., Coventry Health Care), pharmacies and prescription benefit managers (e.g., Medco Health Solutions, Catalyst Rx, CVS/Caremark and Express Scripts) to exclusively offer Lipitor at heavily discounted prices to block pharmacists and mail-order services from dispensing generic Lipitor.

In a memo from CVS/Caremark, a pharmacy benefit management company, and dated Monday, pharmacies were notified that the generic form of Lipitor, called atorvastatin, would not be covered for 29 prescription drug plans it managed for Medicare Part D. Instead, any prescription claims for generic atorvastatin will be rejected with a notice saying: “Brand Lipitor will pay at generic co-pay.”

Watson launches generic

US-based Watson Pharmaceuticals immediately announced its launch of an “authorized generic” version of Lipitor, atorvastatin calcium, under an exclusive supply and distribution agreement with Pfizer, whereby Pfizer manufactures the drug and Watson sells it with its brand name, sharing net sales with Pfizer until 2016.

Watson CEO Paul Bisaro said he had thought Pfizer would retain about 25% of Lipitor users for the next six months, but he now believes that number to be 40% to 45%.”

“This is sort of the new generation of brand protection,” he added.

Here is an interview with Watson CEO, Paul Bisaro, discussing Pfizer’s new strategy Lipitor strategy.

Meanwhile generics company Ranbaxy continues to have problems

Ranbaxy, India’s largest drug maker, is the other company entitled to sell generic Lipitor during the six-month, post-patent exclusivity period. However, an actual launch depends on whether FDA regulators lift a ban that has kept Ranbaxy from exporting some products to the United States following quality control lapses at the firm’s Indian factories.  According to estimates from Mumbai-based analysts surveyed by Bloomberg, Ranbaxy is estimated to generate as much as $650 million from generic Lipitor sales.  However, that number is likely to be modified if Ranbaxy is limited to sales outside the United Sates.

Patients seem to benefit from Pfizer’s new strategy

 Patients stand to benefit from a program that offers the branded drug at the same lower price or lower than its generic version.  While generic medicines are supposed to work the same as brand drugs for nearly everyone, some patients prefer the brand, especially if costs are comparable.  Thus far, Pfizer’s new strategy seems to be popular among Lipitor users, saying sign-ups for its $4 discount card have exceeded its goals.

Pfizer after Lipitor

 As companies compete for market share of the cheaper generic version of Lipitor, Pfizer is left hunting for new sources of revenue to replace the cash flow from its blockbuster.  However, it is well documented that pharmaceutical companies have been struggling to come up with new blockbusters, as discussed in this Forbes article.

Pfizer has not released its projected losses due to the patent expiration, but its company forecasts call for sales in 2012 of $63-63.5 billion, versus $67.8 billion in 2010. Lipitor global sales were over $10 billion last year, and Morningstar analyst Damien Conover estimates a sales figure of $3.8 billion in 2012 – still among the top of drug sales.

Ramifications for the pharmaceutical industry

Pfizer’s aggressive strategy may offer lessons for drug makers facing similar losses of patent protection for other blockbuster drugs over the next few years, and may chart a new path for shifts between the big pharmaceutical companies and generic rivals.  However, it’s important to remember this new model makes the most financial sense during the first six months following patent loss when significant margins still exist, but thereafter it seems the current generics model will remain unchanged.

This new strategy also highlights an emerging trend seen within the pharmaceutical industry wherein the lines between traditional “pharma” companies and “generics” companies are becoming increasingly blurred as their markets begin to overlap.  For a deeper look at this please see Bourne Capital Partner’s October 2011 Generics Report.

Other notes:

European Lipitor patent coverage – As of July 2011, Lipitor had already gone off patent in Spain, Finland and Norway, but elsewhere across the EU the drug remained protected as Pfizer seeks six-month extensions in at least 11 other markets, including the UK, France and Germany.

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Drug Blockbusters Coming Off Patent – Ramifications for Ireland

Ireland is the largest net exporter of pharmaceuticals and medical products in the world, according to Dublin-based industry group PharmaChemical Ireland. However, as discussed in a recent Bloomberg article, the Irish drug manufacturing industry is facing a new set of challenges as many of the blockbuster drug patents have expired or are set to expire in the near future. This has resulted in some well-publicized factory closures, including Pfizer’s announcement in May that it was leaving its plants at Dun Laoghaire and County Cork. The manufacturing site in Cork was dedicated to Lipitor formulation, which will come off patent in the U.S. on Nov. 30, 2011. Likewise, Johnson & Johnson closed its Cashel manufacturing plant with the loss of 133 jobs.

Additional ramifications for Ireland include the following:

1. Five of the world’s top-selling dozen medicines are produced in Ireland, and their sales will fall 52 percent to $13 billion by 2013 from $27 billion in 2010 as their patents expire. (Data compiled by Bloomberg based on analysts’ estimates).

2. The Irish Exporters Association (IEA) on Nov. 4 cut its 2012 growth forecast to 1.6 percent from 2.5 percent. It predicted that exports would grow by 3.8 percent next year, compared with an April forecast of 5.7 percent, based largely on the decrease in exports already seen YTD in the pharma/chemical sector. This will likely hinder Ireland’s prospects of exporting its way out of the economic crisis affecting all of Europe.

3. Drugs companies in Ireland paid just over €1.0 billion of tax in 2010, a figure that is likely to decrease if Ireland maintains its business-friendly 12.5 percent corporate tax. See Table 1 below for comparative European area corporate tax rates.

4. Ireland is fighting to keep its drug-manufacturing stronghold by pitching its low corporate tax rate and relatively cheap labor. According to the European Commission, Irish unit labor costs have declined strongly. In 2010, unit labor costs fell 4.9 percent. They are seen falling 2.5 percent in 2011 and 0.9 percent in 2012.

Some of the ramifications for the pharmaceutical industry include the following:

1. A surplus of manufacturing throughput in all of the EU and continued health care pricing pressure from single-payor negotiated national agreements for treatment procedures, fee structures and rate ceilings are resulting in tougher operating conditions for drug manufacturers in Europe.  According to Washington Monthly, Europe’s pharmaceutical businesses make one-third of their profits in the U.S. market because they can charge five times as much in the U.S. for the same pill made in the same factory.  If the U.S. moves to a more regulated health care system similar to the European model, the entire pharmaceutical industry including drug manufacturers will likely feel the effect.

2. Increased drug manufacturing competition from areas outside of the EU (see India and China – low labor costs and growing throughput; Singapore – low taxes). In India, generic-drug companies are investing heavily in large state-of-the-art manufacturing and development facilities to meet the anticipated generics demand, which is further discussed here. In Singapore, Merck has invested an estimated $1.5 billion, including a commitment to invest an additional $250 million over the next 10 years for new manufacturing, marketing, and research activities. A recent survey by Eric Langer of Pharmaceutical Technology (Volume 35, Issue 8, pp. 78-80) shows Asia gaining quickly among the potential biomanufacturing outsourcing destinations. See Chart 1 below.

TABLE 1: CORPORATE TAX RATES

CHART 1: POTENTIAL BIOMANUFACTURING OUTSOURCING DESTINATIONS

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Updated Numbers from the Venture Capital Industry – Focus on Healthcare

Venture capital investments and raises are down for the third quarter as compared to the second quarter of 2011, but numbers remain consistent with the last 3 years. Among the investments made, there was a trend towards larger deal sizes for later stage companies. Perhaps of more significance was the sharp drop in money raised in the third quarter, which marked the lowest amount raised in a quarter since the third quarter of 2003

Venture Capital Investments

For the first three quarters of 2011, venture capitalists invested $21.2 billion into 2,725 deals, representing 20% more dollars and 3% more deals than the first three quarters of 2010. The 2011 pace already exceeds the $19.7 billion invested in 2009.

Venture capitalists invested $6.95 billion in 876 deals in the third quarter of 2011, which represents a 12% decrease in terms of dollars and 14% decrease in the number of deals compared to the second quarter of 2011 when $7.9 billion was invested in 1,015 deals. Additional VC data are provided by the National Venture Capital Association, including Regional Data and data going back to 1995.

Healthcare Investment Breakdown

For the 3rd quarter, the Biotechnology industry was the second largest sector for dollars invested with $1.1 billion (versus $1.34 billion in Q2) going into 96 deals, falling 18% in dollars and 20% in deals from the prior quarter. The Medical Devices and Equipment industry also experienced a decline, dropping 18% in Q3 to $728 million, while the number of deals declined 21% to 74 deals. Overall, investments in the Life Sciences sector (Biotechnology and Medical Devices) fell 18% in dollars and 21% in deals, dropping to the second lowest quarterly deal volume since the first quarter of 2005. To the contrary, Healthcare Services investments surged with $152 million going into 11 deals (a 200% increase in dollars and 38% increase in deal volume over the second quarter).

BIOTECH VC INVESTMENT

HEALTHCARE SERVICES VC INVESTMENT

MEDICAL DEVICE & EQUIPMENT VC INVESTMENT

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Reuters

Venture Capital Deal Structures

The total number of VC deals thus far for 2011 (876) is up 3% from last year, but down 14% from the second quarter with a trend towards larger average deals going into expansion and later stage companies. See the Table 1 below. The later stage average deal size of $12.5 million represents the largest average deal size for this stage in a decade.

TABLE 1: Total VC Deals by Stage of Development

Within the healthcare sector, the number of deals is also down in Q3 and YTD for 2011. See Table 2 below.

TABLE 2: Number of Deals within the Different Healthcare Sectors

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Reuters

Amount Raised

52 U.S. venture capital funds raised $1.72 billion in the third quarter of 2011, according to Thomson Reuters and the National Venture Capital Association (NVCA). This level marks a 53% decrease by dollar commitments and a 4% decline by number of funds compared to the third quarter of 2010, which saw 53 funds raise $3.5 billion during the period. The third quarter marked the lowest amount raised in a quarter since the third quarter of 2003. See chart below.

FUNDRAISING BY VENTURE FUNDS

Despite the challenging environment for VC firms, particularly those with a focus on healthcare, Sofinnova Ventures created its eighth venture fund during the quarter, with a total of $440 million in new capital to invest, bringing its total money under management to $1.4 billion. Read more about the raise here.

Factors Affecting VC Investments and Raises

The Economy
Mark Heesen, president of the NVCA, explained, “Public policy challenges in the life sciences and clean technology sectors are impacting investment levels this quarter as is the IPO market that basically came to a screeching halt in August.”

Regulatory Environment
Part of the reason was the difficult and unpredictable nature of the approval process at the Food and Drug Administration, said Tracy Lefteroff, global managing partner of PricewaterhouseCoopers’ venture capital practice.

“Challenges in the regulatory environment for Life Sciences companies are prompting VCs to look to other industries to put their money to work for a faster return on their investment as indicated by the notable increase in Software investments,” Lefteroff said.

“Accordingly, over the past two quarters, we’ve seen a clear shift in Life Sciences investments from Seed/Early Stage companies over to more Later Stage companies.

Among companies, Reata Pharmaceuticals Inc. got the largest investment of the quarter, $300 million. Founded in 2002, the company develops oral anti-inflammatory drugs.

Similar Trends Seen in Healthcare M&A Transactions

Some of the same factors affecting the VC industry, namely an uncertain economic picture and a challenging regulatory environment, have also slowed M&A activity. Managements of many firms have reported a wait-and-see attitude in regard to potential transaction activity. As illustrated below, global deal volume and values across all sectors are down for the past few quarters. A similar pattern is also seen in the healthcare sector (see lower chart).

GLOBAL M&A VALUES AND VOLUME – ALL SECTORS

GLOBAL M&A VALUES AND VOLUME – HEALTHCARE

Source: Bourne Partners Internal Research

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Drug Shortages in the U.S. – An Industry Perspective

A recent Food and Drug Administration (FDA) workshop learned that drug shortages nearly tripled between 2005 and 2010. Of the 178 drug shortages in 2010, 132 were generic sterile injectable drugs, including anesthetics, cancer drugs, and intravenous nutrition drugs. Of all 2010 shortages, more than half had roots in production quality issues, such as product instability and contamination.

There are currently 172 drug shortages, of which 131 are generic injectables.  2011 shortage numbers are on pace to exceed the totals of the year prior, indicating this issue remains a relevant, ongoing problem.

Many companies choose not to make these products because they are not as profitable as other drugs, and manufacturing them is complex. The FDA acknowledged the problem and added that few manufacturers produce the medications to meet the nation’s needs, thus contributing to the increasingly common shortage of drugs.

A partial list of drugs in short supply as reported voluntarily by drug manufacturers is provided here:

http://www.fda.gov/drugs/drugsafety/drugshortages/ucm050792.htm

Possible Causes

The drug shortage situation in the U.S., including possible causes of shortages were discussed at a House Energy and Commerce health subcommittee hearing on Sept. 23.
Some of the possible causes include the following:

  • Deferred maintenance at manufacturing facilities that produce hard-to-make sterile injectable drugs may lead to disrupted production while they resolve contamination issues. Relatively few facilities produce these drugs, so they are under pressure to operate continually without maintenance.
  • Drug manufacturers claim the FDA’s sometimes long approval processes have limited manufacturers’ production abilities (i.e., manufacturers can’t quickly address shortage issues).
  • Generic Pharmaceutical Assn. President and CEO Ralph G. Neas claims such common factors as insufficient supplies of raw materials to meet demand, delayed communications about shortages, and changes in clinical practices have altered production volume.
  • Business and economic factors have lowered profit margins for generic sterile injectable drugs, which has led some businesses to discontinue production of certain drugs.
  • Health care prices, including those for drugs, aren’t determined by patient demand, said W. Charles Penley, MD, a medical oncologist with Tennessee Oncology in Nashville who testified at the hearing. “This is not a free-market environment.”

A summary of the House Energy and Commerce Committee hearing, including comments from industry leaders and medical professionals is provided in the American Medical News article linked here:

http://www.ama-assn.org/amednews/2011/10/03/gvl21003.htm

Situation being investigated by Congress, including the role of gray markets

According to a Premier report entitled, “Buyer beware: Drug shortages and the gray market”, gray market pharmaceutical vendors are offering drugs in short supply at an average markup of 650%.

http://www.premierinc.com/about/news/11-aug/Gray-Market/Gray-Market-Analysis-08152011.pdf

As the drug shortage situation has gathered more attention nationally, Democratic Representative Elijah Cummings, a member of the House Committee on Oversight and Government Reform, has begun an investigation into the role five “grey market” middleman companies play in the shortage and how they may be capitalizing on it. Specifically, the investigation aims to determine how the alleged companies are obtaining the drugs and how much they are making in profits by selling them to hospitals, pharmacies and health providers.

http://www.pharmatimes.com/Article/11-10-10/US_drug_shortages_soar_Congressman_probes_grey_marketeers.aspx

A bill by Rep. Diana DeGette (D, Colo.) would ask drug manufacturers to tell the FDA about drug shortages six months in advance, if possible. The agency would be able to keep such warnings confidential to prevent drug hoarding, but it also could notify health professionals and hospitals when appropriate.

Currently, drugmakers rarely have to notify the FDA of drug manufacturing issues. The exception is when a company plans to discontinue a lifesaving drug for which it is the only manufacturer.

Possible solutions

Prescription drug shortages – especially acute for sterile injectable generic cancer drugs – have multiple causes and require multiple solutions, according to the American Society of Clinical Oncology. Proposed solutions include the following:

  • Expediting Food and Drug Administration approval for drugs vulnerable to shortages without compromising patient safety or drug quality.
  • Updating Medicare’s generic drug pricing methodology frequently, especially for shortage drugs.
  • Enacting bipartisan legislation to give the FDA authority to require a drug manufacturer to notify the agency when the company becomes aware of potential shortages.
  • Providing tax incentives to encourage makers of generic drugs to upgrade their facilities and continue or begin producing shortage drugs.
  • Increasing collaboration between government agencies to create a stockpiling program similar to counterterrorism programs.
  • Encouraging other companies to take over or boost their production of shortage drugs when possible. Although the FDA does not have the authority to require drugmakers to increase production, the agency or other government agencies may consider offering incentives to companies to fill the shortage gap.

Below are links to a summary of the Sept. 23rd drug shortage hearing held by the House Energy and Commerce health subcommittee, and an archived webcast of the hearing:

http://www.hhs.gov/asl/testify/2011/09/t20110923a.html

and

energycommerce.house.gov/hearings/hearingdetail.aspx?NewsID=8926

Finally, here is a recent video piece from PBS that explores how drug shortages affect patients and health providers:

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Diabetes Is One of the Fastest Growing Segments of the Healthcare Market

The increasing number of diabetes patients globally is proving a boom for the diabetes drugs market. On a global scale, there are currently 285 million people in the world diagnosed with diabetes. According to Frost & Sullivan, it is estimated that by 2030 the number of people living with diabetes will increase to 483 million patients.

The overall market is witnessing significant growth due to the increasing incidence of diabetes and the corresponding increase in government support for diabetes care. Governments all over the world are taking huge initiatives on various research and development projects in order to improve their diabetes drug delivery techniques

China and India are currently the biggest diabetes markets. According to figures released by the International Diabetes Federation (IDF), in October 2009, China was estimated to have 43.2 million diabetics, compared to 50.8 million in India. According to the IDF, the number of diabetics in India is expected to increase to 87 million. As diabetics around the world still remain under-diagnosed, there continues to be a high global demand for the treatment and prevention of diabetes.

Approximately 24 million Americans have been diagnosed with diabetes, and another 12 million are expected to be diagnosed by 2020, according to the American Diabetes Association (ADA). Diabetes creates a huge burden for those diagnosed, including a loss in productivity levels. A survey from the ADA puts the toll of lost productivity and caring for diabetic patients at a whopping $218 billion annually in the United States alone.

The increase in the number of patients with the type 2 form of the disease, plus the emergence of potential new drug treatments, is expected to raise competition within the diabetes market. This shows a great opportunity for investors to take advantage of the rapidly growing and demanding industry.

A few companies poised to take advantage of the growing diabetes market include:

Amylin Pharmaceuticals Inc.

Ticker: AMLN

Company description:   Amylin markets two medicines to treat diabetes, BYETTA (exenatide) and SYMLIN (pramlintide acetate) injection. It is also currently seeking approval for BYDUREON (exenatide extended-release for injectable suspension), a medication for type-II diabetes, which is administered only once a week.

Novo-Nordisk

Ticker: NONOF

Company description:

Novo Nordisk is a focused healthcare company and a world leader in diabetes care.  The company has a new drug to improve blood-sugar levels as well as weight control. Called Victoza, the treatment won FDA approval in January 2010 and has been available in some European countries and Japan since 2009.

Prodigy Meters

Private

Company description: Prodigy Meters develops, manufactures, and markets audible blood glucose monitoring systems for diabetes patients. It offers meters that help blind and people with low vision to test their blood glucose levels.

LifeScan Inc.

A Johnson&Johnson Company

Company description: LifeScan, Inc. develops, manufactures, and distributes blood glucose monitoring systems for home and hospital use. It offers blood glucose meters, test strips, and lancing devices.

 

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Healthcare Services Sector Leading Industry’s Private Equity Exit Activity

The services sector continues to lead the healthcare industry in exits, accounting for 48% of completed private equity liquidity events so far in 2011.

Private equity firms have exited 144 healthcare companies since 2008.  Recently, KRG Capital Partners and Bain Capital Ventures sold dialysis services provider, Liberty Dialysis Holdings to Fresenius Medical Care for $1.7 billion.  Also, private equity firm TA Associates backed American Access Care who also agreed to be acquired by Fresenius Medical Care in a $385 million transaction.

The chart below illustrates that the services sector continues to have the largest percentage of private equity exits in the healthcare industry, while the healthcare technology sector has grown the most year-over-year.

* As of 8/4/11

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FDA 2011 Drug Approvals Already Top 2010 Totals

The current year is trending to a recent record for new drug approvals over the past few years. Thus far in 2011, the US Food and Drug Administration (FDA) has approved 21 drugs topping 2010’s total approvals. The FDA approved 21 new drugs in 2010 compared to 25 in 2009 and 21 approved in 2008. The number of new drugs approved has remained in the 20- 25 range by the FDA and European Medicines Agency (EMA) each during the past 4 years.

The FDA’s drug approval figures involve drugs or biologics that are made from living cells, which are considered to be new types of products. So far,  new treatments have been approved for lupus (Human Genome Sciences’s Benlysta), melanoma (Bristol-Myers Squibb’s Yervoy), prostate cancer (J&J’s Zytiga), hepatitis C (Vertex’s Incivek) and Seizures (GSK and Valeant), to name a few. Also, in many cases, these new approved drugs offer a significant improvement over existing treatments.

There are still more than a dozen more drug candidates that are scheduled for review by year-end including, Seattle Genetics’ Adcetris (brentuximab vedotin), a first-in-class cancer drug, to treat cytotoxic payload. At this pace, the FDA is likely to approve more drugs this year than the previous years. The increase in drug approvals is part of a general improvement in the biopharmaceutical sector. We believe the performance of the life sciences industry this year is shaping up to be relatively strong.

Read more: http://www.pharmatimes.com/Article/11-08-04/2011_s_US_new_drug_approvals_already_match_2010_s_total.aspx

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