Generic drug companies that make discount knockoffs of brand name medicines are coming up against some big obstacles, even as the number of Americans using their products swells rapidly.
Health maintenance organizations and other cost-conscious managed health care plans use generics heavily and these plans are gaining new members every day. This leads some analysts to predict that by the year 2000, generics could make up 50% of the prescription drug market, up from 20% a decade ago.
That's good news for consumers who will get ready access to medicines at discounts typically between 30% and 50% off brand names.
But it's no guarantee of profits for drug makers.
For one thing, the HMOs are demanding even bigger price reductions while at the same time insisting the drug makers supply a broader selection.
Then the drug makers have to deal with an army of strict regulators from the Food and Drug Administration who have shut offending plants and ordered recalls several times this year.
In addition, the supply of generic drug candidates--brand name drugs whose patents are expiring--is declining.
Industry leaders say they're still confident of maintaining strong profit growth, but only if they meet these challenges.
"There will be those that do well, those that survive and those that won't have a critical mass of products, and will either do poorly or not survive, or will become part of a bigger company," said Phillip Frost, founder and chairman of Ivax Corp., the Miami-based industry leader.
Getting that critical mass has usually meant buyouts or alliances. Ivax, for instance, bought No. 7 generic drug maker Zenith Laboratories of Northvale, N.J.
Brand name drug maker Eli Lilly & Co. signed a deal with generic company Mylan Laboratories for the right to sell Mylan's cimetidine, a generic copy of SmithKline Beecham PLC's successful ulcer drug Tagamet.
Most analysts see these loose alliances, like Lilly and Mylan, as better choices than costly acquisitions.
"The generic companies that want to access the (managed care) channel team up with brand name drug companies by becoming suppliers," said Jack Lamberton, drug industry analyst at NatWest Securities in New York. "The brand name company that wants a wide range of drugs finds that the easy way is to team up with a generic drug company."
Most big brand name companies sell their own products as generics to protect their share of the market, but analysts say this has been a money loser, partially because the low-profit generics eat away at sales of the high-profit brand name versions.
Also, brand name companies, which are used to plush offices and executive perks, simply aren't structured to make money in the low-overhead world of generics.
"It would be like having Mercedes manufacture Volkswagens in the Mercedes plants and expect them to have reasonable prices," said Paul Hansen, a health industry specialist with the management consulting firm Towers Perrin in New York.
While alliances are helping generic drug makers sell more products, they're now finding they may have less products available to make.
Generic drug makers depend on a steady flow of new drug candidates that are available for wider production when their 17 years of patent protection is up.
But cutthroat competition among generic companies drives the prices down quickly after patent expiration, sometimes as low as 90% off the brand name.
"For some, the patent expires in May, you can only make a profit in June and July and after that it becomes very, very tough," said Arvind Desai, analyst with the New York research firm Mehta & Isaly.
This hasn't been a problem in the past two years or so because the industry has had a wealth of blockbuster brand name drugs whose patents have expired such as Xanax, for anxiety; Ceclor, an antibiotic, and Glucotrol, for diabetes.
That number is plummeting from 37 drugs this year to 13 in 1995, Gruntal & Co. figures show. In addition, the just-passed world trade treaty could require some patent extensions.
To solve this problem, Bruce Downey, chairman of Barr Laboratories Inc. in Pomona, N.Y., said companies should specialize.
"Try and provide drugs in four or five product areas where they will have a full line and build the business around those areas of strength," such as antibiotics, painkillers or cancer drugs, he said.
Others are taking the more risky and expensive path of researching their own brand name drugs or licensing brand name drugs from others.
Israel's Teva Pharmaceutical Inc., for instance, has a potential blockbuster brand name drug, Copaxone, nearing approval as one of the first to treat multiple sclerosis.
All these efforts can come to naught, however, if the FDA inspector finds your plant is making flawed products. Half a dozen generic makers have gotten stern warnings, had their plants shut or drugs recalled this year--sending profits and stock prices into the tank.
Drug makers don't have much choice but to follow the FDA edicts, especially in light of the scandals of the late 1980s when 10 companies were convicted of doctoring drug tests or bribing FDA officials.
Salomon Bros. drug analyst Mariola Haggar said this year's problems are understandable, considering the popularity of generics.
"The generic industry has gone through this boom period where so many patents were expiring and their capacity was probably overstretched. In that situation you may have some sloppiness here and there because you're trying to get out too much too fast."
Others complain that the rate of approvals of new drugs has slowed to about 20 per month from 40 per month years ago, and the backlog of new generic drug applications is increasing.
FDA chief David Kessler "has been an extremely tough policeman rather than making the agency one whose purpose was to facilitate products and get them on the market," said David Saks, analyst with Gruntal & Co.
FDA official Roger Williams disputed that claim. "I don't think we're impeding the situation. Does that mean we don't occasionally drive people crazy? Of course we do."
Incoming Republican congressional leaders are hoping to clip the FDA's powers substantially, perhaps stripping it of the right to review drugs for effectiveness and judging them only for safety.
That's a serious misreading of the election, said Ira Loss, who watches the FDA for NatWest Securities. Loss said:
"If Newt Gingrich honestly believes voters were saying, 'Dismantle the Food and Drug Administration,' he's been smoking something."