THE DRUGMAKERS VS. THE TRUSTBUSTERS
Last fall, Upjohn Co. was on the brink of losing a mother lode. Xanax, its blockbuster tranquilizer, would reach the end of its 17-year patent term in October. Without the legal monopoly patent protection provides, the little pills of blue, pink, or white could expect lower-priced generic substitutes to flood the market and eat away at market share and earnings. So the Kalamazoo (Mich.) company made a preemptive strike: It released its own generic form of Xanax a month before the patent expired and before competitors could bring out their versions.
The ploy was a smash. By June, Upjohn controlled 90% of the market for generic Xanax, according to IMS America Ltd., a drug-industry research firm in Plymouth Meeting, Pa. The closest competitor had a mere 6.5%, IMS says. Normally, a generic version can grab one-third to one-half of the market. Upjohn Chairman John L. Zabriskie crows: "This strategy has paid great dividends."
QUANDARY. Selling generic versions of their own drugs is only one of the tactics big pharmaceutical houses are using to fend off pesky competitors (table). But these efforts have raised eyebrows in Washington. Since November, trustbusters at the Federal Trade Commission have opened a dozen inquiries into schemes by brand-name drugmakers to compete with generics, which have lower costs because they do little innovating. The FTC is devising novel antitrust theories to see if perpetuating a patent monopoly beyond its expiration violates the law. "We're looking at any conduct that extends patent rights beyond their legitimate scope," says Mark D. Whitener, acting deputy director of the FTC's Bureau of Competition.
The government is pondering intervention at a highly critical time for the industry. A decade ago, the generics' market share was only 21%, but today it accounts for 37% of the $60 billion prescription drug market, according to David F. Saks, an analyst at Gruntal & Co. And that number will soon rise: Patents for today's 75 best-selling brand-name drugs, which expire by 2010, generated $20 billion in sales last year--and few blockbusters are in the pipeline.
The FTC faces a quandary: If brand-name companies bring generics to market early and engage in price wars, consumers benefit. But this strategy may lessen competition long term. While the majors legally can use that ploy, it might force generics into niche markets, leaving the majors to dominate generics--and keep prices high. "The goal is to drive the generics out of the business," fumes Morton H. Katz, chairman of Clay-Park Laboratories Inc., a Bronx (N.Y.) generic drugmaker.
The FTC has already clamped down on a move by one big drug company. On June 22, it signed a settlement with Kansas City (Mo.)'s Marion Merrell Dow Inc. involving its purchase of generic giant Rugby-Darby Group. The two companies were the only manufacturers of a treatment for irritable bowel syndrome. To break up the alleged monopoly, the FTC required Marion to license its drug to another company. That is likely to happen soon.
But the main focus of FTC probes is the sale of generic drugs by brand-name companies--especially before patents on the originals expire. During the past year, a half dozen companies--including Upjohn, Syntex, Ciba-Geigy, and Bristol-Myers Squibb--have tried this preemptive gambit.
Pharmacists say it's brilliant. Drugstores usually buy the first low-cost alternative, then rarely switch to other brands once customers get used to it. What's more, early entry into the generic market by big drugmakers can keep initial prices high. The majors often price generics at only 10% to 25% less than the brand-name price, while generics ideally should be half the full price.
Generic drugmakers think preemptive introductions are dirty pool. "We have a better-than-even chance of having a majority market share if everyone launches their products on the same day," says William A. Fletcher, president of generic Lemmon Co., based in Sellersville, Pa. That's just what happened with Tagamet, SmithKline Beecham Corp.'s ulcer drug. After Tagamet's patent expired in May, the Philadelphia company released a generic form alongside those of other companies. A month later, generic giant Mylan Laboratories Inc. led the new market with a 44% share, while SmithKline's sales partner, an American Cyanamid Co. division, had only 15%, according to IMS.
Nothing highlights the FTC's enforcement dilemma better than the fate of Syntex Corp.'s Naprosyn, which industry sources say the agency is investigating. The Palo Alto (Calif.) company launched the generic version of its arthritis pill last October--two months before the patent expired. By June, Syntex had grabbed 68% of the generic market, while the next-biggest competitor, Mylan, got only 17%, IMS says.
SHOT IN THE FOOT. But drug analyst Hemant K. Shah says that competition forced the generic price to plunge as much as 90% below Naprosyn's. That's a boon to consumers. And Syntex lost nearly two-thirds of the market for its brand-name drug to generics, according to IMS. While Syntex still controls almost 80% of the total Naprosyn and generic market, its third-quarter earnings declined 45% from the previous year. The weakened company is now being acquired by Switzerland's Roche Holdings. The FTC and Syntex decline to comment on whether Syntex is under investigation.
The FTC's concerns, however, focus on the long-range impact of such price wars. Falling prices for the generic form of Naprosyn hurt all sellers. "Syntex shot itself in the foot, and it shot other people in the feet, too," complains Mylan Chairman Milan Puskar. If generic companies can't make a profit with their copycat versions of blockbusters, they may abandon the market. And big companies will have little incentive to make cheap forms of their best-sellers.
Those concerns are buttressed by the rapid consolidation of the drug industry. In the past year, the FTC approved two acquisitions--by SmithKline and Merck & Co.--of distributors that package low-cost drug benefits for employers. Critics say the purchases snuff out a key source of price competition. The agency's review of a similar purchase by Eli Lilly & Co. of McKesson Corp.'s PCS should conclude in November. The FTC says it will take a harder look now that the market is more concentrated.
So far, the FTC hasn't decided whether to sue drug companies for unfair competition. But President Clinton is expected to fill two openings on the five-member agency with aggressive enforcers, who may back tougher antitrust cases. In the meantime, "we're trying to let the industry know that we're on the beat," says one FTC lawyer. The agency hopes the spotlight will pay off for consumers in lower drug prices.
ELBOWING THE COMPETITION
To thwart generic-drug rivals, brand-name pharmaceutical companies are:
STARTING or acquiring their own generic units. Marion Merrell Dow, for example, purchased the Rugby-Darby Group, the only other maker of Marion's drug for irritable bowel syndrome.
LAUNCHING generic versions of their blockbuster drugs before the patents expire. The practice may enable such companies as Syntex and Upjohn to maintain market dominance.
SUING competitors for patent infringement, objecting to pending FDA generic- drug approvals, and pushing for state laws to hold off generic competition.
SOURCE: BUSINESS WEEKCatherine Yang in Washington