Market Conditions Prime for More Generic-Drug Price Increases

Transcription

1 REPORT David Franklin, Market Conditions Prime for More Generic-Drug Price Increases Companies: ABC, ACT, CAH, CVS, IPXL, LCI, MCK, MYL, RAD, TLV:TEVA, TSE:ENL, WAG, WMT October 2, 2014 Research Question Will declining competition and supply shortages in the generic drug segment continue to drive up prices, or will third-party payers, the FDA and Congress intervene? Summary of Findings The trend of generic drug price escalation was acknowledged by all 26 sources and will continue until market forces change. Most of the price hikes are centered on older, less profitable generics with a single or a limited number of manufacturers. Contributing factors include manufacturer consolidation, the elimination of low-/no-profit products, the high cost of regulatory compliance, quality issues resulting in supply issues, active ingredient shortages, and fewer brand drugs hitting the patent cliff. Direct government intervention is possible but highly unlikely. Congressional action would not be considered until after midterm elections, and price clarity legislation that has already passed will not be enacted until The FDA has no pricing jurisdiction, but could increase the number of manufacturers producing lowerpriced generics by speeding up the approval of ANDAs. Insurers, PBMs and joint buying groups are expected to exert some pricing pressure by creating preferred lower-cost drug lists, eliminating high-cost drugs from formularies, and installing tiered reimbursement levels. Joint buying groups may negotiate largequantity, lower-price contracts. These efforts will take time. Higher generic-drug prices may entice some new manufacturers or producers that abandoned drug production to enter the market. Manufacturers Distributors PBMs Pharmacies Third-Party Payers Industry Specialists Generic Prices Government Intervention Market Forces Will Normalize Prices Silo Summaries 1) Midtier and Large Generic Drug Manufacturers All four sources said industry pricing is dynamic, cyclical and deflationary. Supply and demand determine when a manufacturer increases price, and profitability determines when a manufacturer stops producing a particular drug. Older generics that have generated considerable competition over time but now provide minimal or no profit are the most likely to be discontinued, allowing the remaining manufacturers to increase prices. 2) Drug Distributors Four of five sources think the deflationary nature of the industry and the basic laws of supply and demand eventually will reverse the recent price increases for generic drugs. The dissenting source believes prices will continue to increase at a reasonable rate. 3) PBMs All three sources acknowledged the trend toward higher-priced generics, but one source said it is limited to the older, unprofitable generics and is being sensationalized by the media. Industry consolidation is the leading contributor to the higher drug prices. 4) Pharmacies All four sources said generic prices are trending up, but two believe the increase is limited to a few singlesource or limited-source drugs. Industry consolidation, low margins, the high cost of regulatory compliance, supply chain issues and increased demand all are creating challenges for manufacturers and driving up prices. 5) Third-Party Payers These four sources confirmed the trend of generic drug price increases. Two said it is isolated to older generics or single-source generics. One attributed the trend to the forces of supply and demand and the branded-drug patent cliff issues. Another said room existed for consumers to pay more for drugs, and now they are. 6) Industry Specialists These six sources confirmed the generic drug price escalation trend for some drugs. Contributing factors include industry consolidation, higher worldwide demand, drug and raw material shortages, FDA oversight, and manufacturers abandoning the production of low-value products. 1

2 Background Generic drug price increases began to appear in 2013 and have become a regular occurrence in the United States. In January, the National Community Pharmacists Association (NCPA) reported that 77% of its members experienced a large increase in the cost of a generic drug within the last six months. Since then, pricing continues to rise, with one in every 11 generic drugs doubling in price. In a few cases like the tetracycline antibiotic and the captopril blood pressure pill, the increase was 17,000% above the original price. Rising prices and short supply have been linked to industry consolidation, loss of ingredient suppliers for generic makers, and import restrictions of Indian generic drug manufacturers. The trend already has cost two top Walgreen Co. (WAG) executives their jobs because of the $1 billion forecasting error that did not factor into the recent spike in generic drugs sold under contract to Medicare. The NCPA requested a congressional oversight review of the situation. The Connecticut attorney general s office is investigating the price spikes of Impax Laboratories Inc. s (IPXL) important generic heart drug, digoxin. However, the FDA recently refused to comment on price spikes for doxycycline and tetracycline, only saying that it has no authority over pricing. In Blueshift Research s May 7 Joint Generic-Drug Purchasing Ventures report, sources referred to the escalating prices of some generics, pointing to the effects of the Affordable Care Act, shortages of active ingredients for some drugs, reduced competition related to mergers and acquisitions, and stricter FDA oversight of manufacturers. One source said Teva Pharmaceutical Industries Ltd. (TLV:TEVA), Mylan Inc. (MYL) and Actavis plc (ACT) account for 44% of all the generics made. In 2007, the same three accounted for only 34%. Current Research In this next study, Blueshift Research assessed whether market conditions in the generic drug market would continue to drive up prices or if insurers and the government likely would intervene. We employed our pattern mining approach to establish seven independent silos, comprising 26 primary sources (including seven repeat sources) and five relevant secondary sources focused on the generic drug industry: 1) Midtier and large generic drug manufacturers (4) 2) Drug distributors (5) 3) PBMs (3) 4) Pharmacies (4) 5) Third-party payers (4) 6) Industry specialists (6) 7) Secondary sources (5) Next Steps Blueshift Research will continue to monitor generic drug prices to determine if the hikes extend beyond specific drugs and becomes widespread. We will follow any government agency or congressional intervention and will research the price mitigation efforts of third-party payers, PBMs and joint purchasing organizations. Finally, we will research generic manufacturers intentions of reentering or starting production of higher-priced drugs. Silos 1) Midtier and Large Generic Drug Manufacturers All four sources said industry pricing is dynamic, cyclical and deflationary. Supply and demand determine when a 2

3 manufacturer increases price, and profitability determines when a manufacturer stops producing a particular drug. Older generics that have generated considerable competition over time but now provide minimal or no profit are the most likely to be discontinued, allowing the remaining manufacturers to increase prices. The trend of manufacturers eliminating the manufacturing of their least profitable drugs was deemed a primary contributor. Intervention by Congress or the FDA is unlikely. The high cost of regulatory compliance and recent quality issues with some manufacturers have diminished drug supply and resulted in higher costs. Manufacturers that previously produced a generic drug could reenter the market within 90 days, provided they maintained a filing with the FDA and the required production equipment. However, they may face new compliance issues because of regulatory updates and possible antitrust scrutiny. Downward pricing pressure eventually could be provided by buying groups and insurance reimbursement limitations. Small buying groups are likely to be the most hindered by higher generic-drug pricing. KEY SILO FINDINGS - All 4 manufacturers acknowledged the price escalation trend for some older low-/no-profit generic products. - The generic drug market is dynamic, cyclical and deflationary, with supply and demand being the main pricing element. - Producers elimination of low-/no-profit products, the high cost of regulatory compliance, quality issues resulting in supply issues all have contributed to some generic-drug price increases. - Fewer first-to-market generics are available, which is creating a more price-conscious market. - Government or FDA intervention is possible but unlikely as manufacturers cannot be forced to produce at a loss. - Drug buying groups and reimbursement limits will provide some downward pricing pressure over time. - The FDA backlog of ANDAs and the Generic Drug User Fee Amendment (GDUFA) of $250,000 are hurting producers profits. Miscellaneous - Manufacturers could reenter a market they had abandoned as a result of low/no profit if they maintained their FDA filling and production equipment. However, they now would face new production regulatory requirements and raise red flags regarding antitrust issues. - Smaller buying groups will be severely affected by the drug price escalation trend. 1. Generic pharmaceutical executive for a major manufacturer Recent price increases are a rebalance as a result of supply and demand. The cycle is as follows: Once a branded drug goes off-patent, the initial generics manufacturer typically enjoys six months exclusivity. During this time, the generic can expect 60% to 80% of the brand price. After the six months, numerous generic manufacturers typically enter the space when the total market is large enough. This drives the market price down significantly, and the generic now may only command 5% to 15% of the original branded price. At a time when many branded drugs were coming off-patent and generics manufacturers had a pipeline of first-to-market products, they could afford a few loss leaders. With the brand patent cliff and fewer first-to-market opportunities, such loss leaders make less sense. When only one or two manufacturers of a specific drug are left, a temporary shortage results until capacity is addressed. This offers an opportunity to raise prices. Whether a manufacturer would decide to reenter the market in light of more favorable pricing depends on many factors, including the degree of asset redeployment, raw material supplies, technology and packaging. A manufacturer could reenter the market very quickly if it just recently (less than 30 days) discontinued a drug, but the perception then would be it had never left. Such a quick turnaround could lead Congress to believe it was a false exit. Manufacturers would not want to be under scrutiny for antitrust practices or price collusion. Although Congress is concerned about the increases, any The increase in some generic drug prices is a market rebalance based on supply and demand for specific drugs. When your grande latte costs more than a round of chemo, something s wrong. Generic Pharmaceutical Executive Major Manufacturer 3

4 legislation directly affecting pricing is unlikely to pass. Congress cannot force a manufacturer to produce a drug at a loss. However, it could force a manufacturer to produce a needed drug if a minimum level of profit was guaranteed. The increase in some generic drug prices is a market rebalance based on supply and demand for specific drugs. When your grande latte costs more than a round of chemo, something s wrong. Generic manufacturers have simply gotten out of particular markets because it was just no longer profitable to manufacture and sell specific drugs When only one or two generics manufacturers are left for a particular drug, there is a temporary shortage with resultant price increases, until capacity can be increased. When generics companies had a continuous stream of first-to-market generics, they could afford to manufacture a few loss leaders. The patent cliff provides for fewer opportunities to sell first-to-market generics at 60% to 80% of the brand price. Manufacturers will continue to manufacture generics, but more and more companies are discontinuing their least profitable lines. U.S. pharma is still a for-profit business. Congress is concerned about pricing, but I do not know that they will be able to force a company to manufacture products at a loss. It is possible that legislation could be enacted to force a manufacturer to continue producing a needed drug at a guaranteed minimum profit level. Miscellaneous Whether a manufacturer would return to a market abandoned due to lack of profit depends on many factors including whether assets have been redeployed, availability of raw materials, consistency of processes, etc. It is possible a manufacturer could reenter a market very quickly if they had exited recently. A very speedy return to market could be construed as a false exit, making a manufacturer the potential target for an antitrust/collusion investigation. 2. Generic pharmaceutical accounts director Nothing is ever permanent in generic pharmaceuticals. Generic prices are dynamic and difficult to predict, but downward price pressure always arises. Once pricing of an older generic reaches a point at which the manufacturer is losing money, the company will stop making it. Fewer manufacturers leads to dwindling supply and increased market demand. Some of the shortage may be a result of quality issues in low-cost countries like India and China, but this is not the only factor. A manufacturer could reenter a market previously abandoned within 90 days. Whether regulatory action could affect pricing in any meaningful way is unknown. The source said the FDA has an ANDA backlog, which affects the ability of a generic manufacturer to make a profit. Smaller buying groups will be hardest hit by the generic-drug price hikes. Generic drug prices are dynamic as a result of supply and demand. Generic pricing is dynamic. Although market prices are always being squeezed, it is difficult to predict when an older generic will reach the point where the majority of manufacturers can no longer make a profit. Once a drug price reaches the point where a manufacturer cannot make profit, they will just discontinue production, resulting in shortages and increased market prices. Some of the price pressure may be the result of quality issues and decreased production in India and China, but this is not the only factor. Nothing is permanent in generic pharmaceuticals. Supposedly, the FDA has a backlog of ANDAs. This significantly impacts manufacturers ability to make a profit. When there is less opportunity to Once a drug price reaches the point where a manufacturer cannot make profit, they will just discontinue production, resulting in shortages and increased market prices. Generic Pharmaceutical Accounts Director 4

5 introduce new generics at higher prices, manufacturers are more likely to discontinue the manufacture of nonprofitable lines. N/A Miscellaneous Smaller buying groups will have the most difficulty managing and the least influence to affect increased market prices. It is possible that a manufacturer could reenter a market previously abandoned within 90 days if nothing has changed. But this would require that all manufacturing equipment and materials are still available and processes have not changed. 3. Sales director for a pharmaceutical contract manufacturer Several factors are at play in the trend of higher-priced generic drugs. Manufacturing generics has become more expensive since 2012 when the GDUFA was enacted. This FDA regulation requires a flat registration fee of $250,000 per site. This is a hefty additional cost for small manufacturers, particularly those making low-margin generics. Generic drug pricing is deflationary in general. First-to-market exclusivity allows manufacturers to make substantial profits in the short term, but if the manufacturer runs into quality or supply issues, a shortage and, thus, transient higher prices will occur. Once the exclusivity period expires, a number of manufacturers will enter the space, thereby driving down the market price. Once the price falls far enough that a manufacturer cannot profit, it will often exit the space, resulting in lower supply and an opportunity for the manufacturer/s remaining to raise prices. Manufacturers often will maintain the filing for generics they no longer manufacture in the event they wish to reenter the market. In the case of older generics, however, approved manufacturing processes may have changed. Another factor affecting generic prices is the increased regulatory pressure on compounding pharmacies, which have been regulated by individual states. However, serious quality issues with compounding pharmacies have arisen, resulting in illness and death. Increased state regulation and federal pressure on these alternative sources of generic drugs may play a role in market shortages and increased prices. s Generic drug prices are deflationary in general. Generic pricing is cyclical as a result of supply and demand. Price fluctuations are multifactorial and should be evaluated on a drug-by-drug basis. As more competitors enter following the first-to-market exclusionary period, supply increases and prices fall. Once the market price reaches a point where very little to no profit can be made, manufacturers will exit, creating shortages and the opportunity to raise prices. Increased regulatory fees under GDUFA significantly impact the price structure of smaller manufacturers. General Generics Landscape A generic manufacturer may continue to manufacture a drug that is no longer profitable as part of a loss-leader strategy. Many factors, including the competitive landscape, overall product line profitability and strategic direction, play a role in whether the company continues to manufacture a specific drug. Increased regulatory pressure on compounding pharmacies also diminishes generic drug supply. Miscellaneous Many manufacturers will maintain FDA filings for drugs they no longer manufacture in the event they wish to get back into the market when conditions become more favorable. If the process remains valid and the equipment and raw materials are sufficient, such a manufacturer can reenter the space as quickly as they can produce the product. Many manufacturers will maintain FDA filings for drugs they no longer manufacture in the event they wish to get back into the market when conditions become more favorable. If the process remains valid and the equipment and raw materials are sufficient, such a manufacturer can reenter the space as quickly as they can produce the product. Sales Director Pharmaceutical Contract Manufacturer 5

6 If an older process cannot be grandfathered and FDA requires a refilling to reenter the market, a manufacturer is much less likely to consider producing the old drug. 4. Scientist for a pharmaceutical manufacturer Pricing is a function of supply and demand. A manufacturer ultimately will decide to exit a specific market once profit is no longer possible. Fewer manufacturers will result in shortages of specific drugs and in higher prices. Some manufacturers may capitalize on the opportunity to raise prices following competitive plants closures. Once supply increases, manufacturers are prone to try to maintain the new higher price, but ultimately supply, demand and competition will normalize the market price. The source was unsure whether Congress or FDA could enact any meaningful pricing regulations given the for-profit nature of the United States pharmaceutical industry. Generic drug prices fluctuate as a result of supply and demand. Although the generics market is deflationary in general, many factors can drive up the cost of a specific drug. Once price for a generic drug falls to the point that there is no profit possible, fewer manufacturers will produce it. This leads to lower supply and higher prices. Some manufacturers will capitalize on the opportunity to raise prices following competitive plant closures. Once a generic drug has experienced a price increase as a result of supply and demand, manufacturers will attempt to maintain the higher price to maximize profits. Ultimately, however, supply and demand pressures will result in normalization of the market price. It is unclear that Congress or FDA can enact any meaningful pricing regulations while U.S. pharma operates in a for-profit environment. Once a generic drug has experienced a price increase as a result of supply and demand, manufacturers will attempt to maintain the higher price to maximize profits. Ultimately, however, supply and demand pressures will result in normalization of the market price. Scientist Pharmaceutical Manufacturer 2) Drug Distributors Four of five sources think the deflationary nature of the industry and the basic laws of supply and demand eventually will reverse the recent price increases for generic drugs. The dissenting source believes prices will continue to increase at a reasonable rate. Sources discussed the slowing of brand-name drugs hitting the patent cliff, which has resulted in a limited number of profitable generics; they also mentioned the rising cost of regulatory compliance, increasing demand, the consolidation of manufacturers, drug lot recalls creating shortages, and a lack of raw materials. The FDA backlog of generic drug applications is contributing to the lack of competition. The possibility of Congress or the FDA intervening was met with mixed reactions: One source said such action would be unjust; another said the FDA could speed up the drug approval process, which would lead to increased competition; a third said these entities have tried to intervene before but with little success; and a fourth source said an intervention would only raise manufacturers costs. Buying groups and reimbursement limits were viewed by two sources as a deterrent to higher prices, while another source said these factors do not really change pricing dynamics. Manufacturers, PBMs wholesalers and pharmacies are the potential winners of higher-priced generics, while consumers stand to lose the most from the trend continuing. KEY SILO FINDINGS - 5 drug distributors acknowledge the escalation of some generic drug prices due to supply and demand. - 4 of the 5 expect the same market conditions to reverse and cause prices to normalize. - 1 expects continued generic drug price increases at a reasonable rate. 6

7 - The slowing of brand-name drugs hitting the patent cliff is hurting generic manufacturers and leading to some higher prices. - The increasing cost of regulatory compliance, increasing demand, the consolidation of manufacturers, drug lot recalls creating shortages, and a lack of raw materials also were cited as reasons for price hikes. - Possible government or FDA intervention produced mixed reactions, including possibly speeding up the drug approval process to allow for increased competition, being unjust, having little success with such past efforts, and leading to higher producer costs. - Buying groups, reimbursement limits and tiered formularies were viewed by 2 sources as a deterrent to higher prices; 1 said these factors don t really change the pricing dynamics. Miscellaneous - 2 sources were split on manufacturers returning to the market when a drug becomes profitable to produce. 1. Pharmaceutical distributor accounts executive The generics that experience significant increases eventually will see more normal pricing. Price hikes are a function of shortages for active manufacturers and a reduced number of manufacturers producing a specific drug. Although the firstto-market generic manufacturer typically enjoys a six-month period of exclusivity, this can be disrupted if multiple players try to enter the market immediately. The brand manufacturer also will offer the generic version dependent on established payer agreements. The total number of competitors typically increases over the months and years, which drives the market price down and pressures manufacturers profit margins. At some point, manufacturers exit the product line because they cannot make a profit. If no more blockbusters are coming off-patent, the pipeline narrows for new, more profitable generics, making manufacturers more likely to exit unprofitable markets. If prices do not decrease as a result of more competition and capacity, buying groups pressure and reimbursement limitations will result in downward price pressure over time. U.S. pharmaceutical companies are for-profit businesses. This source believes there is no basis for regulatory action. Generic price increases are a function of supply and demand. They will eventually normalize. The price spike for older generic drugs was predicted five to six years ago based on the patent expiration calendar. When there are no blockbusters coming off-patent, the profitable pipeline narrows for generic manufacturers. This increases the likelihood that manufacturers will discontinue manufacturing unprofitable products. If prices do not normalize in response to increased competition and capacity, market pressure from buying groups and reimbursement limitations will result in downward price pressure. Generic price fluctuations are a function of supply and demand. Increased competition results in abundant supply and low prices. When manufacturer begin to exit unprofitable markets, supply dwindles and prices increase. Pharmaceutical companies in the U.S. are for-profit businesses. I do not think it would be just to regulate pricing artificially except perhaps in rare cases of lifesaving drugs. Pharmaceutical Distributor Accounts Executive Lack of new, more profitable generics makes it more difficult for a company to continue manufacturing older, unprofitable drugs. Market buying group pressure and reimbursement limitations will have some downward pressure on pricing if supply is not increased sufficiently in a reasonable timeframe. Pharmaceutical companies in the U.S. are for-profit businesses. I do not think it would be just to regulate pricing artificially except perhaps in rare cases of life-saving drugs. 7

8 2. Director of a pharmaceutical distributor The generic drug market is deflationary and based on supply and demand. When several manufacturers are producing the same generic and market supplies are plentiful, market prices drop as low as 10% of the brand price. Several factors play a role in subsequent price increases. In general, the cost of regulatory adaptation has risen in recent years, making it more difficult for manufacturers to make a profit. Raw materials shortages and plant closures as a result of quality and regulatory issues also affect market price. A manufacturer is more likely to try to raise prices than to completely exit a market. Once manufacturers decide to truly exit the market, they tend to remain out. Injectable drugs are always more vulnerable to price increases. The source noted fewer qualified manufacturers and more complex processes, which exaggerate the effect of short- and long-term shortages. Fewer drugs came off-patent in 2013 than in 2012, providing generics manufacturers with fewer opportunities to capitalize on higher-profit, first-to-market drugs. The source was unclear how Congress could influence generic pricing. Medicare Part D prohibits the negotiation of rebates and pricing. However, a Medicare drug reimbursement standard exists that is based on the average sell price (ASP). Potentially similar guidance based on average manufacturing price could be instituted. Price fluctuations affect every point in the distribution channel. Each participant is essentially a taker of the price received. Generic drug prices are deflationary. Supply and demand drives price fluctuations on a drug-by-drug basis. Several factors drive up the price of generics including increased regulatory costs, raw materials shortages and plant closures. Injectable drugs are always more vulnerable to price increases. There are fewer players and more complex processes. Fewer drugs came off-patent in 2013, providing for fewer opportunities to maximize first-to-market profits and making it more difficult for generic manufacturers to offer very low-profit or loss-leader products. A generics manufacturer is more likely to try to increase prices rather than exit a market altogether. But once exited, a manufacturer is gun-shy to reenter. Each participant is essentially a taker of the price they get. There may be some limited negotiation options, but supply and demand ultimately determines pricing. It is unclear how Congress could act to directly influence generic pricing. Medicare Part D expressly forbids the negotiation of rebates and pricing. There is a Medicare drug reimbursement standard based on average sell price. Potentially similar guidance based on average manufacturing price could be instituted for generics. Fewer drugs came off-patent in 2013, providing for fewer opportunities to maximize firstto-market profits and making it more difficult for generic manufacturers to offer very lowprofit or loss-leader products. Director, Pharmaceutical Distributor 3. Executive at a pharmaceutical wholesaler with a national footprint Expediting the FDA s generic drug approval process is essential to increasing supply and competition. Wholesalers may benefit from rebates generated by the higher pricing on a drug. Still, that extra revenue could subside quickly if demand moves to another therapeutic for the same ailment. The generic drug joint purchasing organizations will put considerable pressure on manufacturers for lower prices, particularly when multiple manufacturers are selling the same product. Some generic categories and items have gone up pretty significantly. But when you take the total number of generics out there, my guess is that there still would be some deflation [so the prices overall are going down]. [The major factors affecting generic drug prices] would be a shortage in the API [active pharmaceutical ingredient], backorder issues, and obviously there s higher demand for generics overall. I think those continue to be issues that continue to impact pricing and what s causing some of the pricing to go up on some of these specific items. 8

9 There are a lot of generic manufacturers that have spent significant dollars trying to get some of their drugs through the FDA, and unfortunately there continues to be a backlog. I think you are still seeing some issues with the FDA trying to keep up with the demand out there. It s not just those drugs coming off-patent, but it can also be challenges as well from that standpoint with different generic manufacturers challenging the patent and then trying to get approval that way. I don t know if [the FDA backlog] creates shortages so much because I think there are still maybe other drugs out there that could meet the need. I think it s more a function of trying to reduce overall costs in the marketplace. If these generics don t get approved quickly, you are still going to have higher-cost brands out there. And if you have maybe only one generic manufacturer [making a drug], obviously the cost remains pretty high. If there s more than one, you see a greater opportunity for prices to come down. It s an issue that there are poor manufacturing practices out there, and I applaud the FDA going after the companies and making sure that things are done right. You are going to continue to see the consolidation and such drive up prices and the backorders. Congress and the FDA have been trying to intervene, but unfortunately they haven t been successful. I think Congress has thrown more money to the FDA to get more individuals to review the applications for the different generic manufacturers wanting to get their products approved and help speed up the approval process.... Outside of that I don t know really what [Congress ] impact can be unless they start putting more regulations on price increases, which could happen down the road. But hopefully that won t come into play. We continue to see consolidation of manufacturers within the generic drug market. Therefore, there are less companies there to compete. But then you also have some smaller generic players trying to get into the market on different items to increase competition. It s really a mix, but I think the overall effect has been that consolidation in the market has resulted in fewer players and, therefore, less opportunities to get lower pricing in the marketplace. When you speak of new competition, I think it s more that you could have existing generic manufacturers get into different items that may have had lower prices in the past, but because they see higher pricing, they are going to participate in that. I think that s going to be the first approach. Then secondly, you can see smaller entities getting in with those items as well. That depends on how easy it is to enter with regards to approval and the complexity of the drug itself. You are going to continue to see the consolidation and such drive up prices and the backorders. Congress and the FDA have been trying to intervene, but unfortunately they haven t been successful. Executive National Pharmaceutical Wholesaler [Determining winners and losers is] kind of a mixed bag in that you have the increased prices occurring, which when you start looking at the different wholesalers throughout the country, a lot of their rebates are based on those higher prices. Therefore, they are able to generate more income from that standpoint. I think wholesalers can benefit from that, but it could be shortsighted because demand can drop on some of those items and move to other therapeutic classes that can treat those conditions as well. Obviously, when the prices go up, the losers are going to be consumers out there because they are going to get sticker shock when they find doxycycline has gone up several hundred percent due to shortages or what have you. The question is, will all of those drugs continue to be carried by the third parties if they get so expensive? There are numerous plans that have kind of a tiered copay approach on the generics. If [the price] gets too onerous, then they are going to take it off because they may then try to direct their clients to other courses of therapy which is not something anybody wants. You don t want the third-party payers directing what the doctors should be prescribing for their patients. There may be only one course of treatment, but even then there can be some resistance by third parties to cover it. You are going to find that the consolidation on the customer side [with the Big 3 wholesalers, McKesson Corp./MCK, Cardinal Health Inc./CAH and AmerisourceBergen Corp./ABC, which have consolidated with some of the retailers] is going to put a lot of pressure on manufacturers to bring [their] prices down or at least provide those larger entities with the opportunity to acquire the products at a lower cost. They have more buying power, and it puts a lot of pressure on the manufacturers to compete, especially when you have multiple manufacturers on a certain product. 9

10 The action by Congress and the FDA to increase the approval process would be a positive if it were in fact occurring, as I think there are still a lot of delays from that standpoint. I think that would be the key to kind of reduce drug costs and get more generics on the marketplace to really help. Then obviously you are going to have a lot more competition with people getting into the market, which would help also. I think those would be the ways you d see a decrease in the costs going forward. There are also not as many brands coming off-patent in the next few years as there have been in the past. There may be a little lessening of pressure there, but you re still going to have new folks coming on board, trying to go after these different drugs that have may have gone up in price and wanting to get their approvals as well. You should see more activity that way, which could create backlogs, or hopefully we can get more approvals through so that we can start to reduce some of the costs as well if there is a supply issue. Supply and demand only works out there when you see the high demand and the pricing going up. There are other folks wanting to jump in the fray to make that drug but they have to get the approval, so it s kind of a catch Pharmacist in charge of the generic program at a wholesale distributor; repeat source The higher generic prices might filter out because of competition. Still, the government will intervene with more regulations, which will add costs. The insurers and PBMs are not keeping up with the higher pricing, which is leaving pharmacies or patients with unreimbursed costs. The insurers, PBMs and the Big 3 wholesalers will be the winners if the higher prices continue. There is definitely [a generic pricing escalation trend]. I think it s a combination of things. One of them is the fear of the future and Obamacare. The [manufacturers] were trying to have their price increases before that was going to fully be implemented. Another one is the generic manufacturers now are just looking for ways to make more money. If an item isn t profitable for them, they are either going to discontinue it or have a price increase. And if the competition follows with an increase, there will be a win-win. But if they don t [the manufacturer] is just going to discontinue the item and concentrate on the more profitable items. I d say competition follows [with a price increase] over 50% of the time because they are in the same situation. The thing that impacts drug prices is everything is based on competition. If there are multiple vendors, the chances of having a price increase are pretty slim. When you get down to two vendors, you probably will have a price increase, but if you have three or more vendors, it tends to l keep the price still down. The PBMs and insurance companies are not reacting to the price increases; they are keeping their reimbursement at, say, $5 and now the price is $100, but who can afford to lose $95? They are not going up like they should. They are saying to [the pharmacies], Well, you need to buy it from somebody else. I tell my customers to tell them to call me collect and tell me where I can get it for that price because they are going by pricing that s not even in the marketplace now. Every day they delay going up, they are making millions and millions of dollars. Probably close to 90% of a pharmacy s business is third-party insurance. The pharmacies have no control over what they charge. The insurance companies determine what they charge because of the reimbursement; they even are controlling what the doctors prescribe. Doctors can t practice medicine today; they have to get the OK from the insurance company. Manufacturers will probably come back [into the market] with some of the Manufacturers will probably come back [into the market] with some of the older products that were discontinued and are now profitable at today s pricing. There are always new people getting into [the market]. If you look at the new vendors every year, there are always a bunch of new manufacturers coming into the marketplace. Pharmacist, Wholesale Distributor older products that were discontinued and are now profitable at today s pricing. There are always new people getting into [the market]. If you look at the new vendors every year, there are always a bunch of new manufacturers coming into the marketplace. 10

11 If the manufacturers come in with a product where the market price is, say, $100 and they come in at around $100, it s not going to have an effect [on pricing in the market]. If they come in at $50, that impact will be immediate. The FDA backlog [of generic drug applications] is a problem. The user fee [coming from the generic manufacturers]... has had very little effect. They are still way backlogged. [The recently formed joint venture purchasing organizations] are just going to make more money because they are not going to pass on a penny of savings. I think the [Big 3 wholesalers] have the highest pricing in the marketplace today. We will beat them [on pricing] like a drum every day. [If generic-drug price hikes continue] the winners are going to be the Big 3 and the PBMs and insurance companies. I don t know of any [actions being taken to lower drug prices]. If the [government would] just let the marketplace take care of it by leaving it to the competition, [the higher generic pricing] would filter out, but they are going to get in. And whatever they do is going to make things more expensive by putting more regulations in place and more cost of doing business. 5. Executive at a regional pharmaceutical wholesaler; repeat source Generic prices are climbing at a reasonable rate overall. People are astounded by the overall price inflation because they are used to generic prices declining. Everyone benefits from increased generic pricing, excluding the aberrations that are getting all the attention. The source cited more effective alternatives to some of the older generics that have increased so much in price. Price controls would have a very difficult time passing in Congress. Across the board, generics are rising at a reasonable rate all the time. The reason is that s so shocking [to people] is because for the last 20 or 30 years generics have only gone down in price. The ones [that have gone up exorbitantly] get all the press.... Everybody looks at the digoxin and the amitriptyline and the doxycycline, but every one of those has a specific reason on an individual basis [for the price increase] that is not a symptom across the board with generics. The reason the whole market is moving [up in price] is we have reached the generic cliff where there are less trade-name products going off the cliff and becoming generic. A generic company, no matter how many [generic manufacturers] there are has to turn in earnings per share. If you have no new products to make that money during the Hatch-Waxman 180-day exclusivity period, the only way you can move your EPS is to take something that s priced less than the cost of an M&M and make it into actually a drug price. One footnote to that is that even with the general generic pricing increases and not the aberrations I discussed generic drugs are an absolute bargain and an absolute wonderful thing for the country as far as reimbursement and everything else. The real tipping point may have been when we went to the number of pills dispensed in the average pharmacy becoming 70% to 80% generic. When that happened, that s when I think the opportunity came to start raising generic prices rather than continue to decrease them. As long as there are three, four or five players in each molecule, you have a little bit of competition, but if you get down to two players, all of a sudden someone is going to say, Hey, I m not making any money on this. I m raising my price, and to heck with the other guy. He can t supply the whole market anyway. The other guy says I need to make a fair profit on it too [and will raise my prices]. I don t think payers or the FDA is going to move the price. I do think supply and demand for products and other factors move the price. I guess Medicare could say they aren t going to pay for a drug anymore, but so far they are paying even for drugs like [Gilead Sciences Inc. s/gild] Sovaldi, which is roughly $1,000 per tablet. And the good reason is if the The real tipping point may have been when we went to the number of pills dispensed in the average pharmacy becoming 70% to 80% generic. When that happened, that s when I think the opportunity came to start raising generic prices rather than continue to decrease them. Executive Regional Pharmaceutical Wholesaler 11

12 patient gets through that treatment, 90 something percent of them are cured of Hepatitis C so they will save money in the long run. Some of the players will come back into the market with a drug [that the price has gone up on]. It happens every day, especially with the larger ones that dropped an item they had before and they may still have the raw ingredients or even some finished product.... It doesn t mean they will jump in for every form or strength or whatever of that molecule, but they will jump back in. I may be totally wrong, but these [joint purchasing organizations] look really good on paper... but when it comes down to it, are they really changing the whole dynamics of the pricing? No. We have squeezed generic companies on all our bid processes down, down and down. Now if they want to give up more of their margin, it may go lower, but at some point everybody stops giving away their margin. Everybody is a winner when the prices go up. The manufacturers actually get a real margin. The wholesalers usually make some percent on the products.... It s better for the pharmacist, because when the price goes down he gets ratcheted down even lower. They put MAC [maximum allowable cost] prices on him, and he makes less money.... The only exception might be the payer. It costs them more money, but they get more value by having generics. I m not throwing the [generics with the pricing] aberrations in the same bucket, but I ll tell you a tongue-in-cheek way the consumer benefits: He gets upset about [the price] and finds a doctor who will prescribe something that works better. Amitriptyline had a big jump recently. It s an old tricyclic antidepressant, and if your doctor is using that, you need a new doctor. Digoxin certainly has its place but there has to be a better drug than that if you have a cardiologist out there. There may be some [actions being taken to lower prices], but I know of none.... I m not quite in that loop. There s no way the FDA can say you have to charge a certain price for something; that s out of their purview. I m not so sure anything can be done unless we go to price controls, and that would be a really hard thing to do with our Congress. 3) PBMs All three sources acknowledged the trend toward higher-priced generics, but one source said it is limited to the older, unprofitable generics and is being sensationalized by the media. Industry consolidation is the leading contributor to the higher drug prices. Drug and ingredient shortages also were mentioned as factors. Intervention by the government has had little effect in the past and is unlikely to significantly change pricing in the near future. One source did suggest that the Fair Trade Commission should inhibit or disallow the noncompete agreements between brand and generic manufacturers. Two sources discussed insurers and PBMs setting up tiered reimbursement systems and nonpreferred generics lists to encourage the use of lower-cost therapies when appropriate. One source expects joint drug purchasing agreements to achieve about a 5% savings. The winners of the increased generic drug pricing trend are manufacturers, distributors, PBMs and pharmacies. The losers are the consumers and third-party payers. KEY SILO FINDINGS - 3 acknowledge the generic drug price escalation trend. - 1 said it is limited to older, low-value generics and that the situation is being sensationalized by the media. - Consolidation among manufacturers, active ingredient shortages and product shortages have contributed to price escalation. - Government intervention has had little effect on drug prices in the past and is not expected to change prices in the near term. - 1 thinks the FTC should intervene in the practice of noncompete agreements between brand and generic manufacturers. 12

13 - Joint purchasing groups, tiered reimbursement programs and nonpreferred generic drug lists are being created and are expected to have some effect on pricing. Miscellaneous - Additional competition at the manufacturing level will provide micro vs. macro generic pricing relief. - Teva s return to producing some generics following quality problems will help pricing concerns. 1. Sales and marketing vice president for a midsized PBM; repeat source Successful interventions to control generic pricing is unlikely. Manufacturers will continue to increase overall profit, and wholesalers and manufacturers will continue their efforts to consolidate the marketplace. Joint purchasing organizations will not be hurt by the price hikes. Whether from driving up from manufacturers or from short supply, I do think manufacturers are trying to increase their margins. Major factors are ingredient and product shortages, and we ve had declining competition. Those two play a primary role in this. I think you re seeing manufacturers trying to increase overall profits. If there are more competitors, more manufacturers and more manufacturing of generic drugs, prices will go down. If they re good at limiting that number, prices will go up. I still think what s going on with generics is the Hyundai strategy: Once known for one of the worst cars, they now have luxury cars. It s similar although generics will still be a commodity. But in some cases 90% of all drugs are generics for some of our plans. There has been consolidation among retailers and manufacturers, and alliances between generic companies and distributors. But once again it s a marketplace driven by the number of manufacturers and by the wholesalers. You will see some new manufacturers, but you have wholesalers controlling that. And in some cases it s controlled by the generic manufacturers. A lot of competition is driven by whether wholesalers are able to consolidate the marketplace, which is still being determined. [New competition affecting the market] can happen pretty quickly, but it will be more on a micro level on individual categories than on a macro level. I don t think [the joint purchasing groups] will be affected much. I think their generic pricing will be down the same [as we discussed in the last report about 5%]. Not at this point [is there likely to be an intervention]. It will be primarily be driven by brands going off-patent. There has been consolidation among retailers and manufacturers, and alliances between generic companies and distributors. But once again it s a marketplace driven by the number of manufacturers and by the wholesalers. Sales & Marketing VP Midsized PBM Without the protections that big pharma has, the generic marketplace is more of a true marketplace. Winners are the manufacturers and retailers because they make a percentage off the margin. And PBMs win no matter what. There are other effects on PBMs but not material to generic pricing. The losers are the health plans. Miscellaneous I m seeing cases where generic manufacturers are calling on doctors to get market share. 2. PBM consultant; repeat source Generic drug pricing has been sensationalized. Although prices will continue to rise on a select number of generics, many generics are decreasing in price. Also, brand-name drugs still make up such a large percentage of total drug spending. This source was aware of PBMs enacting a nonpreferred tier for generics, and viewed proposals in the 2015 HHS budget and for Medicare Part D as significant. However, major interventions from FDA, Congress or CMS to control generic pricing are unlikely. 13

14 I would say there are as many price decreases in generics as increases. There is a trend for out-of-control increases but only for a select number, typically older products. Generally a small number of products are getting a lot of attention, and it s sensationalism for some of these. Basically manufacturers are rationalizing what makes sense for them to continue to produce and what kind of margin they need to justify it. For example, it s happening with generic Coumadin or Warfarin, which has a shrinking market share because it doesn t have the monitoring that newer drugs offer. To stay, profitable the price has to increase. There s also ingredient shortages and consolidation in the generic manufacturing space. It s basic supply and demand and profitability. If you look at a typical $1 of drug spend, three-fourths or 75 is on brand names on average, and generics are 25 of that a small percentage. You need to put it in perspective. In the overall scheme, generics might increase but not as much as you think. A small percentage has been subject to price increases, and typically they re older products that don t account for much of the overall pharmacy spending. Once people understand that, it s less of an issue. They will continue to drive up prices for a certain number of products, but everyone needs to understand it accounts for such a small percentage of the drug spend. The increases in brand prices are much more of a significant issue. There are fewer generic manufacturers.... I don t see increased competition, I see the big ones getting bigger. The [joint purchasing organizations and their discounting are] essentially a volume pricing; that will continue. On page 80 of the Department of Health and Human Services [HHS] budget for the fiscal year 2015 has proposed a penalty if the average price increases beyond CPI [consumer price index], and the manufacturer will be penalized with a rebate. And there s the Medicare Part D proposal that will go final next year where they will have to base MAC lists on average acquisition costs and update no less than every seven days. Those both are significant and are tied together. I have heard of [PBMs/health plans enacting a tier to control generics]. I m sure that is going to become more popular. Blue Cross Blue Shield of Rhode Island is enacting that. Smart move here, putting high-cost generics on [a tier] to push utilization to the lower-cost products in the same therapeutic class. We re in a free market system, and there s been a lot of attention, with certain senators and congressmen looking into it. Whether any interventions will be successful is yet to be determined, but typically the government doesn t do much to control prices. You need upfront pricing control, not necessarily with generics but with brands. The biggest reason for rising drug prices is manufacturers increasing brand prices. There are only two countries that allow any pricing by manufacturers: One is New Zealand and the other is the U.S. The winners are the manufacturers. The losers are the pharmacies that get paid by the insurers because they tend to not keep prices up where they need to be. The other loser is the plan, but generics are a small percentage of their spend. Miscellaneous There are as many price decreases in generics as increases. There is a trend for out-of-control increases but only for a select number, typically older products. Generally a small number of products are getting a lot of attention, and it s sensationalism for some of these. PBM consultant I have heard of [PBMs/health plans enacting a tier to control generics]. I m sure that is going to become more popular. Blue Cross Blue Shield of Rhode Island is enacting that. Smart move here, putting high-cost generics on [a tier] to push utilization to the lower-cost products in the same therapeutic class. PBM consultant As for CMS, there s the HHS budget plan. And states certainly have the ability to put together a preferred drug list. And more 340B programs makes sense, but I don t expect much more than what s already been done. The material in those EpiPens only costs about $1 and epinephrine is cheap, has been around since the 1930s. It s ludicrous in terms of how much these companies are making on EpiPens. 14

15 3. CEO and an operations senior vice president of a midsized PBM; repeat source Little is being done or has the potential to combat higher overall generic price increases. However, this PBM works primarily with self-insured clients and is developing a tiered process that includes a nonpreferred generic level. Absolutely there is [an overall increase]. Sometimes it s due to a high-priced generic specialty drug or to general increases. A few years ago FDA moved to monitor grandfathered generics, and it wasn t effective. At that point the unrealistic profit margin wasn t worth it for many generic manufacturers to keep on making them, so we had fewer national drug codes [NDCs] and then we had active ingredient shortages. Those two are the big ones. Along with a little greed, the manufacturers thought their value was greater than what was assigned to it. Obviously there s been decreased competition due to fewer manufacturers from mergers too. Why they ve gone to so few, I don t know. Brand names buying generic companies also helped get it all started. I don t think Congress can take any action; they re hog-tied and obviously they can t do this themselves. I don t think FDA can have any effectiveness with this. They ve closed down a couple plants and do more with good operating policies to make sure manufacturing is safe and effective. FDA has seen things, but while they say they don t like the pricing, it s not their responsibility. FTC needs to get involved to inhibit or disallow the noncompetitive agreements being negotiated between brand and generic manufacturers. Any brand manufacturer influence resulting in the delay in the release of an ANDA should be investigated. Insurers don t have any play in this at all. They don t get involved. We [as PBMs] put cost pressure at provider level, but that doesn t have any effect on generic pricing for the manufacturer. It s been a long time since we ve seen this kind of a pricing trend going on. We used to be able to count on when a new generic drug came out; we would watch the price drop each day. It doesn t follow that trend anymore. We have some generics coming out that will be charged higher than their brand equivalent, which is leading us to develop a tier for nonpreferred generics. This will put some downward pressure if it s adopted. Usually when one PBM does things, others follow. We can t have members paying zero or $5 when that generic is now $300 or $400. We re putting that in place fourth quarter We ll make it available. We have to talk it through to the clients, but it should be an easy sell. I haven t heard of any [other PBMs] doing it. We ve pushed contract pricing but nothing on the member level. You would think there would be more [generic] competitors, I haven t heard of any. I m surprised smaller ones haven t taken more ANDAs, which is more It s been a long time since we ve seen this kind of a pricing trend going on. We used to be able to count on when a new generic drug came out; we would watch the price drop each day. It doesn t follow that trend anymore. CEO & Operations Senior VP Midsized PBM likely than for a new generic company to get licensed. Teva took a pretty good hit with their manufacturing, but once they get into production, there should be more pressure. I don t think this is much of a change on the [joint purchasing] partnerships. They ve all been dealing with generic manufacturers and seeing how much profit they can make. They may watch it a little closer, but I don t see it will have a big impact. Even if it does, it won t give the chains a bigger advantage. The independent GPOs [retailers] have deals too. I m not hearing of anything significant. We re doing this extra tier, and we may see some generics go to a noncovered status where there are therapeutically sound alternatives within a class. We ll do what little we can do.... Our [PBM] industry has the greatest potential, but... we don t know what to expect of [the larger companies with which we compete]. For example... if our industry as a whole were to place generic Nexium into another nonpreferred tier or not cover it altogether, we could crush the manufacturer sales and pricing. It depends on the everyone s agenda. We re also wondering when consumers will come to understand, they re starting to, but that will take too long, is too far down the timeframe to have much effect. 15

16 Companies that are self-insured and consumers are the biggest losers; the manufacturers obviously and the wholesalers will be winners. Not sure about providers and the retail chains; every time they try to make an extra nickel, we take it from them. Most PBMs would be winners, but PBMs like ours who take fiduciary responsibility seriously would be less so. 4) Pharmacies All four sources said generic prices are trending up, but two believe the increase is limited to a few single-source or limitedsource drugs. Industry consolidation, low margins, the high cost of regulatory compliance, supply chain issues and increased demand all are creating challenges for manufacturers and driving up prices. Two sources expect the higher prices to motivate new competition, but two or three years will pass before the effect is significant. Also, it will be limited to specific drugs. Sources do not expect any intervention from the government, third-party payers or trade associations to change pricing in the short term. If the trend of higher prices continues for 18 months or more, one source expects some review by the government. The recently formed drug buying groups are expected to generate lower-cost contracts and contribute to a steady supply of some drugs, but any savings would not pass beyond the manufacturers and buying groups. Insurers must adjust their formularies to steer away from the higher-cost generics, and doctors likely will prescribe lower-cost drugs when they have therapeutic options. KEY SILO FINDINGS - 4 acknowledge generic drug price escalation trends. - 2 think it is a few single- or limited-source drugs. - Industry consolidation, low margins, the high cost of regulatory compliance, supply chain issues and increased demand were all cited as creating challenges for manufacturers and driving up prices. - Short-term pricing relief is not expected. - If the escalating trend continues for 18 months, the government may get involved. - Drug buying groups will negotiate lower costs, but little will be passed on. - Insurers will adjust formularies away from higher-cost generics. - Doctors will prescribe lower-cost drugs when they can. Miscellaneous - 2 expect higher-price generics to motivate additional competition, but it will take up to 2 years for these new players to affect the market. 1. Pharmacy manager at a major retail pharmacy chain Increasing regulations are the primary cause of drug manufacturers exiting the market. They cannot make a profit on the low-cost generics with the FDA squeezing safety regulations on one side and Medicare pressuring prices on the other. Insurers have a lot of control, but they pay so little and take so long to pay that a retail pharmacy is no longer a profitable, sustainable business plan. CVS Health Corp. (CVS) has too much power and has virtually killed the concept of a private pharmacy, as well as badly hurt the other big players like Walgreen Co. (WAG) and Rite Aid Corp. (RAD). The entire healthcare industry, doctors, hospitals, pharmacies and insurance companies are all corporate now, and people are just numbers. Nothing significant will relieve pricing pressure anytime soon. We are definitely seeing an increasing price on generics, but it is really just a significant increase on a handful of drugs. It is related to a supply/demand issue with too few manufacturers making the drug. Most of our regular generics are OK, no issues. 16

17 FDA oversight has a huge impact on packaging and safety inserts. We have had so many recalls, so many safety concerns even on OTC drugs, that nothing is inexpensive anymore, and a lot of simple OTC remedies are not even available now. The manufacturers just quit making them because they were not cost-effective. The DEA has so many restrictions over controlled substances, narcotics. Percocet used to be about $1 a pill; now it is $3.50 a pill. Hydrocodone has seen huge price increases as well.... Everyone is paying higher prices. Diovan is a blood pressure medication, popular because it has limited side effects especially in elderly patients. It went generic almost two years ago, but because of increasing regulations the generic came out as a compound product, including a diuretic. But Aetna and Medicare Part D designated the new compounded generic as the only allowed alternative. The diuretic is not most appropriate for everyone. It was just a mess. Now Diovan is back, but it is significantly more expensive, and too many insurers deny coverage for it. Doxycycline is the only drug recommended for Lyme disease. Some people use it for acne or other skin conditions. Vets even use it for animals. It has been around forever and was very inexpensive. Then we had a shortage. It was on backorder for a while. When we finally got it in again, it was 15 times the price. Colchicine for gout used to be the cheapest drug on the market; it is all generic. Then the FDA required it to be reformulated. Now Colcryst is the only thing available, and it went from being $15 a month to $200 a month. Medicare D pays $79 to $100 a month for it. Regulations are already too heavy a burden, so many drug manufacturers just get out. The original manufacturer offers a generic, but it may only be 10% less expensive than the branded original. Medicare pushes back, so the manufacturer drops the drug because it is no longer profitable. Those drug makers that keep making the drug take advantage of the limited availability and raise prices to recover their losses on all the other generics. We will not see new competition making an impact. The big manufacturers and the buying groups have too much power. New entrants to the market will not be able to gain any foothold. The big buying groups will not have any impact that helps the consumer at all. We may see a better, more sustainable supply as a result of their buying contracts, but we will not see prices come down. If you ask the same questions in different regions, you will get different answers because the same players have different levels of influence in different areas, but it is the same few players. Here CVS has too much power, and it seems to be a growing influence. CVS is not offering anything better. They have just wrapped up all the volume by agreement with our state. Now all state-insured people have to use CVS or pay a penalty. Who is going to do that? So many more opportunities have opened up worldwide that major drug makers do not have to sell in the U.S. and undergo all the FDA oversight. If they sell in other markets, they can be more profitable. I have even heard one of the Big 3 pharmacy retailers [Walgreen] is considering moving its headquarters to Europe because it is so difficult to remain profitable under the heavy regulations in America. We are definitely seeing an increasing price on generics, but it is really just a significant increase on a handful of drugs. It is related to a supply/demand issue with too few manufacturers making the drug. Most of our regular generics are OK, no issues. Pharmacy Manager Major Retail Pharmacy Chain CVS has too much power, and it seems to be a growing influence. CVS is not offering anything better. They have just wrapped up all the volume by agreement with our state. Now all state-insured people have to use CVS or pay a penalty. Who is going to do that? Pharmacy Manager Major Retail Pharmacy Chain The FDA is all restrictions, fines and lawsuits. Companies are hurting and cannot compete. GlaxoSmithKline [plc/gsk] and Pfizer [Inc./PFE] are both predicting huge losses. I do not see anything getting better. We are monitored by a state board of pharmacy. It used to be about keeping standards high, and everyone respected that. Now it is all about changing the rules and tripping us up so they can fine us. Our company recently joined an agreement with a wholesaler, but it has not been a good transition. They were not prepared to meet our volume. They stock five or six different manufacturers and have agreed to always send us the least expensive drug they have, so that means every time I get a shipment, it is from a different manufacturer and the pill looks different. Our customers do not like that. It messes with their trust. They think we have switched drugs 17

18 or made a mistake. Obviously, we cannot dispense two different looking pills in the same bottle, even though they are the same drug. We end up with leftover supply we cannot sell. It is really a problem. Nothing significant will help prices anytime soon. Congress might intervene, but we will not see changes there that will help the problem. Medicare s influence on the drug market is huge, so their influence will make an impact and pressure pricing by the manufacturers. But it will not cause prices to go down. It is possible that someone will come up with a new niche, some gimmick that moves the needle. I do not know what, but an example would be like a few years ago when we started giving flu shots at the pharmacy. That was unprecedented. Now everyone is doing it, so the edge is gone. Insurers pay so little and take so long to pay that locally owned pharmacies cannot survive anymore. Pharmacies need so much capital to stay afloat, it is not a viable business plan to run one anymore. Everything has gone corporate. Pharmacies are corporate; doctors, hospitals and insurers are all corporate. Every decision is about the bottom line. If there are limited insurers, then patients have no choices, and that seems to be the direction we are going. Miscellaneous CVS is not going anywhere. They just started this antismoking campaign; they are no longer selling cigarettes because smoking is not healthy for you. They even changed their name. Now everyone is jumping on that gimmick. Now if other pharmacies sell cigarettes, it looks bad. 2. Pharmacy manager at a major retail pharmacy chain The entire generics market is stable, but a few single-source generics are priced too high. When this happens, usually insurers replace the high-priced generic drug with a similar drug on their preferred list. Drug manufacturers are not compelled to continue making an unprofitable drug, which may happen because of raw materials shortages or other supply/demand issues. Congressional intervention usually is not good for the market. Large purchasing groups are able to secure contracts on the most cost-effective drugs and also assure a stable supply. I am seeing a higher GPM than ever before, so the entire generics market is not on an escalating price trend. Ninety-seven percent of patients I work with have insurance coverage. It is a very good place to be right now overall. If we are more specific to single source generics, then we do have some generics that are priced incredibly high, and a lot of things play into that. Ultimately, if a drug manufacturer cannot make a profit on a certain drug, they will quit making it, and that may be the biggest factor. Take tetracycline, for example. It is an older antibiotic and everyone used it. We used to get it for pennies a pill, and then there was a shortage. We could not even get it for three or four years. Now it is back, available again, but it is $7 a pill a tremendous increase. The good thing is we have a lot of alternative antibiotics available now. The worldwide market demand for drugs has opened up now to include China and India, and that is a huge volume of people to be served. Sometimes the raw materials needed to make a drug are in short supply, causing an undersupply issue and driving up the cost to make the drug. A drug maker may just quit making that drug and move to something more profitable. Keeping competition open is the only real driving factor, and it will naturally resolve the issues given some time. But some antibiotics may go away in the process. Generally we have other antibiotics available, and the payers will select another more cost-effective choice to put on their preferred or formulary list rather than continue to pay exorbitant prices. Cash patients are most impacted because they are the ones carrying the full burden of cost alone, and they do not have a formulary list to protect them, so to speak, when these shifts occur. They are often unaware they may have an alternative. When a patent on a branded drug expires, the competitive landscape changes. Often the same manufacturer of the branded drug is the first to offer a generic because they are ahead of the game. But this initial offering may not be priced much lower than the original branded drug. It is when other manufacturers come out with a competing generic, usually three to six months, that we begin to see the price dropping. 18

19 There are enough drug manufacturers out there to keep the market competitive, but they still have choices about what drugs they make and how profitable those drugs need to be. We now have drug makers in India, Israel and Ireland. The FDA has the burden of monitoring the standards on all of those companies, so the world depends on the U.S. to maintain the quality of the drugs on the market. Certainly large purchasing groups will have some purchasing power to help manage costs and supply. Walgreen is contracted with AmerisourceBergen and Alliance Boots, which is a UK generics supplier [owned by KKR and Walgreen], to source the same drug at the same price for 9,000 retail locations across the country. They have the largest worldwide logistics in the world. But the compelling factor is more than just cost; often it is driven by available and sustainable supply. Insurers have already started acting by changing their preferred drugs to other more accessible, cost-effective options. A couple of years ago the President said the FDA would put pressure on drug manufacturers to inform the public if a drug would be unavailable or discontinued. However, there is really not a lot they can do to compel a manufacturer to continue making a specific drug if it is not profitable. I do not see the single-source generics driving the market long term. In the end, when insurers change their preferred lists, demand dries up for the original expensive drug. I have tetracycline on my shelf at the back of the store now, but I fully expect it to expire there because no one is paying the higher price for it now. Insurers have already started acting by changing their preferred drugs to other more accessible, cost-effective options. Pharmacy Manager Major Retail Pharmacy Chain The generic drug industry is a free market system subject to normal fluctuations. It will all balance back out naturally given some time. Congressional intervention is not a good thing, and ultimately does not help anyone. Miscellaneous It will be interesting to see what happens when the patent for [Pfizer s] Viagra expires. It is still a couple of years out but an area to watch. [AstraZeneca plc s/azn] Crestor is also expiring in the next couple of years, but it is not as popular as [Pfizer s] Lipitor so that may not be as compelling. 3. Pharmacist owner of a small group of independent pharmacies; repeat source Generic pricing is on the rise although a few generics still cost very little. A coalition of third-party payers would be required to get Congress to address the problem. The source would rather not see more government regulations but fears that this is what is needed to rein in prices. There s definitely a trend toward generic prices going up. In the past year, we have had numerous products whose prices have gone up 300% overnight. There are a few generics that are still very inexpensive. There have been some shortage issues due to the ingredients, the raw materials. I think there have been several companies in India that the FDA has shut down the import of their products. That s taking players out of the market. And the prices are going up because [manufacturers] can get them. It s easy to blame the ACA [Affordable Care Act] for everything, so I don t know [if it has had an effect]. Most of the people who we have, the elderly and all, already had some type of coverage to begin with. But there is a lot more demand now because there are more people on insurance, especially in states that have expanded Medicaid. But Medicaid tends to have a very tight formulary. In the last six months it s been the worst I have ever seen it in terms of shortages. Just flat out, nobody has it. I ll even call a [nearby] hospital and ask if they have it, and they will say, I wish. Pharmacist Owner Small Independent Pharmacies There are enough players. There s definitely consolidation. The companies keep buying each other. If both generic companies produce the same medication, then a lot of times one of them will drop theirs. I used to be able to kind of 19

20 pick and choose which company I liked and wanted to use for products, and I trusted them. Nowadays it s pretty much anywhere you can get it, you better get it quick because it s going to be gone before long. In the last six months it s been the worst I have ever seen it in terms of shortages. Just flat out, nobody has it. I ll even call a [nearby] hospital and ask if they have it, and they will say, I wish. We have seen some [new competition enter the generic market] because occasionally I will get things from companies that I don t even know who they are. Yes, I think [the increased pricing] may bring on some new smaller companies, especially for some of the more unique generic items something that s not one of the top 100 drugs. I think it would take two to three years [for new competition to affect the market]. Patients are going to be the losers because a lot of them are just going to be shut out; they are just not going to take their medications, especially if more and more of the third-party payers say, We are not paying for this or that. Doctors get tired of messing with it, people get tired of it, pharmacies get tired of it. I can see where that whole thing could eventually not be good for patients and not for the pharmacies too. The chains margins are slim to none, just like independent pharmacies. I d think wholesalers would probably be under pressure because they are probably paying more to the manufacturers as well, and they have to pass that onto us. The whole thing is just all cascades. I don t know about manufacturers. It s hard to say, but I would think they d be having a heyday right now because a product that used to ship to me for $10 is $1,800 now or whatever. You d expect they are really raking in the dough right now, but I don t know if that s the case. If the [pricing] continues at the pace it has in, say, the last say 18 months, finally the government somebody is going to start looking into it and saying, Hey, what s going on here? We can t have this. Patients and pharmacies are starting to speak up about it. I m not aware of actions being taken at this time. A lot of times the third-party payers will raise the copay on certain generics, but usually it s more a yes or no: We are either going to pay for it or not pay for it. Historically the pharmacy groups try [to lower prices], but we always seem to be chasing our tails [because] it s after it s happened and it s really hard to undo things. It s going to take somebody really big [such as] a coalition of the third-party payers to say, We have had it.... If they can t get it done, then it s going to have to be CMS. Something can be done. It ll take some government intervention or something to probably get it back under control. I hate to think that it will just continue spiraling out of control. I hope [generic drug pricing] gets kind of reined in and under control. I hate to see any more government regulation than we already have. I d prefer that not be how it happens, but I m just afraid that s going to be the only way it will. 4. Executive at a mail order pharmacy that primarily serves employer groups A lack of pricing clarity in the generic market allows manufacturers, distributors and retailers to maintain their pricing power. Because of that, the source does not think a short-term solution exists that could reduce pricing. Medicare and Medicaid could limit generic drug reimbursement, but that would result in higher prices for private payers. Overall we have seen a reescalation of pricing over the last nine months. Earlier in the year there were fewer, but significant price increases that seemed to be associated with some supply chain disruptions. And I think what we have seen from late summer onwards here is that generic drug pricing seems to be increasing more across the board than it was earlier in the year. There continues to be consolidation amongst generic drug manufacturers. All the large manufacturers are publicly traded companies, so they are going to continue to grow their earnings, which is how they get people to invest in their stock. They continue to consolidate and take market share. I think there continue to be supply chain issues. Generic drug manufacturers to a large extent are motivated by economics, so when prices in certain drug classes fall too low, they just take their capacity and manufacture other higher margin drugs, which means there Earlier in the year there were fewer, but significant price increases that seemed to be associated with some supply chain disruptions. And I think what we have seen from late summer onwards here is that generic drug pricing seems to be increasing more across the board than it was earlier in the year. Executive, Mail Rrder Pharmacy 20

21 are fewer suppliers left. Then those suppliers use that market imbalance to increase pricing. Also, there continues to be growth and demand for generic drugs; that... will continue to increase prices. New [manufacturers] will enter the market, but it s going to be on very specific drugs and it will take a long time for them to have a meaningful impact.... But as prices continue to rise, there s going to be a stronger economic incentive for additional manufacturers to enter the market and for the existing manufacturers to add capacity, if they can get a return. I see the strategic rationale for the joint purchasing organizations is to extract larger price concessions from the large manufacturers. I think you will probably see alignment around certain drug classes amongst these organizations and manufacturers. But I don t see that necessarily being passed onto the payer. I think to a large extent that the additional margin so to speak that has driven those partnerships to fruition is going to be to a large extent contained by the partnerships. [If the higher generic pricing continues] the winners will be the PBMs. They get to attain more margin because they are the ones that sort of control drug pricing for basically all the health plans and the private-pay parties, as well as to a certain extent the Medicare Part D. I am not aware of anything organized [in terms of actions to lower generic drug prices]. I have read and seen that some elected officials have raised their concern. And I think the reaction of many employer groups is pretty indicative of how they have been forced to deal with it, which is try to place more responsibility for paying for these drugs on members. The government... may be able to impact pricing on their level. But if the government starts putting caps on the price they will pay for generic drugs, it s my belief that you ll see [prices] increase on the private-payer side. Employers have voiced their concern, but they are not alone. We as a nation have seen a continuous whatever 5% to 7% cost trend in healthcare, which is significantly higher than inflation.... We haven t really been able to do anything about it. Generic drugs [are] still the Wild West. It s a very complex market with a very large number of highly utilized drugs, but there s not a high level of price clarity, especially as you get further down the value chain to the actual payer and end user. That s been basically exploited by manufacturers and distributors and retailers to a large extent so that they continue to have significant pricing power. I don t see a short-term fix. Just like they do in other parts of healthcare, you find isolated incidents where something is completely out of whack [price-wise] and somebody may do something about it. But it s not going to change the underlying trend. [The higher pricing is] not something that someone can move online and fix, because you still need prescriptions and doctors. Unless you sort of fundamentally change how the doctor-patient relationship is structured, I don t think somebody can fix this overnight like you have seen in a number of other industries, like financial services. 5) Third-Party Payers These four sources confirmed the trend of generic drug price increases. Two said it is isolated to older generics or singlesource generics. One attributed the trend to the forces of supply and demand and the branded-drug patent cliff issues. Another said room existed for consumers to pay more for drugs, and now they are. Two sources said specialty and biologic drugs also are experiencing price escalation, and one said they will increase 67% by Insurers efforts to control costs associated with the rising drug prices include dropping expensive drugs from formularies, implementing step therapy programs and participating in drug purchasing collations. One source said insurers have been preoccupied with the implementation of the ACA, but next year they will focus on controlling drug costs and may even use price mandates. Government intervention is likely, especially for the specialty drug issue. One source believes new competition in generic manufacturing is unlikely because they cannot successfully go up against the large producers. Another said manufacturers are clamoring to get into the specialty drug market. KEY SILO FINDINGS - All 4 acknowledged the price escalation trend of generic drugs. 21

22 - 2 said it is isolated to older and single-source generics. - 2 said specialty drug and biologics will increase by 67% in price by Market supply and demand forces, the reduced number of branded drugs hitting the patent cliff and consumers willingness to pay more are reasons for the price increases. - Government intervention is likely, especially for the specialty drug pricing issue. - Insurers are expected to drop expensive drugs from their formularies and to implement step therapy programs. - Joint purchasing organizations are also expected to help reduce prices. Miscellaneous - 1 said insurers soon will be finished implementing the ACA requirements and then will concentrate on drug price reduction efforts. - 1 said new generic competitors are unlikely because they cannot compete against the large producers. - Manufacturers interest in the specialty drug market is high. 1. Director of pharmacy services at a third-party payer Generic drug manufacturers are facing a colossal constellation of cost increases. FDA standards and increasing regulations have pressured manufacturers during the last 10 years, reducing the number of players either by consolidation or makers just exiting the market. Large purchasing organizations have only one goal: to control a piece of the market, which only exacerbates supply and cost issues for everyone else. The drug market is not a free one; too few large players control too many layers of the system. New competitors likely could not win; as such, they will not enter the game. The biggest factors will be raw materials, FDA regulations, U.S. compassionate care legislation and Medicare rules that require equal access for everyone. Improvements in research may help manufacturers time the production of appropriate volumes of medications when and where they are most needed, which may ease supply issues worldwide. Some older generic drugs have been around for 40 years and have recently seen a significant price increase. Manufacturers go through so many levels of complication now, from added FDA standards and setting a benchmark price to meet the layers of the market like need or demand vs. supply, and the cost-effectiveness of it all in each market. It is a colossal constellation of cost increases. Drug pricing is also tied to the price of petroleum. Petroleum is used to manufacture most drugs, and the increasing regulations in that industry are contributing to higher prices there, which pass through into this market as well as many others. Manufacturers are paying more to get the drug to market initially, pass FDA guidelines and all the fees. Walmart [Stores Inc./WMT] has moved Synthroid for thyroid patients up to $8 when it used to be on their $4 generics plan. I do believe the general trends are level now and may even be falling in some categories. Consumers are backing up some, taking fewer drugs, maybe dropping one prescription out of six or seven. The number of generic drug houses has dramatically dropped off over the Eventually it may all balance out, but it is not a fair playing field when a few big manufacturers control all the raw materials. Smaller players will not be able to get in the game. Director of Pharmacy Services Third-party Payer last 10 years because of several factors, including FDA regulation increasing, consolidation of players and some exiting because of increasing profit pressures. Eventually it may all balance out, but it is not a fair playing field when a few big manufacturers control all the raw materials. Smaller players will not be able to get in the game. New players cannot compete, so there likely will not be any significant change in the competition between manufacturers for a long while, if ever. Large purchasing organizations only have one goal in mind, and that is to control the market in some way beneficial to themselves. That only serves to contribute to the problems, to shortages and increased prices for other players. 22

23 Walmart, for example, has a worldwide influence. When there was a sudden increase in herpes and they tried to corner the market on acyclovir, no one else could get it. Walgreen, CVS, Walmart, McKesson and Cardinal are all the big players, but they are working against each other. Some strategic games are going on, but the gainers will have to control the raw materials, distribution and consumption. Smaller players cannot compete, so they will not enter the game. Everyone is working on something but timing is critical, and it will take awhile for anything significant to reach the level of the consumer. Specialty drugs continue to go up in price, and the government is attempting to control prices here and in Europe. Funny that Europe wants what we have, and we want what they have. No one likes their own system. Europe has one or two steps to clear to get a drug to market. The U.S. is unique in the world with the FDA, which requires no less than six or seven steps to clear a drug. Eventually the government will set the pricing worldwide. Anything stimulated by $300,000 from Cystic Fibrosis Foundation, for instance, will end up under a compassionate care pricing. What is good for the patient and provider will be required by law and priced under compassionate care. It will include anything like Hepatitis C, HIV, diabetes, cardiac care, anything that people respond to will fall into that category, and the government will require manufacturers to provide the drugs under a controlled price structure. The drug industry, both generic and branded drugs, is all supposed to be a free market. And it is called a free market, but it is not. Too many layers of the market are controlled by a few big players, and that does not make a free market system. We may see a few new players, but more than likely they will lose their shirts. Miscellaneous As we are able to get more sophisticated data, the big players can compress the timeline on manufacturing appropriate volume of drugs timed to meet demand. That is a huge research machine, and it may help ease supply issues. The most compelling factors to pricing are controlling raw materials, FDA regulations, U.S. compassionate care legislation and Medicare rules that require equal access for all. 2. Pharmacy health plan leader at a healthcare co-op The source noted a few single-source generics with higher prices based on limited supply. Drug manufacturers may exit the market on a drug when the profit margin is too tight, which may limit availability and drive up prices. Insurers are likely to drop an expensive generic from their preferred list, in favor of a brand-name or a similar drug. Coalitions and insurers can work together to increase their buying power, keeping costs low and sustaining availability. The source discussed the pricing of specialty and biologic drugs, which are more expensive to make and have 20-year patents. Congress may intervene if a drug maker does not introduce new drugs at fair prices. A few drugs have become less available when the makers of the drug dropped out because profits on it were too tight. Supply and demand are the primary drivers in the market, and manufacturers know that. If only one manufacturer is making the drug, they can set the price. Declining competition, drug shortages and increased demand have all played a role in driving up the prices on some generic drugs. Purchasing coalitions and insurers are the most effective at offsetting the prices. Insurers may select the brand drug over a generic if there is very little price difference, or they may select another similar drug, which in turn causes demand to drop off for the more expensive generic. Manufacturers have to have a sustainable market for a drug, or it will dry up. I see the competition among drug manufacturers to be more at the other end of the spectrum in the specialty and biologic drugs. These have 20-year patents, and some are very expensive. A lot of manufacturers are clamoring to enter the specialty market, and increased availability of choices helps control costs. Sometimes we have to work together to make a drug more accessible, make an oral format instead of an injectable, or find a more convenient form for dispensing the drug. 23

24 We are expecting a cost increase of 67% on specialty and biologic drugs in Purchasing coalitions will be on the rise, joining together for better buying power. If drug manufacturers do not introduce new drugs at fair prices, Congress will intervene. They are already looking at new Hepatitis drugs because they are too expensive. Sovaldi is something like $1,000 a pill. But it is not usually good for Congress to get involved. Insurers have to tighten protocols and use tighter controls to assure the right drugs are issued to the right patients in order to be able to sustain coverage for the larger group. Insurers, payers and the government are likely to be the first to act in order to control costs, and in some ways they already are making an impact. The generics market is a free market, but still things can be done to influence it. Risks are usually involved and have to be weighed against the benefits, but we can respond. Keep watching that specialty drug market and those manufacturers. That may be the more compelling cost issue in the immediate future. Those drugs are expensive to make and the makers still need to make a profit, so all the players will have to work together to make a sustainable solution. Pharmacy Health Plan Leader Healthcare co-op If generic drug manufacturers exit the market, there is not a lot a payer can do. But coalitions can work together to increase buying power, keeping costs low and sustaining availability. Miscellaneous Keep watching that specialty drug market and those manufacturers. That may be the more compelling cost issue in the immediate future. Those drugs are expensive to make and the makers still need to make a profit, so all the players will have to work together to make a sustainable solution. 3. Benefits manager of a large medical organization This source said the generic price increases are a result of a free market system and of the cycle of brands coming offmarket. Interventions are limited and not likely to affect pricing. They have increased overall. We re still in the process of becoming an [accountable care organization] so we re still working independently. But the effect on [our self-insured program] is we re holding our own on our costs. A lot of brand names are coming off, and manufacturers are trying to make the most money. That s the primary reason [for the increases]. The others are very secondary to that; it s supply and demand. I do not think it will continue. My crystal ball says there are new advances and new drugs coming out, so generics will have to come down in price eventually. From our standpoint, we ll have to be limiting unless there are known efficiencies. For example, there s the new heart medication that is significantly higher. New brands like those cause everyone to go to their physician to get that drug, and it drives our costs up. You need to put in step therapies on brand drugs. There are a few cases where the generic doesn t work because of allergies to secondary filler ingredients. I would hope there would be more competition because that will drive everybody s costs down. I think the impact would be very quick because pharmacy groups purchase for cost and make decisions very quickly. The joint purchasing organizations will fare fine, and there should be no effect. They have such a large customer base and buy the lowest price. We re shopping our PBM. It s an economy of scale for us now [that we re merging with some other organizations]. I don t see any likely intervention.... The generic drug industry is a free market system, and little will change that. In the long term the employees are the losers because they re seeing rising copays, and the manufacturers developing and marketing the generics are the winners. For the most part these are maintenance drugs. The end users can t take what they were prescribed, or they ll skip a day, or if they re on three to four maintenance drugs, they ll have to choose. Manufacturers have their costs built in. They re the winners. The middlemen distributors, PBMs, get a small portion. 24

25 4. Executive with extensive expertise in health insurance benefits; repeat source The only way for third-party payers to control high drug prices will be to dictate the price. Private payers still are swamped with implementing the Affordable Care Act but, once completed, they will concentrate more on pricing and other costcontrol issues. If consumers end up with the bill for drugs that private and government insurers will not pay, they will get on the bandwagon of innovators that can halt the price increases. Generic penetration depending on how it s being measured through the employer or whatever is really probably almost at its maximum. The majority of people who can use generics are probably using generics now. I think that we got there because we were giving the drugs away; now you can t give them away anymore. Whether you re going to make the person pay $4 or $10, they are still going to buy it. I think there was room for the customer to pay more; the market is taking advantage of that, and I think that s fine. If I am driving down the street and trying to buy generic Lipitor and on every corner there is another drugstore and one says $4 and one says $5, that s true market pressures keeping generic prices down. But if I know that I m picking up a $1,000 drug and my health plan is going to pay for it because I ve hit my maximum out-of-pocket, I m no longer making a consumer choice anymore. Now the purchase is between the insurance company and the provider and the only way to control that price, in my opinion, is to mandate it. Medicare and Medicaid will exert their pressure [to lower drug prices]. The carriers will exert their pressure. The carriers will get the consumers to go along with them if they market it correctly. [The carriers] need patients to buy the plan that allows the carriers to dictate the situation, which I think consumers will do. If I am a consumer and this plan says it is 20% less if you allow us to control the drugs you are taking and it gives you less choice, will I go along with that? The answer is yes. It s harder [to do that] in the larger group markets because the employers will try to argue with [the insurers] and tell them they don t want those constraints, but I think that s going to go away. If I m a health insurance company selling products in the small group or individual health insurance marketplace, I can get away with just saying, This is the way my drug plans are, and this particular drug can only be purchased from this place. I can dictate it. The most immediate losers are the consumers because in one way, shape or form those bills get sent to the consumers. I think there was room for the customer to pay more; the market is taking advantage of that, and I think that s fine. Executive w/ Extensive Expertise in Health Insurance Benefits The employers have had it; they are not going to stand back and absorb the kind of inflation they have absorbed for the last 20 years. They will use defined contribution, and the private market place is a way for them to shuffle out of the game [although] they won t get out of the game totally. That means the individual has to bear more cost of health insurance and healthcare in the form of copays and deductibles. That s why I just don t think [continuation of the higher pricing] is going to happen. The consumer will latch onto anything innovative to stop it. Anyone who wants to get innovative in this space and try to figure out a way to stop that rise, I think the consumer will get on that bandwagon. That would never have happened 10 years ago because consumers still expected the employer and government to pay for everything and they are now finding out that s not happening anymore. My involvement [in trying to lower generic drug pricing] is going to be on the insurer side and the self-funded employer side. There s no question that they are all right now trying to figure out how to deal with this, but it s in the very early stages. The problem right now in the health insurance industry... is that they are absolutely buried in trying to implement the ACA.... The good news is this time next year they won t be talking about implementing the ACA; it will be done, and they can then get to focusing on these topics. That may be another dynamic that might be in play the last two years. I think carriers were completely overwhelmed and not able to watch things as tightly as they were a couple of years ago. When these insurance carriers went to the generic push, they had the time. There was nothing going on, and they could really get into it and they dove deep. There s nobody diving deep right now. They are just trying to get through the day. 25

26 There s no question that government pressures on price are in play, and they are happening through the regulation of the [health insurance] rate. I don t think that s necessarily a bad thing. And there s no question that because of movement to the high deductible health plan, that the consumer is now paying attention. I just believe that Milton Friedman was right when he wrote his paper on healthcare and America. He said there are only two forces known to mankind that can control price: government control and consumers. And in the American healthcare system, neither is in play. The ACA put both of those into play. 6) Industry Specialists These six sources confirmed the generic drug price escalation trend for some drugs. Contributing factors include industry consolidation, higher worldwide demand, drug and raw material shortages, FDA oversight, and manufacturers abandoning the production of low-value products. One source said new generics coming to market during their exclusive marketing periods are being introduced at much higher prices, sometime even more than the branded versions once rebates are factored in. The pricing trend is expected to continue for the near future as market conditions adjust and cost-containment efforts take time to have an effect. Those efforts include new competition entering or reentering the market, the elimination of the FDA generic drug application backlog, insurers adjusting formularies to avoid high-cost drugs, and joint purchasing entities establishing lower-cost contracts. Intervention by the government is possible, especially for specialty drugs and biologics. The National Community Pharmacists Association is pushing for the passage of HR4437, but it will not be addressed until The CMS requirement for more price transparency from PBMs will be enacted in KEY SILO FINDINGS - All 6 acknowledged the generic drug price escalation trend for some drugs. - The pricing trend is expected to continue for the near future as market conditions adjust and cost containment efforts take time to make an impact. - Industry consolidation, higher worldwide demand, drug and raw material shortages, FDA oversight, and manufacturers abandoning the production of low-value products were all cited as contributing to the higher prices. - New generics coming to market during their exclusive marketing period are being introduced at much higher prices than in the past and in some cases higher than the branded drugs when rebates are factored in. - Intervention by the government is possible, especially for specialty drugs and biologics. - The National Community Pharmacists Association is pushing for the passage of HR4437, but it will not be addressed until The CMS requirement for more price transparency from PBM will be enacted in The elimination of the FDA generic drug application backlog would help increase the number of generic drug producers and eventually reduce prices. Miscellaneous - New competitors are expected to enter or reenter the market to benefit from the higher drug price. Still, these factors will take typically six to nine months before affecting pricing. 1. John Norton, PR Director for the National Community Pharmacists Association This organization has been actively pushing Congress for solutions, but Mr. Norton acknowledged that Congressional action will be limited until January 2015 when it will reconvene post-elections. The free market system is playing a big role in generic pricing, with increases likely to continue in the short term. However, he is hopeful about HR4437, and expects the FDA and manufacturers to address shortage issues. CMS decision to require higher transparency in pricing from PBMs for the 2016 plan year also is a positive sign. 26

27 Earlier this year we released the survey on how three-fourths of surveyed member pharmacists reported large increases in generic drug pricing. Another effect is pharmacies purchasing these drugs are aren t reimbursed correctly because the maximum allowable costs [MACs] lists updated by PBMs are not being updating promptly, and there s a higher risk of community pharmacies going out of business. A primary reason is the cost benefit analysis for the manufacturer, which doesn t stay ahead of when issues arise. If there s a spike in need for a certain generic they are left flat-footed, which can cause prices to increase. I m sure the merger wave can impact prices, and that s part of the issue. Since the solution hasn t been found, I think the issue will still be here for a while. Three to four years ago we got to this patent cliff, with huge blockbusters, and this should have led to a huge cut in costs. Clearly there were a large swab of exclusions, and there have also been these spikes. It should have been different. I don t know of new generic competitors or how long it would take. But of course, the more competition the better because it should drive prices down. We hope competition steps up. It shouldn t impact [the joint purchasing organizations] negatively, but I don t know how positively it could. The McKessons of the world have tremendous power, and this pricing issue creates an incentive for their prominence as they can best achieve price reductions. For our organization, finding a group to help our independent pharmacies is essential. CMS did offer an important concession when they adopted the rule for Part D plans; 2016 is the year that this will be implemented. Creating a standard and timeframe are critical steps. Forcing the PBMs to update [MACs] more frequently will help to address the discrepancies between their acquisition costs and reimbursements. Also when independent community pharmacies sign contracts with PBMs, they have no idea what the criteria is for the reimbursement formulations they are subject to. This is another important remedy. We will see how the implementation of this process plays out, which is why we are still focused HR4437 and other actions for more transparency and hearings to understand the reasons for the price increases. Clearly, we would like the FDA to do something. It will take some time to change the reimbursement structure. And it would be Congress that can create a more fair transparent system with HR4437. It s true the clock is running out with this Congress. They re only here a couple more weeks; then there are the elections followed by the lame-duck session. But we are keeping up our momentum, calling for more hearings and hopefully creating additional solutions. And it will be front and center in January The generic industry is definitely part and parcel of the free market system, but I don t believe that nothing can be done. FDA and manufacturers can address one of the more obvious reasons of the shortages. The drug manufacturers come out on top. The losers are the pharmacies and patients to a certain extent who are affected by the service issues. The biggest winners are the PBMs who control the system. Earlier this year we released the survey on how three-fourths of surveyed member pharmacists reported large increases in generic drug pricing. Another effect is pharmacies purchasing these drugs are aren t reimbursed correctly because the maximum allowable costs [MACs] lists updated by PBMs are not being updating promptly, and there s a higher risk of community pharmacies going out of business. PR Director Natl. Community Pharmacists Assn. 2. Pharmaceutical consultant This source described a number of drivers behind the increase in generics pricing as part of a dynamic cycle. Greater drug demand worldwide affects supply. In Western countries, aging populations require more long-term pharmaceutical therapy. Developing countries also are seeing higher demand resulting from increased Westernization. On the supply side, capacity has been reduced because of company consolidation, manufacturers exiting the CMO business to convert facilities to captive use, and increased quality oversight with resultant delays in compliance. Many manufacturers are also exiting unprofitable markets. When a generic drug is launched, it can be a billion-dollar market, which attracts 27

28 multiple manufacturers. With increased competition and abundant supply, the market may shrink to a hundred of thousands of dollars, driving manufacturers out of the most unprofitable lines. API manufacturers also are abandoning low-value products. This results in fewer manufacturers, decreased supply and increased demand. Such a situation creates an opportunity for the remaining manufacturers to increase price and profit margin. The new price potential then attracts new manufacturers. Previous manufacturers may reenter in as little as six to nine months if their approval is in place and the required equipment and materials are available. The FDA has approved more NMEs (new molecular entities) in the first three quarters of 2014 than in all of 2013, which is good news for branded drug manufacturers. Still, the shortage of drugs coming off-patent is hindering the ability of generic manufacturers to maximize profits. Generic drug prices are dynamic based on supply and demand fluctuations. Increased drug demand resulting from aging populations and developing world demands tax the drug supply. Drug manufacturing capacity has decreased due to company consolidation and plant closures, companies exiting the contract manufacturing business in favor of captive use facilities, and increased quality oversight with resultant delays in compliance. Many generic manufacturers are exiting older, unprofitable markets. Manufacturers of active pharmaceutical ingredients are also abandoning low-value products, thereby decreasing availability of key components. Fewer suppliers and increased demand result in shortages and price increases. But price increases encourage new and returning market entrants. If a manufacturer opts to return to a more profitable market, it could do so within six to nine months if the approval and all required equipment and supplies are in place. Increased drug demand resulting from aging populations and developing world demands taxes the drug supply. Decreased profit potential and the lack of a new generic drug pipeline lead manufacturers to abandon the least profitable products. The FDA has approved more new molecular entities in the first three quarters of 2014 than in all of But it is the shortage of drugs coming The FDA has approved more new molecular entities in the first three quarters of 2014 than in all of But it is the shortage of drugs coming offpatent that is negatively affecting the ability of generic manufacturers to maximize profits. Pharmaceutical Consultant off-patent that is negatively affecting the ability of generic manufacturers to maximize profits. Miscellaneous The largest buying groups demand for large, single lots have been blamed for supply shortages in some instances, but the U.S. government remains the single largest purchasing entity. 3. Generic pharmaceutical consultant Generics pricing is naturally cyclical. Drugs should be looked at on a case-by-case basis considering supply and demand factors. At initial offering, a generic drug can provide a strong profit incentive for a manufacturer. Over time many competitors, including low-cost country manufacturers, enter the space. This results in increased supply and downward price pressure. Once the market price reaches a level that generics manufacturers cannot make a profit, a number of the generics manufacturers will abandon the compound for more profitable products. Some low-cost generics manufacturers have been forced to at least temporarily discontinue manufacturing because of quality issues. With less competition and dwindling availability, the remaining manufacturers are free to raise prices. If the price level becomes attractive enough, more manufacturers that produce similar dose-form products may enter or return to the space. Entering/reentering a particular market depends on many factors, including equipment availability, raw materials availability, supplier qualification status, stability of the manufacturing process, and corporate strategic direction. At minimum, it would take some months to reenter the market. If the potential to make profit exists, more generics manufacturers will consider adding the product. Once the available supply increases, the market price will normalize. Generic drug prices are cyclical. They need to be evaluated on a case-by-case basis. 28

29 Multiple competitors and increased supply leads to price pressure for the older generics particularly. Once the market price reaches a level that manufacturers cannot afford to make it, they will often exit the market. This leads to decreased supply and higher prices. Quality issues with overseas manufacturing plants, particularly in India and China, have stalled or entirely discontinued sources of generics. Whichever manufacturers are still producing can command premium pricing. Some of the price increase may be attributable to higher raw materials costs. In reality, generics manufacturers focus on dosage forms, not therapeutic class. Whether a manufacturer will enter the market for a particular product is largely dependent on the equipment, technology and plant capacity. Very low market prices not only drives out competition, but generally speaking it is the result of lower quality and corner-cutting. Injectable drugs were high on the shortage list approximately five years ago due to manufacturing capacity limitations. Once the market price falls to a point where a manufacturer cannot profit, many are driven out of the space. The remaining manufacturers are then able to capitalize on the opportunity to maximize profits for some period of time. The decision to consider returning to a market previously abandoned due to downward price pressure is multifactorial. Equipment must still be available and appropriate to the task. Raw materials must be available and qualified. Any changes to the manufacturing process, and suppliers would introduce a longer timeline and higher cost of entry. It is likely many of the former manufacturers will have simply moved on to other product lines. N/A Miscellaneous Generics pricing is always cyclical. The smaller pharmacies and buying groups that cannot accommodate the price fluctuations will be the biggest losers. The decision to consider returning to a market previously abandoned due to downward price pressure is multifactorial. Equipment must still be available and appropriate to the task. Raw materials must be available and qualified. Any changes to the manufacturing process, and suppliers would introduce a longer timeline and higher cost of entry. It is likely many of the former manufacturers will have simply moved on to other product lines. Generic Pharmaceutical Consultant 4. Assistant professor of pharmacy sciences The biggest, most powerful players will be the winners. Meanwhile, patients, employer-paid co-ops and private pharmacy retailers will be hurt the most. Ultimately these losers will exit the market and rely on the Affordable Care Act to provide for everyone. Growing the world economy and assisting international drug manufacturers with obtaining FDA approvals will help increase competition. Improving technology could increase production and lower costs of production, which would increase profitability and encourage more competitors to enter the generics market. World economic recovery eventually will draw large economies in Africa and Latin America into the marketplace, increasing demand and the inflow of dollars, in turn drawing more competitors. As more products go generic, makers are introducing them at a higher price in order to keep them profitable. The first generics to come out may be only slightly less than the brand, but as more makers introduce their version, the prices will usually come down a bit. The problem is that fewer manufacturers are making generics so there is less competition in play to draw the prices down. Magnesium sulfate shortage was huge, and it was caused by a raw material shortage. I expect prices will continue to go up. The political will of Congress could bring it down. It has taken significant legislation to drive the use of generics, but now controlling pricing on those generics is anti-competition. Insurance companies are forced to look into alternative treatments to avoid paying for the higher-priced drugs, whether branded or generic. The market is unfairly influenced by the bigger players. Who has more money, and who has more political power? 29

30 We are beginning to see some new drug manufacturers in the worldwide market making a bit of an impact. But FDA regulations are tough and anti-competition. I do think it is just a matter of getting all the FDA approvals for various drugs, and that is ongoing now. We may begin to see relief on some generics. But it will happen a drug or two at a time, not all at once. India has the biggest manufacturing potential and they are working on getting approvals, with some drugs already available. It just takes some time to get approvals on generics, and some money is involved too. The manufacturers of the original brand has already geared up, so they are able to get their generic on the market first. Large purchasing groups have already had an impact. They have already squeezed out the mom-and-pop shop retailers. Reimbursement contracts are less favorable for independent pharmacies, so they would have to try to join in with someone to get any stable supply line. Obviously the biggest, most powerful groups will be the winners, and everyone else will be the losers.... Eventually they will give up and rely on the Affordable Care Act to cover everyone. Then our government will end up being the biggest payer and the biggest loser. FDA does have some impact on pricing, but usually those costs are built in to the pricing structure before the drug hits the market. We are seeing quite a bit of congressional activity on the biologicals and specialty drugs to control pricing. Insurance companies and the larger purchasing groups like Medicare will have influence as well. I expect prices will continue to go up. The political will of Congress could bring it down. It has taken significant legislation to drive the use of generics, but now controlling pricing on those generics is anti-competition. Asst. Professor of Pharmacy Sciences Consumers will only see relief when the outcry is large enough to make an impact. When consumers cannot afford meds... when insurance begins to push back on the consumers.... The market will not shift as long as regulatory pressures continue to stifle competition. There are too many variables to call the drug industry a simple, free market. Maybe if four or five more big purchasing groups came into play to create a greater level of competition between them, it might free it up a bit. But as long as they continue to consolidate groups, it has the impact of anti-competition. If we allow it to run, it may work itself out with some additional competitors. Miscellaneous We may begin to see some new technology that increases production and lowers cost. If profits were more viable, competition would be more likely to join in. More competition would be the biggest impact for the near term. As the world economy comes out of this slump, African and Latin American economies will expand. Those people will begin to adopt more Western ways, and they will become more open to American products. When that large volume of consumers enters the market, it will grow demand for drug manufacturers and everyone else, which in turn will increase the flow of dollars into the marketplace. For now, everything we sell to those countries is deeply discounted, so their impact is minimal or nonexistent. FDA would like to see international harmonization of drug regulations. That would put all manufacturers on the same playing field, bringing more entrants into the global manufacturing market and more money from a variety of economies. 5. Industry health and welfare benefit consultant Generic drug manufacturers continue to consolidate, which decreases their need to compete as much on price. PBMs and large pharmacy chains will be most likely to succeed in lowering pricing, which may take about two years. If private health insurance exchanges gain dominance, they could implement restrictive drug formularies, which would affect drug pricing. I m seeing [the price increase] in my clients. Also when I interview PBMs, they say they are seeing price increases on generics in the neighborhood of 4% to 6%, kind of on a unit cost basis. I can t say it s probably 100% across the board, but it s across enough categories that it s probably a majority. We are seeing pretty dramatic increases in some of the insulins and in the generic version of diabetic drugs. If you look at generic drugs when they first become generic, which is called the period of exclusivity, those drugs are 30

31 coming out a lot higher than they used to at least for that initial period to the point where some of the brand drugs with the rebates are still less expensive. We are seeing a lot more consolidation whereas before you might have had five to six manufacturers, you may be now down to one or two. I think continued consolidation gives them somewhat market share power and they don t have to compete as voraciously as they used to. In the short term [declining competition and shortages] will continue to drive up [generic] prices because, relatively speaking, even with increased prices, it s still much less expensive to use a generic than a brand. If generic prices keep going up, employee health benefit plans will be the losers because their costs will keep going up. One of the reasons there s a potential boom [with private health exchanges] is because employers can do what s called a defined contribution [where they give the employee X amount and say], You go buy what you want on this website. I would say it s probably going to be the big pharmacy chains and the PBMs [that can succeed in lowering pricing]. It will probably take them a couple of years. We are getting calls from pharmaceutical companies and others asking will these private health exchanges impact us. If private health exchanges begin to control healthcare, maybe they can control formularies, which When I interview PBMs, they say they are seeing price increases on generics in the neighborhood of 4% to 6%, kind of on a unit cost basis. I can t say it s probably 100% across the board, but it s across enough categories that it s probably a majority. Industry Health & Welfare Benefit Consultant would control drugs, which would impact pharmaceutical companies. As all of this kind of evolves, it [depends on] who s sitting on top of the pyramid. Then you can start doing restrictive formularies. Unless you want price setting by the government and I m not sure that has ever truly succeeded it s really going to have to be the market to kind of put the pressure on to do it. I don t know [if Congress has ever imposed pricing controls on drugs]. I know way back when they tried it on a lot of other things. Medicare is a big purchaser, and they have tried to, I think, probably to do better with the drug purchasing since we got Medicare Part D. But even that they have kind of outsourced some of that to PBMs and other types of players. 6. Mitchell Goldberg, MBA, chief strategist, MG Associates, a generic pharmaceutical consulting company Generic pricing inflation appears to be occurring on a category-by-category basis. User fees for generic manufacturers are helping to clean up the FDA backlog of ANDA approvals. Governmental attempts to lower generic pricing could lead to even more drug shortages. There is a generic pricing escalation trend. It is by no means an exhaustive one therapeutically; rather it seems to be on a category-by-category basis. There are several reasons. Depending on the drug and the specific landscape, it may be an issue of drug shortage due to formulation and stability issues, or API access, or a reduction of competitors based on FDA oversight and companies closing plants to avoid being shut down, or an inability to achieve the margins that a manufacturer is looking to achieve. Economics 101 deals with the elasticity of supply and demand. Some companies will have the opportunity to raise the price, at least in the short term; they think they can get a short-term benefit. The price increase is not going to be limited to some sort of cost plus; instead it will reflect what the market will accept, including some increases beyond 100%. Another issue... distributors will withhold product from the market until a shortage is created, thereby creating a vacuum for much needed product. The price increase will tend to be significant. One other issue: Smaller, less financially capable companies who have attempted to bid on large hospital contracts [GPOs] have seen themselves get shut out of awards too many times in the last several years not to believe there is some conspiratorial basis or at least bias toward supporting the larger companies. Eventually, it appears some of the niche companies have opted to delete a product or not bid the product rather than continually lose awards. Less competition indirectly results in more shortages. 31

32 In the extreme, if enough companies either cannot produce a product or delete [it] from their portfolio, the particular drug may become a sole source generic. The net result significantly higher pricing. The future, too, may see the generic manufacturers similar to the retail industry consolidate, leaving an even more precarious situation whereby products will be shorted and prices spike in tandem. One other key takeaway: Generic price inflation is not on an across-the-board basis; instead, it is on an opportunity basis due to several factors including, but not limited to, market conditions, API access, inadequate third-party reimbursement, and ability to stabilize certain molecules. As the [generic drug] price goes up, players with FDA approvals come back [into the market] to see if they can make some money on it. When [more companies] come in, the prices decrease in proportion to the number of new competitors. What happens with a lot of smaller companies that can t get their foot in the door to really do well is that rather than going after the big blockbuster [generic] drugs, they go after generic niche drugs. If you pick the right drugs, you can do very well. It may only be a $100 million market but with two competitors dividing up [that amount] instead of 10 players dividing up a billion. Joint purchasing organizations have a great deal of leverage. They try to create long-term, mutually beneficial relationships with the larger manufacturers. When the manufacturer attempts to raise prices to a GPO, the purchasing executive will often take the following stance: Raise my price today, but as soon as someone else enters the market with a lower price, you re going to lose the product. It is prudent for the government stay out of the fray, essentially letting the market regulate itself. If the government pushes generic companies to lower prices, there are too many negative ramifications that will create even more shortages. Intuitively, it is counterproductive. Chief Strategist, Generic Pharmaceutical Consulting Company The public will lose because they will have to pay higher cash prices for generic drugs, especially concentrated in some life-saving oncology drugs. The pharmaceutical generic companies may win in the short term, and some are only concerned about such. The wholesalers are going to pay a higher price, but since they make their money on back end, demand-oriented rebates, the higher pricing results in higher rebates. The insurance companies are going to pay more money to their clients for certain drugs. They may threaten higher copays or may even drop certain products altogether rather than face lost margins. It is prudent for the government stay out of the fray, essentially letting the market regulate itself. If the government pushes generic companies to lower prices, there are too many negative ramifications that will create even more shortages. Intuitively, it is counterproductive. The FDA backlog [as of 2012 it was approximately 28 to 36 months] for ANDA approvals is an issue too. Since less new products are entering the marketplace, the amount of competition decreases accordingly. However, on a positive note, the backlog is being cleaned up. User fees [for manufacturers] are ridding the market of companies submitting ANDAs without any financial risk. Although there are less ANDA applicants since the user fees have been implemented, the end result is a reduction in wait time. [By mid-2014, the average wait time is closer to 20 to 24 months.] Secondary Sources The following five secondary sources discussed pricing increasing for 50% of generic drugs because of short supply; insurance companies adding to consumers out-of-pocket costs; one consumer being forced to take a lower dosage than prescribed because of high costs; ways to keep prescription costs down; and the pending entry of biosimilar drugs that could decrease prescription drug prices in the United States. 32

33 Aug. 12 Drug Channels article Prices are increasing for 50% of generic drugs but declining for the remaining 50%. Still, those that are increasing are doing so at a higher volume than their decreasing counterparts. Short supplies are to blame. Surprise! Retail generic drugs are no longer getting cheaper over time. Our latest exclusive analysis (below) finds that half of all retail generic drugs became more expensive over the past 12 months. And some of those drugs got much, much more expensive. One out of 11 generic drugs more than doubled in cost, with some increases exceeding 1,000 percent. Retail generic drugs usually get cheaper over time. By contrast, our analysis showed that the median price change was 0%. In other words, 50% of the drugs increased in cost, and 50% declined. The chart below shows the frequency distribution of acquisition cost changes among the 2,376 generic drugs. Only half of the generic drugs (49.8%) declined in cost. The median decline was -6.8%. Only 16% of the sample experienced declines greater than 10%. Half of the generic drugs (50.0%) increased in cost. The median increase was +11.8%, much higher than the median decrease. Some products had mega-increases. Among the nearly 2,400 generic drugs, 224 (9.4% of the total) increased by more than 100%. In some cases, the cost increases were substantial. The table below shows the 10 drugs with the greatest percentage increases. Consider the antibiotic tetracycline. The NADAC per unit for a 500 mg tetracycline capsule increased from 5 cents to $8.59 (+17,714%). The NADAC per unit for a 250 mg tetracycline capsule increased from 6 cents to $4.26 (+7,340). These increases appear to stem from a nationwide supply shortage. Here's what the ASHP Drug Shortage website reports: Teva states that tetracycline capsules are unavailable due to a raw material shortage. Watson discontinued tetracycline capsules in October ASHP reports that the company could not provide a reason for the discontinuation. Heritage launched tetracycline capsules in October