Thursday, September 08, 2011

Medco’s Latest Update on the Generic Wave

We all know about the generic wave—the unprecedented volume of brand-name drugs that will be losing exclusivity and facing generic competition over the next five years. But you may not know that Medco Health Solutions (NYSE:MHS) regularly updates and publishes its best guess about the timing of these launches.

Below, I take a look at the latest projections through 2021, which show a slightly longer generic wave versus previous forecasts. I estimate that the generic dispensing rate (GDR)—the percentage of prescriptions dispensed with a generic drug instead of a branded drug—will be approximately 85% by 2016.

The pharmaceutical industry’s nightmare is just beginning, while the drug channel gets ready for the profit deluge. Surf’s up!

The exhibit below summarizes the pace and entry of generic drugs projected by Medco as of July 2011. The raw data are available here: Estimated Dates of Possible First Time Generic/ Rx-to-OTC Market Entry. I added the first half of 2011 to the chart.

The wave's timing has shifted since the earlier forecast. Generic launches will be higher in 2015 and 2016, but lower in the later years. 2018 is no longer projected to be as significant, while 2020 looks better. You can see the previous forecast in Medco's Generics Outlook: Party On, Dudes!

Note that this chart assigns 100% of a brand-name drug’s sales to the year when the generic launches. Thus, all of Lipitor’s annual sales are counted in 2011 even though the generic won’t arrive until Q4. The revenue estimates are based on 2010 U.S. retail sales and are not adjusted for price inflation.

Generic launches are very important to the profitability of all channel participants—wholesalers, pharmacies, and PBMs. Channel profits from a generic drug are typically highest in the first 180 days after the entry of the first-to-file ANDA company.

Channel profits are even higher when there is also an authorized generic in the market. I’ll have more to say about this profit cycle in a future post.


  1. Hold your horses Adam. With more payers going to AAC pricing, margins are dropping on the pharmacy side.

    I don't understand how one post can state that acquisition cost reimbursement (NADAC) is hurting PH, while the upcoming generic wave will be a positive.

  2. Horses are held. I frequently point out the pressures on generic profitability, such as more sophisticated payers, new reimbursement methodologies, or competition among pharmacies. Even if NADAC data get published (not a sure thing, IMHO), there will still be an adoption period by commercial and government payers.

    Thus, the channel will still benefit financially over the next few years, even if the benefit is less than in prior years.  And don't forget that the channel can benefit from average cost methodologies during periods of generic substitution. See Profits from Generic Injectables: Too High or Just Right? for an example of how the reimbursement math works today in the Medicare Part B ASP system.

  3. Generic medicines are actually good for the consumers since they get the same quality of medicines at a cheaper prices. This makes a huge difference and impact to the people who live in third world countries. Also, since the economy is getting hard and difficult nowadays, the generic wave  becomes more common.