Thursday, September 22, 2011

Pharmacy Profits from Authorized Generics

The Federal Trade Commission (FTC) recently released its long-gestating report Authorized Generic Drugs: Short-Term Effects and Long-Term Impact. It’s a follow-up to the 2009 “interim report” that I wrote about in Authorized Generics: Money Saver or Evil Strategy?

Buried in the report’s 270 pages are some interesting data nuggets about prescription prices and pharmacy acquisition costs during the first 180 days of generic competition. Dig out the FTC’s numbers, as I do below, and we see that:
  • A pharmacy’s gross profit per prescription jumps when the first-to-file generic enters the market.
  • A pharmacy’s gross profit per prescription is even higher when an authorized generic competes during the first 180-days.
These profit dynamics illustrate why a brand-name manufacturer can do little to slow rapid generic substitution. However, pharmacies should give a big “thank you” to brand-name manufacturers that launch an authorized generic.


Here’s a brief overview on the generic market for those readers who don’t follow such things.

A First-to-File ANDA is a generic drug approved by the FDA under an Abbreviated New Drug Application (ANDA). It’s granted to the first generic drug applicant that seeks FDA approval prior to the expiration of the branded drug’s patent.

An authorized generic’s (AG) U.S. marketing approval derives from the brand-name drug manufacturer’s new drug application (NDA). An authorized generic may be produced and marketed by the brand manufacturer or via a licensing agreement with a third-party company.

Thus, there are two potential types of generic markets during the 180-day exclusivity period:
  • ANDA-only market—The first-to-file ANDA is the only generic drug in the market.
  • ANDA+AG market—The first-to-file ANDA and the AG are two competing generic drugs in the market.
Once the 180-day exclusivity period ends, other manufacturers that have filed a successful ANDA with the FDA can begin marketing competing generic versions of the product. That’s when prices start to drop sharply.


The FTC’s analysis of 95 drugs found that generic drugs are less expensive in an ANDA+AG market compared with an ANDA-only market.
  • The retail price paid to a pharmacy for a generic drug in an ADNA-only market is about 14% below the corresponding brand-name price. However, the discount is about 18%, or about 4 percentage points less, in an ANDA+AG market (per page 46).
  • The average pharmacy acquisition cost for a generic drug in an ANDA-only market is about 20% below the corresponding brand-name price. However, the discount is about 27%, or about 7 percentage points less, in an ANDA+AG market (per page 48).
Note that these are the unweighted/no-controls data, which best represent the typical situation for a pharmacy. The FTC also reports sales-weighted pricing and statistically-adjusted pricing. The results below are similar.

AGs could have a long-term effect by reducing the incentive of generic manufacturers to challenge a patent. But the FTC concludes that “…the reduced revenue stemming from authorized generic competition during 180-day exclusivity has not affected the generic’s incentives in a way that has measurably reduced the number of patent challenges by generic firms.”


Now, let’s do a little math magic and see what happens.

The average brand-name prescription price in 2010 was $167 (per The 2011-12 Chain Pharmacy Industry Profile, page 55). Before a brand-name drug loses marketing exclusivity, a pharmacy’s gross margins average about 6.5%. See Pharmacy Reimbursement Drops Again…or Does It?

The table below combines these data with the FTC’s estimates to show gross profit and gross margin per prescription in an ANDA-only market vs. an ANDA+AG market. Obviously, these are market averages. YMMV for any individual prescription or drug.

As you can see, gross profits and gross margin are larger when an AG competes in the market. As I argue in Generic Drug Profits: Too High or Appropriate Incentive?, extra channel profits accelerate generic substitution.

After 18 to 24 months, pharmacy gross profits will typically be lower than during the 180-day exclusivity period. But the spread often rises in the post-180-day period depending on:
  • The rate at which acquisition costs drop as multiple manufacturers enter the market
  • The rate at which pharmacy reimbursement for the generic drug gets reduced, a.k.a. “MAC'd down”
As I discuss in Chapter 4 of my new wholesaler report, wholesalers also benefit from this dynamic. The wholesaler’s acquisition cost drops much more than do retail pharmacy prices or pharmacy acquisition costs. In an ANDA+AG market, the first-to-file manufacturer must compete for generic market share with the authorized generic.

Now you know. Interesting, huh?


  1. Adam, the data sure is interesting but I can share with you it's not all black and white when a big piece is missing.

    Trends over the past 2 years have PBM's not only dropping the MAC much quicker than before, but also creating a new reimbursement pharmacy model for single source generics (SSG's).

    Though you're blog is very entertaining and full of facts, you often leave some big holes in telling the complete pharmacy story. I'd suggest you look at average generic dollar margin trends over the past 5 years to get a better picture. Believe me it ain't so peachy.

    Also a simple heads up..... the phrase is MAC'd, not MACced.

    Healthy year to you.

  2. Adam really has no idea of what it takes to run your average retail Pharmacy. He simply pieces together a bunch of financial information (and the sources don't seem to be all that trustworthy or accurate) and then projects an opinion...IE Independent Pharmacy's are more profitable than Mail order Pharmacies. Independents are forced to report income BEFORE paying overhead expenses (salaries etc)...PBM's show profit AFTER paying such expenses...yet he continues to take the stand that Independents are more profitable ( and therefore more costly to the healthcare system).  To use a baseball analogy, Adam = a utility infielder,  grasping many concepts adequately enough to make the team but not good enough to be an everyday position player. GO Phillies!

  3. Very insightful article today regarding authorized generics vs ANDA-only.  I was curious if you (or others) have ever performed an analysis regarding the typical increase in price for a brand drug during the last 6 to 12 months prior to the release of a generic.  It would be helpful to have that data to understand the net savings a generic brings.  

  4. I'm aware of the phenomenon. See page 51 of the FTC report for what happened in their sample.

  5. You are certainly entitled to your opinion, Broncofan7, but not your own data. The FTC study seems reliable enough to analyze. It's not perfect, but is definitely incremental information about AG economics.

    I don't recall saying that independent pharmacies are more profitable than PBMs. At least have the courtesy to dislike me for things that I have actually asserted.

    Be sure to tune in tomorrow for more fun with "a bunch of financial information."

  6. Never claimed that it was the whole story, just an interesting factoid. Trends over the past 5 years, many of which have been discussed on Drug Channels, are far from the dire straits painted by some pharmacy owners.

    Thanks for the pharmacy grammar check, which is now fixed,