Thursday, December 01, 2011

Ranbaxy Makes Three: The Battle for Generic Lipitor Profits

The generic Lipitor story got even more interesting yesterday with the news that Ranbaxy would enter the US market after all. See Ranbaxy’s Lipitor Copy in U.S. Stores Threatens Pfizer Sales.

Atorvastatin now becomes a three horse race between Pfizer’s heavily-discounted brand-name product, an authorized generic from Watson, and the first-to-file generic Ranbaxy.

The claims and counterclaims about savings are hard to sort out. But Ranbaxy’s presence in the market will most likely boost profits for pharmacies, PBM, and wholesalers.

The controversy over atorvastatin stems from Pfizer’s strategy for retaining brand sales. The USA Today has a unexpectedly lucid summary in Pfizer maneuvers to protect Lipitor from generics:
  • A $4 discount card available at
  • Building brand awareness with direct-to-consumer advertising
  • Providing discounts so that the branded version is less expensive for payers than the generics during the first 180-days
Pfizer’s discount strategy for the first 180-days works because pharmacies and wholesalers make more money from the generic during the first 180 days of a generic launch.

The intuition is straightforward. Pharmacy prices (and reimbursement) typically drop by only 10-15% during the first 180 days following a generic launch. However, pharmacy acquisition costs drop much faster, especially when there is an authorized generic in the market. Thus, the drug channel sees higher gross profits from the generic vs. the brand.

In Pharmacy Profits from Authorized Generics, I provide data showing that pharmacy gross profits per prescription almost double during the 180-day exclusivity period. Here's the summary table from that article:

If you need further proof, here’s a slide from McKesson’s (NYSE:MCK) June analyst day meeting. As you can see, the wholesaler told Wall Street that it makes 2-3 times as much money from a generic during the 180-day exclusivity period.

Pfizer has gone after these economics by cutting its own price, undermining the channel profit story. Perhaps this explains why Pharmacists United for Truth and Transparency, a new lobbying group of pharmacy owners, has been so critical of Pfizer’s strategy. PUTT positions themselves as the self-appointed "advocates" for self-insured employers, but there is also a healthy dose of economic self-interest behind their actions.

PUTT initially claimed that Pfizer’s strategy would cost more for employers and health plans, although many payers unequivocally claim that the brand will be cheaper than the generic, per the quotes in Facing Generic Lipitor Rivals, Pfizer Battles to Protect Its Cash Cow. Even so, some PBMs and plans are reportedly rejecting Pfizer’s offer and sticking with the generic. Ranbaxy’s entry alters the economic calculation even more.

As I told the New York Times yesterday, this battle is just taste of what’s ahead as the drug channel fights for the incremental profit in the generic wave:

You have over $80 billion in drugs that are going to go generic. Say $80 billion settles to $10 billion eventually. That’s $70 billion savings. But during that period going from 80 to 10 there’s going to be a lot of money made by the various channel intermediaries, and they all want a piece of that pie.
Stay tuned for a dramatic photo finish!


  1. Hi Adam – Nice column.  What isn’t clear to me is the role Teva is laying for Ranbaxy.  Is Ranbaxy using Teva to manufacture atorvastatin at a Teva-owned NJ plant, since Ranbaxy still can’t export to the US from its Indian plants?  Is that why there was no announcement from the FDA yesterday on reaching a settlement with Ranbaxy re Indian manufacturing problems?  I presume Teva had filed an ANDA some time ago, and that the FDA had given it preliminary (but not final) approval, so in essence Ranbaxy is buying from Teva but using its Paragraph IV privilege to market with 180 day exclusivity?  Is that right?  If this is right, and Ranbaxy has to pay Teva, increasing Ranbaxy’s costs, it makes it easier for Pfizer to undercut Ranbaxy’s price?

    Is Plavix the next big one?  Zyprexa didn’t get much news.

  2. According to Larry Marsh at Barclays:

    "The details of the Teva relationship, while not specifically disclosed, may be for sales promotion, capacity addition, or bulk sales, among other things.  Despite prior speculation that was some form of an ANDA swap, this does not appear to be the case. The drug will be manufactured by Ohm Laboratories (a unit of Ranbaxy) in New Jersey."

    I expect wholesale prices to drop as Ranbaxy/Teva try to get share after the big players already have committed purchase volume for the launch. 

  3. This WSJ story provides more detail:

    Ranbaxy to Share Part of Lipitor Profits With Teva

    From the article: 

    "Ranbaxy Laboratories Ltd. Thursday surprised investors when it said it would share with Teva Pharmaceutical Industries Ltd. profits from six months of exclusive sales of a copy of Pfizer Inc.'s blood cholesterol-lowering Lipitor in the U.S."

    "Teva is one of the generic competitors that will enter the market in June 2012 when Ranbaxy's sales exclusivity expires."

  4. PUTT-Dave MarleyDecember 01, 2011

    OOPS! While copying the text from my Word doc, I missed a very important last paragraph:

    In the chain pharmacy world, Adam may be correct. A few
    dollars difference in filling the generic for a conglomerate of 6000 stores
    probably does equal big bucks. For most independents, it might equal about $500
    for all generic Lipitor filled in the first 180 days instead of the brand. That
    is NOT a healthy dose of economic self interest.

  5. PUTT-Dave MarleyDecember 02, 2011

    Adam’s perception of PUTT’s interest in the Lipitor game needs some clarification. First we are not a “lobbying group”, and have no PAC.  We specifically make no direct attempt to influence legislation. He is correct when he states we have “self appointed” ourselves as advocates for the self insured employers, because no other part of the drug channel has stepped up to do so.
    Pharmacy owners are kindred spirits of our self insured brethren because we are both being taken advantage of by the PBM industry. While pharmacy has been aware of this fact for some time, it is readily apparent that the majority of the self insured decision makers are not.  To that point we have a common enemy in the PBMs.
    What pharmacy owners have that the employers do not, is an awareness of the true cost of drugs. However, because pharmacy PBM contracts prohibit individual pharmacies from talking to the employers, PUTT was created to facilitate this information transfer without placing individual pharmacy owners in jeopardy with the PBMs.
    Adam’s perception that this is in part about protecting a few dollar difference between margins in brand vs. generic, that is simply not true. The fact is, whether pharmacist gets a script for brand or generic Lipitor in the next 179 days, they are going to do everything possible to get it changed to generic Zocor whenever appropriate.  Why, because THAT is what’s in the patient’s AND pharmacy owner’s best interest. The profit dollars and margin percent are higher for simvastatin than either brand or generic Lipitor, and in most cases can be sold at $18 for 90 pills.
    In the chain pharmacy world, Adam may be correct. A few dollars difference in filling the generic for a conglomerate of 6000 stores probably does equal big bucks. For most independents, it might equal about $500 for all generic Lipitor filled in the first 180 days instead of the brand. That is NOT a healthy dose of economic self interest.

  6. This discussion is at least half way off the point of this Lipitor issue.. I work for a chain and I can tell you that like the independents noted above, chains also make a better profit on simvastation and would rather sell that.. and we hate the drug companies and PBM's as much as the anyone... But I digress.. The issue  here is NOT profit margin.. It's the corrupt alliance between drug mfg and PBM's. We all know how the system works, and PBM's have been getting kickbacks for years and screwing insurers, pharmacies and patients.. The few $$ over the next 6 months are not the issue, it's the way Pfizer is competing to hold on to market share that illustrates the inate vulgarism of these bedfellows

  7. Alan,

    Zocor lost exclusivity in 2006, so simvastatin has been an option for 5 years. Old news, IMHO.


  8. PUTT-Dave MarleyDecember 05, 2011

    I realize that in this era of Enron, Bank Bailouts, Auto Bailouts and Abramhoff altruism may be hard to find or difficult to believe. Here is another plausible explanation though. We pharmacists entered this profession because at our core, we are "helping" individuals who made a choice to enter a "helping" profession. Unlike the soulless PBM conglomerates, most pharmacists at their core have a need to help others when we see something wrong.

    As for the "Caveat Emptor", that excuse is off the table because it is not only the "buyer" that is harmed by bad PBM deals. When a large employer in a community makes a bad decision based (mandatory mail) based upon a recommendation of a benefits consultant who has a hidden back door deal with the PBM, the entire community is hurt. When those millions of dollars in drug spend go out of state, local jobs and local tax revenue from the spending those jobs created goes out of state too.

    Where you say Caveat Emptor, I say "Iustum Fac" (do the right thing).

  9. Dave,

    The following statements can be simultaneously true and are not mutually exclusive:

    1. As pharmacists, pharmacy owners care about their patients and their communities.
    2. As small business owners, pharmacy owners care about the profits of their businesses.

    We can debate the relative influence of these two factors, but I am skeptical that point #2 has absolutely no nfluence on PUTT's actions and focus. 


  10. Point #2 can also apply to a PBM mandating the use of its own mail order pharmacy. 

    For every Goldman Sachs, there are many more smaller self insureds (towns, cities, school districts, hospitals) that lack the time and resources to truly understand their contracts.  IBM can afford consultants and their bad decisions do not raise taxes.

  11. Michael DuffyDecember 05, 2011

    If this is solely about independent pharmacy owners trying to protect the profits of their businesses, why are chain pharmacists concerned about this as well. Alan Kramer, whom posted above, is apparently concerned about these tactics as well, and he mentions that he works for a chain, and would seemingly have little interest in the profitability of the situation. From my experience with 3 chains, they tend to reward pharmacists for increased market share, not necessarily increased gross profit per rx.  

    Perhaps your statement above should be amended to say:

    2. As small business owners, pharmacy owners care about keeping the doors of their businesses open, and sustaining the future of their livelihood which is the practice of Pharmacy. 

    Pharmacy is a profession, not a transaction at the register. Most of us have  doctorates, and all of us have invaluable knowledge that serves and protects our patients and communities. We didn't just slap a sign on the wall and say open for business. We earned our right to be Pharmacy owners and the majority of us have less interest in earning the 30.5 million that Medco's CEO David Snow was compensated last year, and more interest in sustaining our businesses, profession, and the health and well-being of our patients. Thanks to the writing on the wall from the PBM industry, I doubt if any of us that opened pharmacies in the last 5 years expected to get rich off our businesses. Most of us would be glad to just break even. I imagine, that like myself, most new pharmacy owners chose to open their pharmacies so that they could practice the profession of pharmacy the way they felt was necessary. To provide the services to the community that they viewed as important, and perhaps they just wanted to avoid 14 hour shifts with no designated lunch or bathroom breaks so that they could go home at the end of the day with full bellies, empty bladders, and enjoy the time they get to spend with their families!! 

    I am highly concerned that your distorted view of what most Independent pharmacy owners are like, has such great influence over the decisions of the self-appointed (since you love that term) decision makers (PBM's) of our beloved profession.