Drug margins under fire

Drug margins under fire

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Today’s NYT has an article (Reg Reqd) pointing out how vulnerable the PPI (ant–ulcer/anti-heartburn) drug market is to the oncoming generic versions of Prilosec.  Prilosec has been about the most successful drug in history (somewhere around $6 bn a year at its height) and catapulted Astra-Zeneca into the first rank of pharma companies.  They’ve also successfully switched their marketing focus to consumers and doctors over to its successor drug, Nexium, including moving the "purplepill" website. The Times reports that generic makers including division of Novartis and of P&G are going to come after the markets of Nexium, Protonix and the rest with generic Prilosec, and it’ll cost 1/5th the price. Wellpoint, the health plan which successfully got the FDA to agree to move Claritin and its allergy competitors to OTC status, is already planning to move as many of its members as it can to the generic Prilosec.

This is beginning to remind me of the early 1990s when there were few new blockbusters, and many old ones, including the first PPIs Zantac and Tagamet,  were coming off patent. Some companies then tried to manage a "brand to OTC" strategy, such as Syntex with the brand (Naproxen) that is now the OTC drug Alleve.  Syntex found that the sales for the brand fell off a cliff rather than rolled down a slope (and part of the result was their being swallowed by Roche). Then as now drug companies were concerned about the impact of a big new government program, and their stock prices were at bigtime lows. Look at this chart of Merck’s historic price and compare the 1992-94 dip to the one in the last 2 years)

However, overall drug companies have continued to be remarkably successful in both delaying the introduction of generics, albeit by using loopholes that have been partially closed, and at convincing doctors not to bite the hand that feeds them, even though some say they want to. What really will make the difference in their future is the next set of blockbusters.

You can historically look at parts of health care where drugs have replaced hospitalization. For instance anti-biotics replaced TB Sanatoriums, which represented some 30% of health care spending in the 1920s and 1930s, and indeed the first PPIs essentially replaced ulcer surgery. You can also argue that the statins are doing a pre-emptive strike on heart surgery rates in 10-20 years time.  But with no imminent blockbuster class on the near horizon, big pharma is scrambling to discover which part of today’s health care system they’re going to replace with a pill, or which unrecognized "disease" they can convince people they can cure (think Viagra).  Because that’s the road to another stock run-up as we saw in the late 1990s. I don’t think it will be as easy for them this time, but don’t write this industry off!

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