Generic drug makers feeling the squeeze

The mood at the annual generic drug industry confab in Orlando in February was especially somber. The discussion during one panel was all about plunging drug prices, consolidation among drug-buying groups, and the increasingly cutthroat nature of the business. A top executive at Israel-based Teva Pharmaceutical Industries Ltd., the No. 1 supplier of generics in the U.S., which is laying off 14,000 employees and shuttering about half its 80 manufacturing plants, tried to lighten the mood with gallows humor: “Teva certainly has no challenges,” said Brendan O’Grady, the executive vice president who heads its North American commercial business. The joke hit the mark, perhaps because it landed so close to home.

The generic drug industry, which supplies almost 9 of 10 drugs prescribed in the U.S., is in crisis. These companies aren’t the superstars making cutting-edge cancer and hepatitis treatments that are priced through the roof. They’re the producers of bread-and-butter pills consumers often take for granted: antibiotics, arthritis treatments, medicines for diabetes and high blood pressure. With the profitability of these prosaic pills fading fast, companies are exiting important parts of the business. “We’re one of the companies that continues to make antibiotics, and we’ve asked ourselves for years why we continue to still make them,” O’Grady said at the conference.

Share of U.S. prescriptions

The industry’s woes can be summed up in two words: plummeting prices. Far removed from the pharmacy pick-up counter is an arcane world of supply chains ruled by a tightknit band of players forcing prices for most generic drugs lower and lower, both with their increasing purchasing clout and because they’re able to select from an ever-growing universe of generic drug suppliers.

The top three manufacturers—Teva, Mylan, and the Sandoz generic drug division of Novartis AG—control only about a third of the market by sales. That leaves lots of smaller players vying for business. Industry executives say new entrants have been popping up—sometimes small outfits led by former managers of other generics companies who hire contract manufacturers around the globe to make their drugs. They elbow into the market by offering lower prices.

That flies in the face of the public perception that all medical costs are spiraling upward. While many health-care products, including branded drugs—those still under patent—routinely command big price hikes, that’s not the case with most generics. A deflation tracker developed by researchers at Evercore ISI Research shows generic drug prices are falling about 11 percent a year, while brand-name drugs are rising about 8 percent a year.

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About five years ago middlemen in the drug-delivery supply chain started to form buying consortia to gain more leverage over drugmakers. The consolidation has since become so extreme that just four groups now control 90 percent of drug buying in the U.S. And two of those four are joining forces to purchase generics, which likely will lower prices further.

Share of U.S. prescription spending

The squeeze is leading some manufacturers to stop making some critical low-margin drugs. “We have supported the consortiums to the point where we’re discontinuing products and shutting facilities,” says Paul Campanelli, chief executive officer of Endo International Plc, the fourth-largest generics maker in the U.S. “We are not in the position to provide more price reductions.”

Endo has slashed its workforce in half, to about 3,000, over the last 18 months, closing manufacturing facilities in Huntsville, Ala., and Charlotte. The drugmaker’s generic division, known as Par, has stopped making 85 products. Endo was one of the biggest makers of the popular blood pressure medication lisinopril, for example, but decided to stop manufacturing it because the drug was no longer making enough money.

“Already this year, Par has had requests for six different products. ‘Can you make A, B, C?’ The answer is no,” Campanelli says. “And even if we could, pricing is still so low we wouldn’t be able to bring back a product.”

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Campanelli didn’t specify who asked him to start making the drugs he’d discontinued, but he’s likely talking about one of four buying groups: Red Oak Sourcing; Walgreens Boots Alliance Development, known as WBAD; ClarusONE Sourcing; or Econdisc Contracting Solutions. WBAD is in the process of joining forces with Econdisc, which Adam Fein, CEO of consultant Drug Channels Institute, says will combine generic drug purchasing by the second- and fourth-biggest buyers in the market. Such groups buy drugs sold through retail giants like CVS Health, Target, Walgreens, and Walmart. Fein calls these buyers the “Four Horsemen of the Generic Apocalypse” and wrote in a blog post that “the forecast calls for generic pain.”

The drug-buying groups say they’re not the problem. “For many complex reasons, generic drug manufacturers are being challenged to become more efficient and institute more nimble supply chains,” says Econdisc President Jan Burkett. “The notion that group-purchasing organizations are somehow to blame for generic drugmakers’ woes is a red herring.”

The credibility of generic drugmakers has been hurt by such incidents as the public outcry in 2016 over Mylan’s boost in the price of the lifesaving, anti-allergy shot EpiPen to about $300 a shot from around $50 when it acquired the device in 2007. There’s also a price-fixing probe hanging over the industry: A group of attorneys general from 47 states and the District of Columbia is investigating alleged price fixing among generic manufacturers during past years when prices shot up for specific drugs. Their complaint alleges generic drug company executives agreed to raise or maintain prices in tandem over dinner parties, phone calls, and text messages.

Lawmakers are going after the industry, too. A new Maryland law prohibits price gouging in generics and allows the state’s attorney general to challenge generic drug price hikes. But executives say these measures couldn’t come at a worse time. “We constantly talk about the portfolio of the business eroding in price,” says Robert Matsuk, Glenmark Pharmaceuticals Ltd.’s president for North America. “And yet we’re getting these new bills about being price gougers.”

Glenmark, based in India, is a small player with ambitions to file 15 to 20 new generic drug applications in the U.S. this year. But with prices in retreat, the company may forgo launching a newly approved drug if it doesn’t look like it will make money. “The question becomes ultimately how many people are going to exit, and where will the market find a new equilibrium?” says Matsuk.

The losses keep mounting. Sandoz, the third-biggest manufacturer by sales, reported its U.S. revenue slid 17 percent in the fourth quarter of 2017 and cited consolidation among buyers as a reason. Novartis has said it’s considering selling off part of the business. Mylan, the second-biggest, said price deflation in the fourth quarter was even more pronounced than in prior quarters. “You get to prices as cheap as dirt, and then you wonder why companies are having to make harsh decisions,” Heather Bresch, Mylan’s CEO, said at the industry gathering in Orlando.

Before the buying groups formed, drugmakers such as Teva or Endo were able to offset the losses from an unprofitable drug by selling other medicines at a higher markup. Robert Stewart, incoming CEO of Amneal, the No. 5 generic drug company in the U.S. once its pending merger with rival Impax is completed, says that’s no longer the case. “There’s almost really no benefit to having that full-suite portfolio anymore.”

Jeff Watson, president of Canadian generic drugmaker Apotex, says he sees the potential to fill gaps if and when shortages crop up. “We are anticipating more of it, and we are looking at what would be our opportunity to respond.”

If shortages do occur, prices could begin to rise. That would be good news for companies—if not for patients.

Paul Bisaro, an industry veteran who will be executive chairman of the Amneal-Impax combination when the merger is complete, said earlier this year that makers of generics need to think about using companies such as Amazon.com, FedEx, or United Parcel Service to get drugs directly to consumers. But that’s a long way off.

Until then, the cuts keep coming. As a cost-saving measure, Endo this year decided to move much of its generic research and development division to India from the U.S. On a recent March afternoon at Endo, Campanelli had to step out of an interview for a few minutes to thank a handful of employees for their hard work. It was their last day.

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