Drug prices to plummet in wave of expiring patents

“The profit dollars that companies used to reinvest in innovation are no longer going to be coming,” warns Terry Hisey, life sciences leader at consultant Deloitte LLP’s pharmaceutical consulting business. He says that raises “long-term concerns about the industry’s ability to bring new medicines to market.”

But pharmaceutical companies can save billions when they stop promoting drugs that have new generic rivals, and U.S. drug and biotech companies are still spending more than $65 billion a year on R&D.

Drug companies have received U.S. approval for 20 drugs this year and expect approval for other important ones the next few years. Eventually, those will help fill the revenue hole.

For now, brand-name drugmakers are scrambling to adjust for the billions in revenue that will soon be lost. Typically, they raise prices 20 percent or more in the final years before generics hit to maximize revenue. Some also contract with generic drugmakers for “authorized generics,” which give the brand-name company a portion of the generic sales.

Brand-name companies also are trimming research budgets, partnering with other companies to share drug development costs and shifting more manufacturing and patient testing to low-cost countries.

Pharmaceutical companies have cut about 10 percent of U.S. jobs in four years, from a peak of about 297,000 to about 268,000, according to Labor Department data. Nearly two-thirds of the cuts came in the last 1 1/2 years, partly because of big mergers that were driven by the need to bulk up drugs in development and boost profits in the short term by cutting costs.

Drug companies also are trying to grow sales by putting more sales reps in emerging markets, such as China and India, and by diversifying into businesses that get little or no generic competition. Those include vaccines, diagnostic tests, veterinary medicines and consumer health products.

As the proportion of prescriptions filled with generic drugs jumped to 78 percent in 2010, from 57 percent in 2004, annual increases in prescription drug spending slowed, to just 4 percent in 2010. According to the Generic Pharmaceutical Association, generics saved the U.S. health care system more than $824 billion from 2000 through 2009, and now save about $1 billion every three days.

The savings are only going to get greater as our overweight population ages. People who take their medicines regularly often avoid costly complications and hospitalizations, says AARP’s policy chief, John Rother, which produces even bigger savings than the cheaper drugs.

In addition, many patients taking a particular brand-name drug will defect when a slightly older rival in the same class goes generic.

Global sales of Lipitor peaked at $12.9 billion in 2006, the year Zocor, an older drug in the statin class that reduces bad cholesterol, went generic. Lipitor sales then declined slowly but steadily to about $10.7 billion last year. That still will make Lipitor the biggest drug to go generic.

For patients, it’s a godsend.

Douglas Torok, 59, of Erie, Pa., now spends nearly $290 every three months for insulin for his Type 2 diabetes, plus four daily pills _ Lipitor, Plavix and two generics _ for his blood pressure and cholesterol problems. The $40,000-a-year foundry supervisor fears not being able to cover the out-of-pocket costs when he retires and doesn’t have a generous prescription plan.

In the meantime, once Lipitor and Plavix get generic competition his copayments will plunge.

“I will pay $16 for 90 days,” says Torok, who hopes to travel more. “It’s a big deal for me on my income.”

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