THE SPECIFICS ON GENERICS

Generic drugs are the strongest remedy for shrinking pharmacy margins at supermarkets.Despite competitive pressures and receding reimbursement rates, the low-priced alternatives to brand drugs still provide a boost to profits for supermarket pharmacy and significant savings to customers, retailers told SN.Between the start of Medicare Part D prescription coverage, which encourages the use of generics,

Generic drugs are the strongest remedy for shrinking pharmacy margins at supermarkets.

Despite competitive pressures and receding reimbursement rates, the low-priced alternatives to brand drugs still provide a boost to profits for supermarket pharmacy and significant savings to customers, retailers told SN.

Between the start of Medicare Part D prescription coverage, which encourages the use of generics, and Wal-Mart Stores' launch of its plan to offer certain generic medications for $4, the drugs are top of mind for retailers and consumers.

"Generics are very important and we do everything we can to increase the dispensing rate for our patients," said Michele Snider, director of pharmacy, Save Mart Supermarkets, Modesto, Calif. "In most cases it is less expensive for the patient and more profitable for the pharmacy to dispense the generic, so it is important to continue that."

Additionally, about $100 billion worth of name-brand drugs have already lost or will lose patent protection over the next four to five years, said Curtis Maki, vice president, program management, HBC/GM/Rx, Topco Associates, Skokie, Ill. "Although there will be intense competition, the outlook for the generic industry is very good over that time period," he said.

Generic prices are typically 50% to 70% lower than the brand-name drug equivalents, according to figures from the Food and Drug Administration. This can help keep insurance premiums low and benefits high, Maki said.

The generic drug industry is cyclical, so when the brand companies do well, generic companies will do well several years later, Andrea Hofelich, spokeswoman for the Generic Pharmaceutical

Association, Arlington, Va., told SN.

Just as a number of "blockbuster" or popular brand-name drugs are coming off patent, the patient acceptance level of generics has increased as well, said Edith A. Rosato, senior vice president, pharmacy affairs, National Association of Chain Drug Stores Foundation, Alexandria, Va.

During his September address to the Senate Special Committee on Aging, Mark McClellan, former administrator for the Centers for Medicare and Medicaid Services, broke down the value of name-brand pharmaceuticals coming off patent over the next few years.

"The GPhA has indicated that 'blockbuster' name-brand pharmaceuticals coming off patent are valued at $22 billion in 2006, $27 billion in 2007 and $29 billion in 2008. For example, Zocor, a cholesterol-lowering drug and one of the nation's top sellers, just recently came off patent. An antidepressant, Zoloft, recently came off patent as well. The patent for a high blood pressure medicine, Norvasc, expires next year; and Advair, an asthma fighter, loses its patent protection in 2008," he said.

STRONG OUTLOOK

The outlook for the generic industry over the next year or so continues to be very strong, said Dan Milovich, director of pharmacy operations, Bashas' Supermarkets, Chandler, Ariz. "Generic drugs are of an extreme importance in making health care more affordable for all," he said. "This corresponds to all health plans and goes way beyond just Medicare Part D."

However, early indicators show that Medicare Part D beneficiaries are relying on generics to a greater extent than the rest of the U.S. population, according to McClellan. "Nationwide, among all payers, the proportion of generic usage by prescriptions dispensed stands at 51.9%. Data recently gathered by CMS shows that generic usage among all types of Part D plans was 60.1% during the first two quarters of 2006."

"Realizing the significant impact of increased dispensing of prescriptions and the accompanying costs associated with this, many insurance plan payers, including the federal government, have positioned generics favorably in terms of patient co-pays," Rosato said. "Typically these drugs are placed on the lowest tier and require either no co-pay or a modest one, thus encouraging use of these products by patients."

In addition, the total Medicare population traditionally has constraints on its monetary resources, "so they are looking at how to make their money go further and one way is to get the generic drugs," said John Fegan, senior vice president of pharmacy, Ahold USA, Braintree, Mass.

MEDICARE IMPACT

Save Mart is looking forward to increasing its dispensing rate for generics, based on lower-than-expected generic grosses since the start of Medicare Part D, Snider said.

"When you look at all of the formularies from the different Medicare Part D plans, quite a few of them include brand names when generics are available, and a few of them mandate brand drugs instead of generics and give the customer a lower co-payment for that," Snider said.

With that, some drug prices did not drop, although reimbursement rates and co-pays did, she said.

In 2006, some formularies may have included the brand-name drugs because the first approved generic version of every drug gets a six-month exclusivity period in the market, during which time the price remains high on the brand and generic alternative, Snider said.

"There is an opportunity in the next year as these generics come off exclusivity that many more formularies will add them," she said.

Moving The Market

The dispensing rate for older generic drugs is picking up after Wal-Mart Stores' September launch of its $4 generic prescription program. In announcing an expansion of the plan, Bill Simon, executive vice president of the professional services division for Wal-Mart, said 36,000 new prescriptions were filled in the 10 days after the launch in the Tampa Bay, Fla., test market.

This month, Wal-Mart expanded the plan to include 314 drugs and the entire state of Florida. Retailers to match the plan so far include Publix, Costco, Target and southeastern discounter Fred's, while Kmart called attention to a similar program it already offers nationwide, which prices 90-day supplies of some generic drugs at $15.

"The Wal-Mart move just heightens the awareness surrounding generic medications," said Dan Milovich, director of pharmacy operations, Bashas', Chandler, Ariz. "Bashas' has been offering 90-day supplies of generic medications at greater discounts than this $4 program for over two years."

Other retailers will launch their own initiatives, though it may not have the same look as the Wal-Mart program, said Curtis Maki, vice president, program management, HBC/GM/Rx, Topco Associates, Skokie, Ill. "To be successful, competing retailers must package the program in such a way that the perceived value will be equal to or greater than the Wal-Mart program."

The difficulty for supermarkets lies in the assumption that many supermarkets would have to use other sectors of the business to support the pharmacy, if they were to match the deal, said Michele Snider, director of pharmacy, Save Mart Supermarkets, Modesto, Calif.

"When a consumer goes to a physician, they expect to pay a physician in order to get information about their health," she said. "When they come to a pharmacy they want information about their health, about their insurance plan, about their drug, about their interaction and about their lifestyle, yet Wal-Mart is making it look like we can do all this for $4. It's not realistic."

Rx Pricing Upheaval

A tentative legal settlement reached this month in Boston is going to cause a complete upheaval in the way retail pharmacies are reimbursed for dispensing brand-name drugs, retailers and industry experts told SN.

Eventually, the effects of the settlement will change the way reimbursement rates are calculated for generic drugs as well, they said.

Members of the Prescription Access Litigation Project, Boston settled against Hearst-owned First DataBank, San Bruno, Calif., in a suit alleging that from 2002 to 2005, First DataBank conspired with prescription drug wholesaler McKesson Corp., San Francisco, to arbitrarily increase the Average Wholesale Price for brand-name prescription drugs, which it publishes, by 5%, according to the litigation project.

Health plans and insurers typically reimburse pharmacies based on the AWP plus a fee for dispensing.

The AWP is meant to reflect the markup that wholesalers charge retailers above what the wholesaler paid the manufacturer for the drug.

Litigation project members said in a statement that the average markup was 20% until many of First DataBank's AWPs rose to 25% in 2002, allegedly under the influence of McKesson in order to benefit the wholesaler's pharmacy customers.

As a result of the settlement, First DataBank is immediately moving the AWP back 5% on hundreds of commonly prescribed drugs, effectively lowering the reimbursement rate to retail pharmacy. Furthermore, First DataBank will cease publishing AWP data within two years of the final approval of the settlement, the litigation project said.

"Because we base all of our third-party contracts on AWP, we will have to renegotiate those," John Fegan, senior vice president of pharmacy, Ahold USA, Braintree, Mass., told SN. The most likely candidate for replacing the AWP is the Average Manufacturer's Price, he said.

E.M. Kolassa, chief executive officer and managing partner of Medical Marketing Economics, an Oxford, Miss., consulting firm, agrees that AMP is the most likely alternative, but is not convinced that it will be the best. Average Manufacturer's Price reflects how much the wholesaler pays the manufacturer.

"The problem with AMP is that it is based on the assumption that pharmacies can buy the product at or very close to the price the manufacturer sells it to the wholesaler for," he said.

For the time being, with the AWP decreasing by 5%, retailers need to renegotiate with all insurance plan payors for a higher dispensing fee, Kolassa said.

"Over the years, because of the additional money that came with AWP reimbursement, retailers have been able to accept lower dispensing fees," he said.

Once the AWP is gone, "it is likely that AMP or some other alternative is going to move to the forefront pretty quick, quicker than we wanted it to," Fegan said.

The change will affect the entire industry, he said. "That means generics also. We are all worried about the generics sector being hit. But for right now, selling generics is a significant way for us to try to maintain and stop the erosion of margins."