Managing Healthcare Costs: Pfizer

Today’s Managing Health Care Costs Indicator is $324 million

This week New England Journal has a simulation showing the value of the introduction of generic atorvastatin in terms of lowering health care costs.

Some numbers:

· Pfizer had revenue of $7 billion last year from Lipitor. It was the top selling medication in America

· Judging from generic simvastatin introduction in 2006, the cost will decline by 16% one month after generic introduction, 19% at six months after generic introduction, and 60% by 12 months.

· Savings from the introduction of the generic medication will be over $2 billion next year, and will be over $4.5 billion in 2014.

· Pfizer’s agreement with Ranbaxy to delay the introduction of generic Atorvastatin by 6 months cost Americans $324 million in savings. (I suspect this understates the lost savings – since the delay will continue to increase costs for an entire year or longer after the final introduction.)

Generic drug introductions continue to remain one of the major sources of new value in the health care space. Vigorous antitrust enforcement and regulatory actions to speed introduction of generics is important to be sure we get the maximum value from generic introductions.

Pfizer’s efforts to lower the profits of the generic companies that brought the first atorvastatin to the market might seem like a good deal at first. Consumers can purchase brand name Lipitor for as low as $4 per month – as opposed to $160 per month at Drugstore.com today. However, these efforts will lower the profits of the initial two generic manufacturers and could dissuade generic manufacturers from pushing hard for early generic introductions in the future.

Today’s Managing Health Care Costs Indicator is $106 billion

Saturday’s New York Times documented efforts Pfizer is making to thwart conversion from brand name Lipitor to generic atorvastatin. Pfizer is promising huge discounts on brand name Lipitor if the Pharmacy Benefit Managers (PBMs) block coverage for generic atorvastatin for six months.

Here’s what this will do:

1) Patients will continue to pay the higher ‘brand name’ copay or coinsurance, rather than paying the lower cost share for a generic

2) Employers will in general pay more – although if the Pfizer discounts are deep enough the incremental payment could all be absorbed by increased patient cost-sharing

3) Enhance profitability for PBMs, which will take a share of the ‘discount’ offered by Pfizer as detailed in employer contracts. PBMs usually make more money with generics – but Pfizer’s move would upend that situation for Lipitor for the next six months.

4) This will be a financial body blow to the two generic manufacturers, Ranbaxy and Watson, who have a 6 month window of semi-exclusivity when they can sell their generics for a discount compared to Lipitor. Six months later, when all generic manufacturers are able to produce and sell atorvastatin, the price will collapse, and there will only be a small profit opportunity.

New generic medications, in general, sell for about 20% less than the brand name equivalent during the 6 month semi-exclusive window. At that point, it’s likely that the price of generic atorvastatin will decline to just a little bit more than generic simvastatin, which is now sold at WalMart and other pharmacies for as little as $4 per month. Lipitor now sells for $160 for a one month supply (drugstore.com, 20mg).

Pfizer has earned a quarter of its revenue, or $106 billion, from Lipitor over the last decade.

The manufacturers willing to run the legal gauntlet to challenge Pfizer’s patents to be the first to offer generic equivalents must see a substantial payoff, otherwise we would have a de facto six month extension for drugs going off patent. Delaying availability of generics could cost us billions.

More important than the higher prices consumers or employers will pay is that Pfizer’s actions threaten the profitability of the initial generic manufacturers. That could prove the most expensive result – and employers and regulators should look at this deal very closely.