What goes up usually does come down.  The generic industry is in the middle of the now famous “patent cliff” being faced by the pharmaceutical industry.  Many of the monster brand name drugs have lost their patent or will do so over the coming months and generic drug companies have done pretty well as had been expected.  An interesting article in the New York Times a week or so ago points out that the real concern for generics will come as this patent cliff situation slows down.  Note that even Teva, a company that sells one out of every six generic prescriptions in our country, has announced significant cutbacks in the near future.

It is important to consider the business model for the generic industry.  They are in business to do one thing and one thing only with their generic products: cut costs.  There is no innovation, no increase in patient convenience, no increased efficacy and no safety advantages but rather they must by definition be exactly the same as the branded products they replace.  The only protection they have from other generic companies, making the same product and driving the price and margins even lower, is a small section in the Waxman-Hatch law that gives the first generic six months of exclusivity.  For a number of reasons that advantage is less and less lucrative today due to authorized generics and other complex deals.  Generic companies are struggling to find areas where they can produce drugs their competitors can’t or to secure branded products and morph more of their business into that space.

Last Friday, lost in all the publicity around the Supreme Court’s decision to rule on two significant cases about same sex marriage, came the huge announcement that they will also take up the “pay-to-delay” issue that could dramatically impact the generic drug industry.  Take a look at this NYT piece and study the interesting facts behind the case.  The key issue is whether these arrangements between the generic and branded companies have resulted in antitrust violations.  The FTC has always felt they do, as do members of Congress.  The courts have usually not agreed up until this case that the Supreme Court has agreed to hear.  The simple strategy behind pay to delay, is that a generic company challenges a branded drug company’s patent before it has expired and both sides end up in court. The branded company then settles by agreeing to pay something to the generic company and the generic company agrees to wait until the patent period is over to market their drug.  Depending on which side of the argument you believe this either saves or costs society huge amounts of money.

Note that the generic industry could suffer a serious blow if the court rules these payments must stop. Generic companies will have to litigate to the end rather than settle early and this means not only huge legal fees but also that they will need to be much more selective about the patents they are challenging.  The branded companies will have much more muscle and will also have significant motivation to defend every patent through the longest legal struggle possible.

Even though the industry has been able to capture roughly 85% of all prescriptions and their revenue is up 19% this year, the future does not look all that positive.  Their scorched earth pricing policies once their exclusivity period is up, and now the instability of the 180 day exclusivity could make the time ripe for some legislative change.  With both the branded and the generic industries under significant pressure it may be time for a new “Waxman-Hatch” type agreement where both industry and society could help assure long term innovation and financial stability for all parties.  This will take some creativity and careful analysis by Congress, but it now appears as though the first move may be up to the Supreme Court.  It should be interesting.