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Proliferation of generics to help pharmacy operators' earnings.

NEW YORK -- Drug chains across the country are looking for the next few years to be profitable ones as more generic medications enter the market.

Executives say that while the stream of new generics will cause many retailers to see dips in their same-store sales in 2012, the long-term impact of more lower-price medications will be positive for the industry.

"These generic introductions will pressure the top line but will help the bottom line, especially after any post-exclusivity period, and this trend is expected to carry forward for the next several years," CVS Caremark Corp. chief financial officer David Denton said at the company's annual analyst conference here last month.

While the surge in generics introductions will lower many retailers' revenue this year, the introduction of these medications will drive up community pharmacies' script counts and will help increase their pharmacy margins.

On the downside, Denton said, CVS and other drug chains are likely to see their samestore pharmacy sales decline because of the coming generics' wave.

Additionally, he noted, generics will also have a greater-than-usual impact on operating expense leverage, given the sheer size of the top-line impact.

"While we expect only a modest de-leveraging in operating expenses as percent of sales, there are, in fact, underlying productivity improvements that are being more than offset by the impact of new generics," Denton explained. "That said, new generics are clearly good for our business and are expected to contribute significantly to operating profit growth for the next several years."

Down the road, he stressed, this year's influx of new generics will have a positive impact for CVS and the nation's community pharmacies.

Branded drugs with combined annual sales of nearly $97 billion are expected to go generic over the next several years, helping retailers grow their earnings through 2015 and beyond.

This year alone, about $35 billion of branded drugs are losing patent protection.

Denton noted that how these drugs come to market will determine the impact they have on pharmacies' bottom lines.

"The manner in which generic drugs are introduced to the marketplace impacts the cadence of profitability," he said, explaining the difference between what he calls limited supply, meaning from two or fewer suppliers, and breakopen, meaning from three or more suppliers.

Limited-supply generics, Denton explained, typically have a 180-day exclusivity period during which they perform much like a branded drug, carrying higher paces and costs.

After generics lose their exclusivity, more suppliers begin offering these drugs and the benefits for community pharmacies begin to become clearer, Denton said, explaining how the intense supply competition and CVS' ability to drive down procurement costs with its purchasing scale help the chain get larger margins from these now-established generics.

"The other key way that generics can enter the market would be as a break-open generic," he said.

These products enter the market with three or more suppliers on day one and behave like the limited-supply generics do after their exclusivity period expires, Denton said.

"With these generics we see optimal profitability right out of the gate," he stated, citing Pfizer Inc.'s Lipitor (atorvastatin calcium), Eli Lilly and Co.'s Zyprexa (olanzapine), Bristol-Myers Squibb/Sanofi Pharmaceuticals' Plavix (clopidogrel) and Merck &Co.'s Singulair (montelukas sodium) as examples of break-open generics that will impact the industry this year and into 2013.


Generics Continue To Represent A Significant
Opportunity In The Coming Years

2011 Liptor Zyprexa Levaquin Concerta Taxotere                20.1
2012 Plavix Seroquel Singulair Athos Lexapro Diovan
     Diovan HCT Eloxatin Geodon Tricor 145MG Provigil         35.9
2013 Cymbalta Oxycontln ER Niaspan Aciphex                    10.9
2014 Nexium Capaxone Celebrex Novolog                         16.6
2015 Ability Namenda Androgel Lovaza                          12.7

Source: IMS Health, CVS Caremark estimates.

Note: Table made from bar graph.
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Title Annotation:RX: RETAIL PHARMACY: Generic Drug Report
Publication:Chain Drug Review
Date:Jan 16, 2012
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