Making the case for generic medicines

While a report published earlier this year showed that the market for the supply of generics in the UK is generally working well and is attractive for generics manufacturers, traditional business models and ways of working are likely to be disrupted in future by Brexit, a squeeze on reimbursement and new technology.

The future of the UK's generics industry was the focus of discussion at an event earlier this month hosted by Pinsent Masons, the law firm behind Out-Law, in partnership with the British Generic Manufacturers Association (BGMA).

A shift in perception

A study prepared by consultancy business Oxera for the BGMA, published in June this year, took an in depth look at the supply of generic medicines in the UK. The findings can help support a change in public perception of the industry.

Much of the public attention the industry currently receives centres around the price for a small number of generic medicines. These are seized on and attract often unfavourable attention. However, what is not widely known and as the Oxera report confirms these price spikes are typically short-lived. as the prevailing market conditions serve to regulate prices through effective competition. In turn, the companies in the market are able to regulate their production levels to adjust to changes in supply and demand. This is a sign of a healthy market.

"Importantly, manufacturers have the ability to change their production levels and prices relatively easily to react to changes in market conditions," the report said. "In the short term, manufacturers generally avoid exiting entirely, instead decreasing production if market conditions are adverse and increasing production if market conditions improve. This creates a self-correcting mechanism whereby short-term and significant price increases are often met with additional supply followed by a decrease in price."

The Oxera report's overall conclusions that "the market mechanisms for the supply of generic medicines in the UK are functioning well", and that generic medicines are "delivering significant price reductions" where there is competition in the market, are supported by statistics in the report. They highlight, among other things, that generic medicines now make up 75% of all NHS prescriptions, more than double the volume of generics being prescribed in 2005. At the same time, generics account for just 28% of the total amount the NHS spends on reimbursement for medicines. It has been estimated that 1.2 billion packs of generic medicines are supplied to the NHS each year at an average cost of just £2.50 per pack.

The generics industry does more than just offer lower priced copies of originator products when patents protecting originators' market monopolies expire. There is genuine innovation in finding enhancements, offering different dosages or delivery mechanisms that benefits patients.

Future sustainability

Market conditions can be tough for generics. In some cases, the price that generic medicines are sold for can fall below a price point that delivers profitability for the manufacturers. The effect of this can be to dissuade some companies, particularly smaller manufacturers with fewer product lines, from entering a market, or cause others to pause or limit production until the tension between supply and demand is more favourable. This can have a knock-on impact on competition and pricing.

Larger manufacturers tend to be able to recover the hit they take on some low and below cost medicines if there is a balance across the whole portfolio they supply. Yet many in the generics industry are beginning to look at whether they really are obtaining a fair share of the overall value chain in discussions about the future sustainability of the industry.

Some of the attention has turned to the current distribution model. The Oxera report highlighted that almost 80% of generics sold to pharmacies are supplied via wholesale. It means that the actual sale price of medicines to the NHS typically is not reflective of the prices generic manufacturers receive for their medicines. Indeed value is often assessed after wholesalers have applied a margin in their dealings with pharmacies and the pharmacies have been reimbursed by the NHS after their dispensing costs and margin are also applied. This again can skew perception of the value for money delivered by manufacturers.

The distribution model is ripe for disruption, and as new technologies such as 3D printing become more available and cheaper to use, we may see a direct-to-patient model emerge.

Further change is anticipated as a result of Brexit and future trade agreements the UK might strike with other countries, perhaps most notably the US.

Existing supply chains face disruption and new regulatory hurdles look set to apply to UK-based generics seeking to sell into the EU market. At the same time, coverage of a prospective UK-US trade agreement has indicated that US negotiators may seek to encourage the price of medicines in the UK to rise to levels that would make it easier for US-based suppliers to compete.

What is unlikely to change is the squeeze on reimbursement we have seen as government ministers and NHS officials seek to get the best value for money for the taxpayer.

The good news is that many government and NHS decision-makers understand the positive contribution generics make to the bottom line and opening up patient access to medicines. The challenge, however, is that the emphasis appears increasingly to be on the affordability of medicines rather than on patient outcomes. The challenge for the generic industry is to raise awareness and understanding of the benefits for patients of new and more complex generics and biosimilar products and to invite policy makers to take a fresh look at the current categorisation system for reimbursement.

The combination of an ageing population, increased demand for medicines, the rising cost of innovative new treatments and financial pressures on health systems means competition regulators are likely to continue their scrutiny of the life sciences sector too for the foreseeable future.

The introduction of the Health and Medicines Supply Act 2017 is likely to reduce the number of cases the Competition and Markets Authority (CMA) investigates on excessive pricing, but we can expect the regulator to focus attention on the strategies originators sometimes pursue to delay generic competition.

Misuse of the patent system, denigration of competitor products and  'product hopping' are some of the practices used to  artificially extend the period of exclusivity following the expiry of the original patent that have fallen foul of competition regulators in the past. This is a non exhaustive and expanding area of competition law that will be used to tackle new delaying tactics as they develop and become more sophisticated.

Intellectual property (IP) protection is at the centre of many competition cases in the life sciences sector. The current system needs to be properly balanced and ensure that generic companies are both free to compete and that they are properly rewarded for the innovations they are responsible for in order to encourage further improvements.

Generics and biosimilars are the basis for equitable access to high-quality and affordable medicines in the UK. The industry needs the support of policy makers to ensure the business model is sustainable into the future. If there is no reward to be gained from innovating then there is a real risk that companies will dampen their efforts to innovate or, in the worst case, exit the market entirely.

Catherine Drew, Robert Vidal, Helen Cline and Samantha Carter are experts in life sciences at Pinsent Masons, the law firm behind Out-Law.