Magazine article Drug Topics

Generic Profitability: Is It at Risk?

Magazine article Drug Topics

Generic Profitability: Is It at Risk?

Article excerpt

Wal-Mart offers generics for $4.00. The Deficit Reduction Act cuts billions of dollars from pharmacies' Medicaid reimbursement for generic drugs. There's no doubt about it, generic margins are under siege today. Besides the two developments listed above, many others are contributing to lower margins for the pharmacist, including the following:

Spread pricing is eroding the financial viability of many retail pharmacies. Pharmacy benefit managers have utilized spread pricing for many years as a source of profit. Spread pricing is the activity of paying a pharmacy a contracted price for dispensing a covered drug and then marking up the pharmacy price when invoicing the payer. PBMs have increased the amount of spread pricing on generics during the past two years in response to increased payer scrutiny of brand pricing.

Wholesaler markups on generic products also influence the profitability at retail. As wholesalers reduced their markups on brand products, they named to generics to maintain profitability. Wholesalers mark up generics between 18% and 25% above their net cost. For independents and small chains, this is devastating to margins. Large chains, mail-order pharmacies, and certain large-volume group purchasing organizations purchase generics directly from manufacturers yielding higher generic gross margins.

Consolidation in the generic manufacturing industry probably poses the greatest long-term threat to generic profitability. For example, Teva/IVAX controls 20% of U.S. generic sales. Consolidation has resulted in decreases in the differential between the AWP and the net acquisition cost to a pharmacy. While this change may add uniformity to generic manufacturer pricing models, it strips margins from retail pharmacy.

Large PBMs and health plans establish MACs for 80% to 90% of all generics, often at an average discount from AWP of 50% to 60%. Generic pricing spreads of AWP minus 25% to minus 35% yield an automatic loss to retail pharmacies, forcing them to send the patient to an unsuspecting competitor or request the physician to select a brand equivalent or a more favorable generic.

The Hatch-Waxman Act has also resulted in reducing generic margins. The law provides a generic maker six months of marketing exclusivity for newly released generics. Most often these drugs are priced at 20% below the comparable brand. …

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