Drug Spending Growth Drops as Brands Are Replaced by Generics

The annual growth rate in spending on drugs may be cut in half over the next five years as people opt for less expensive generic medicines over brand-name treatments, a health-care research group said today.

While global expenditures for medicines will still reach almost $1.1 trillion by 2015, the annual compounded growth rate may be reduced to 3 to 6 percent through 2015, compared with 6.2 percent over the last five years, according to the IMS Institute for Healthcare Informatics in Parsippany, New Jersey. Still, emerging markets will double their purchases to as much as $315 billion, the institute said in a report.

Expiring patents on branded medicines will yield $98 billion in net savings to government health plans and commercial insurers during the next five years, with the U.S. providing the biggest increase in spending for generic alternatives, the institute said. Market share for branded drugs will drop to 53 percent from 64 percent last year, according to the report.

“This patent dividend may actually be coming as a surprise to payers and not yet fully worked into their own estimates,” Murray Aiken, the institute’s executive director, said in a conference call yesterday. “It’s a reasonably significant slowdown.”

The 2008 global financial recession and recent government actions to control drug prices in nations such as China, Italy and Japan also are reasons for the slowing growth rate, Aiken said. Rebates and discounts offered by drugmakers aren’t reflected in IMS audits and may add as much as $75 billion by 2015, the report said.

Productivity Focus

While the pharmaceutical industry’s research and development spending has increased, “everyone is focused on trying to raise the productivity of the R&D investment and that continues to be a struggle,” Aiken said.

Last year, U.S. regulators approved 21 medicines for sale, the fewest since 2007. Pfizer Inc. (PFE), Merck & Co., Eli Lilly & Co. (LLY) and Bristol-Myers Squibb Co. all failed in 2010 to gain approval for new drugs.

Already this year, New York-based Bristol-Myers won U.S. marketing approval for its skin cancer treatment Yervoy, Whitehouse Station, New Jersey-based Merck gained approval for the first hepatitis C medication, Victrelis, in more than a decade and Indianapolis-based Lilly was cleared with German drugmaker Boehringer Ingelheim GmbH to sell the drug linagliptin to help improve blood sugar control in people with Type 2 diabetes.

“This comes back to ‘innovation wins out’ and if you have the innovative products, the global market is only getting larger,” Aiken said. “If not, you’re competing against an ever-more aggressive set of generic producers.”

To contact the reporters on this story: Pat Wechsler in New York at pwechsler@bloomberg.net Alex Nussbaum in New York anussbaum1@bloomberg.net.

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net.

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