A novel aggressive pricing approach by Merck & Co. in order to compete with Teva's generic version of its cholesterol blockbuster drug Zocor has spurred deep concern about the future of the generics industry.
"The fact that Merck signed deals to undercut pricing on branded Zocor ahead of Teva's generic launch of the blockbuster drug raised serious concerns in the market about future prospects for generic companies as brand name manufacturers are willing to cut their own prices much more significantly than previously thought in order to make the generic business model less attractive," said Avi Weinreb, trader at Clal Finance Batucha Investment Management.
Merck is cutting the price of its cholesterol drug Zocor so low for UnitedHealth Group Inc. and WellPoint Inc, the two largest US health insurers, that members will pay less for the original pills than for the generic equivalent.
In the meantime, Aetna Inc., the third largest US health insurer said on Thursday it would buy discounted copies of the Zocor cholesterol drug from Teva rather than accept an offer from Merck. Under terms of the deal with Merck, members of UnitedHealth would pay around $10 for a month's supply of Zocor as opposed to $40 for a generic, when the drug loses patent protection on Friday.
Weinreb added that what this could mean is that generics might see pricing pressure even when they get 180-day exclusivity. Generic companies make most of their profits when awarded six months of market exclusivity because a lack of competition means they don't have to sell their product at an enormous discount to the brand.
"But now Teva will be facing two competitors when launching its generic drug on Friday while facing conditions of lower pricing," said Weinreb. India's Dr. Reddy's is also expected to sell an authorized generic version of Zocor once Teva launches, thus further cutting into Teva's expected margins.
Richard Watson, analyst at William Blair & Company said the Merck deal was raising concerns of reduced market share for Teva and potentially setting a negative precedent for generic companies if other branded companies pursue similar strategies to Merck's going forward.
But, he added: "We believe Merck's strategy is a one-off attempt to maintain whatever market share it can for its largest selling product more so than a paradigm shift in how branded drug companies defend their franchises against generics." Zocor generated $4.4 billion in sales last year.
Clal's Weinreb noted that the impact of Merck's unprecedented tactic only would be known once other brand drug companies follow suit.
"If, for example, Pfizer would react in a similar manner when Teva launches its generic version of $3.3b. blockbuster drug Zoloft in July, this would set a negative trend,"said Weinreb.
Meanwhile, Ori Hershkovits, an analyst at Leader & Co. pointed out that questions over the incentives Merck was offering UnitedHealth remained open, for instance, such as with how many other organizations it had reached a similar arrangement and how much it actually cut the drug price.
"Without knowing that, there's no telling how the whole thing will affect Teva's earnings," he said.