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News analysis: The Bergen Brunswig-Ivax merger plan exemplifies the generic drug industry's strategy for cashing in on a coming boom as many lucrative drug patents expire.

November 13, 1996|BARBARA MARSH | TIMES STAFF WRITER

Patents on a rainbow of branded drugs will expire in the next five years, promising a pot of profits for makers and marketers of generic drugs.

The merger announced Monday between the generic-drug giant Ivax Corp. of Miami and behemoth distributor Bergen Brunswig Corp. in Orange exemplifies steps being taken by companies across the industry to get ready to reap the rewards.

Intensifying cost-cutting pressures throughout the health-care industry have triggered demands for these lower-cost generic clones, which can also generate higher profit margins than brand-name drugs for distributors and druggists.

Over the next five years, patents will expire on 43 branded drugs that each generate sales of $50 million or more annually for their manufacturers, clearing the way for scores of lower-cost copycats. Generic drugs are at least 50% cheaper than the brand.

"The amount of [prescription drugs] moving from brand to generic over the next five years is huge--estimated to be $20 billion a year," said Robert E. Martini, Bergen chairman. Even with steep price discounts on sales of generic drugs, Martini said, that translates into about $7 billion in annual sales.

However, consumer advocates have qualms about the manner in which generics will be marketed to patients. While advocates welcome the opportunity to buy quality medicines at cheaper prices, they worry that consolidations among drug makers, wholesalers and managed-care companies could limit the patient's access to the best care.

The generic industry was launched across the nation in 1984 when the federal government permitted makers of generic drugs to start work on developing clones two years before the patent on the brand expired. At the same time, manufacturers holding 17-year patent rights were given the option of a two-year extension, say industry sources.

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With cost pressures from health-care insurers and other payers intensifying in recent years, the generic industry entered a "boom stage," says analyst David Saks of Gruntal & Co. in New York.

Annual U.S. sales of all prescription drugs amount to $70 billion, with generics accounting for about $6 billion of that, Saks said. Over the next five years, he expects generic sales to double as patents expire on drugs with huge markets.

His list of blockbusters includes Zovirax, a herpes therapy by Glaxo Wellcome Inc., which goes off its patent next year; Cardizem, an anti-hypertensive medication by Marion Merrell Dow Inc., 1998; and Vasotec, a treatment for high blood pressure by Merck & Co., 1999.

Saks estimates that in the U.S. alone, Zovirax has annual sales of $400 million, Cardizem's $800 million and Vasotec $1 billion.

In recent years, drug companies have taken steps to position themselves to take advantage of growth in demand for generics. Major manufacturers of branded drugs began making generics as well. Several even purchased pharmacy benefit management companies, whose cost-conscious customers prefer generics.

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For low-margin distributors like Bergen, the potential for profit growth in the generic field is enticing. If its merger with Ivax proceeds, Bergen estimates that it will reap higher profits on the $2 billion worth of generic drugs that it sells annually because the combined company, BBI Healthcare Corp., could manufacture half of these products.

In addition, the companies believe that Ivax sales across the U.S. could jump from $350 million to $1 billion by being marketed through Bergen's distribution network.

In fact, the prospects for growth in the generic industry surely prompted Ivax shareholders Tuesday to question whether the company should shop for a higher bid than it received from Bergen.

Under terms of the $1.4-billion merger, Ivax shareholders would receive less than the price of the stock last Friday.

"If something better came along, there would be a good deal of pressure on management to go for it," said David Katz, chief investment officer at Matrix Asset Advisors, a New York investment firm that holds about 270,000 shares of Ivax.

Meanwhile, consumer advocates question whether an industry consolidation like the one Bergen and Ivax are planning would be a good deal for consumers.

Advocates say generic drugs nowadays appear to be as safe and effective as the branded originals--and are much cheaper.

"In general, generics are really good for the consumer," says David Gross, a senior policy advisor at the American Assn. of Retired Persons.

However, critics say the opportunity for a distributor, or druggist, to make a bigger margin by directing business to one generic drug maker instead of another means that the array of generics available at the drugstore could be diminished.

Dr. Sidney Wolfe, director of Public Citizens Health Research Group in Washington, notes that choices for consumers have diminished as a result of prior mergers between drug companies and benefits providers.

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