Lifecycle: End Game

Very few drugs live forever. Barring remarkable scientific advances and radical market dynamics, most drugs hit old age—and sharply declining sales—several years before their patent expires. But some drugs go out with a bang, not a whimper.

Take Merck's Vioxx, for example, which was yanked from the scene because its reputation was ruined; even if it makes a comeback, it's unlikely to achieve the sales of its bright youth. And with the rise of generics—and their challenges not only to class competitors but to patents themselves—even blockbusters are reaching their senior years earlier and earlier. The sales of such champions as Pfizer's Lipitor and AstraZeneca's Crestor are being chipped away when the first drug in the category goes generic, as was the case with Merck's Zocor late last year. Since then managed care organizations (MCOs) are increasingly filling statin scripts with simvastatin, the generic version.

Top Seven Specialty Pharmas

The patent for NMEs (new molecular entities) begins at registration and goes for 20 years. After spending 12 to 15 years in development, testing, and government review, a drug has about five to eight left to recoup its investment and turn a profit. Drugmakers have been predictably inventive in coming up with marketing and other strategies to maximize this potential.

End-of-lifecycle products can continue to generate revenue, but companies usually have to revise the blueprint for these brands. Such established brands come in a variety of types: classic cash cow, merger fallouts, portfolio-burdened products, small brands, and products with lower-than-expected growth rates. Each, in turn, requires its own specific revenue-producing programs: alternate forms of promotion, various approaches to pricing and contracting, strategic alliances as well as different tactics for manufacturing and operations. Many end-of-lifecycle products are a significant source of large-pharma income because they require little effort and pose little risk. They can also be used as a hedge against the high risk of drug-development failures.

Top 200 Drugs, 1975–1995

In the past, there were two ways for companies to deal with an off-patent product: either by dropping it from the portfolio or keeping it as a "service product." Stopping it cold solves the problem of carrying a weak product, which can be very costly—and not just in the amount of uncovered overhead and outlay. There are hidden costs—an out-of-date reputation for the firm, an obsolete product that does not add prestige—as well as the burden of maintaining a drug that no longer fits the current product line. However, when a company decides to drop a brand, it has to make some additional decisions. If the product has strong distribution and residual goodwill, the company can probably sell it to another firm. If no buyers emerge, it must decide whether to liquidate the brand quickly or slowly.

Moreover, dropping a product disappoints and angers some physicians and patients. To avoid this scenario, a company may choose simply to keep the product in its portfolio. A number of products have been commercially successful for 40 years and counting, such as the Premarin brand of conjugated estrogens and the Synthroid brand of levothyroxine.

Innovators of End-of-Lifecycle Drugs

However, since MCOs came to the fore in the '80s, the situation has become harsher because the so-called formulary effect makes the sales of end-of-lifecycle products decline even more steeply. MCOs, prizing cost containment, switch to generic equivalents as soon as a drug goes off patent. Given this, end-of-lifecycle products are hard-pressed to attract new prescriptions. Increasingly, branded originator products lose as much as 90 percent of market share to generics. As a result, companies are eager to get rid of many of these end-of-lifecycle products, saving the cost of maintaining them.

The Move to Specialty Markets

Today, branded pharmas are putting enormous resources and effort into product lifecycle management. Commonly used tactics include creating new formulations, expanding indications, contracting with authorized generics producers, and switching Rx drugs to over-the-counter (OTC). Yet such tactics are all costly—and do not guarantee market success. For the large-cap pharmas with multibillion-dollar annual sales, products generating less than $100 million a year are rarely worth the effort. As a result, a niche market exists for those end-of-lifecycle drugs: specialty pharmaceutical companies can buy and continue to manage those products profitably, at least for a limited time (see "Top Seven Specialty Pharmas").

New Sellers of End-of-Lifecycle Drugs

Specialty pharmas usually focus most of their efforts on sales and marketing in one or two therapeutic areas with tightly focused physician populations, such as psychiatrists, obstetrician-gynecologists, or gastroenterologists. These specialists can be managed with smaller sales forces (often less than 300, but as few as 35). Numerous companies have been notably successful at focusing on managing end-of-lifecycle drugs as an important part of their business model, including King, Ovation, and Valeant pharmaceuticals.

Another reason for jettisoning an old product is that it no longer jibes with the current image or identity of a firm's portfolio in a particular therapeutic class. And more and more are coming to this niche market.

Status of Branded Drugs, 2005

Spotting the Trends

In order to track the evolution in how the industry is dealing with the opportunities and challenges of end-of-lifecycle products, we started by recording the top 200 drugs annually published in Pharmacy Times for every five-year-interval from 1975 to 1995. (We stopped in 1995 because that cutoff allowed for a sufficient lifecycle for the originator company to sell the product—and for us to observe the pattern of sales and prices under the new owner, plot trends, etc.) Then we checked the 2005 Red Book for the current manufacturers. This revealed how many of the drugs remained with the original manufacturers and how many belonged to a new owner in 2005. The year in which the ownership transfer took place was confirmed.

At the beginning, a total of 1,000 drugs for every five-year interval between 1975 and 1995 was obtained. After screening out duplicates, 522 products were left. Of these, only 85 currently belonged to branded manufacturers other than their original inventors.

The "Top 200 Drugs, 1975–1995" chart (page 107) reveals certain characteristics of the top 200 drugs for those five years. The number of branded products decreased, from 185 in 1975 to 142 in 1995. Meanwhile, the number of generics in the top 200 increased from 15 in 1975 to 58 in 1995. Clearly, the generic sector grew dramatically as cost-containing MCOs stepped into the market.

Safety Drug Withdrawals, 1997–2001

The "Status of Branded Drugs, 2005" chart (right) tracks the growing trend to sell off branded drugs in the top 200 list. For example, in 1975, 185 were branded products, while 15 were generic; by 2005, 56 of those branded products were still with the original manufacturer, while 38 were with a new owner, and another 91 had been discontinued.

These findings are suggestive. The number of branded drugs that are still promoted by the original manufacturers in 2005 increased, from 56 in 1975 to 105 in 1995. An obvious explanation for this increase is that more-recent drugs have longer patent life remaining, so there is no compelling reason to unload them from the innovator's portfolio. Similarly, the number of branded drugs discontinued in 2005 decreased, from 91 (from 1975) to 13 (from 1995).

However, as of 2005, the number of branded drugs that were with a different manufacturer increased from 1975 to 1985—and then diminished. This may be because without further investment in sales force and promotional activities, revenues from end-of-lifecycle branded drugs tend to decrease gradually and finally disappear. After a certain point, an old drug cannot make enough profits even for a specialty pharma and is dropped.

New Drug Approvals, 1994–2004

The "New Sellers of End-of-Lifecycle Drugs" and "Innovators of End-of-Lifecycle Drugs" charts (both above) portray the distribution of the original manufacturers of old products as well as the specialty pharmas that took over ownership. Among the total 85 products, the innovators were mainly large-cap pharmas: Wyeth was the number-one developer and owner, with 16 branded drugs, followed by Bristol-Myers Squibb and Eli Lilly, with 10 each. By contrast, the distribution of the secondary sellers spreads out widely. Most specialty pharmaceutical companies own three products or less—with the notable exception of Monarch, a division of King, which has 10 of the total. It is also rlikely that certain branded pharmas are more actively divesting end-of-lifecycle products than others. Wyeth, for example, sold a significant number, while Pfizer only parted with a few of its supply.

The End-of-Lifecycle Business

Why would a multibillion-dollar drugmaker decide to jettison a few end-of-lifecycle products with low sales? The most obvious answer is that limited profitability of such drugs makes streamlining the portfolio very attractive.

But that is not the only reason. For a firm that wants to be thought of as a leader in new treatments or technologies, it is unwise to continue selling "old-fashioned" products like reserpine or thyroid extract. Or it may be that over the years, a company's R&D focus has shifted into other therapeutic areas, and maintaining a field force to support one drug in its own category is no longer cost-effective.

There are other financial reasons to drop products. The raw materials take up valuable warehouse space, as do the unsold finished goods. There may not be time for scheduling production, even though it may require a factory run of only one or two days a year. Still, that process involves changing and cleaning equipment, a potential for contamination, and preventing tableting of much more profitable lines. Moreover, industry experts estimate that the seller can expect to earn a fee from the new buyer that is three to four times that of the drug's current annual sales.

A special situation may prevail in the case of a merger between two or more branded pharmas. The Federal Trade Commission could force the newly formed company to sell some of its existing products to avoid market dominance in a certain therapeutic area. This presents the big pharma with an opportunity to re-evaluate its top-selling drugs and pipeline, build a desired image as an innovator, and free itself of any undesirable not-so-profitable products.

But if the economics driving the large-cap pharmas to divest of old drugs are plain enough, why are specialty firms so eager to acquire them?

According to a recent study conducted by Rebecca Hellerstein, physician prescription behavior tends toward consistency, and some are likely to prescribe trade-name drugs for long periods of time. Such hard-won brand loyalty means that those end-of-lifecycle products can still generate at least modest sales, even when the specialty pharmas do not invest heavily in sales and marketing. Besides, such an end-of-lifecycle product can propel a specialty pharma to build a sales force in a certain therapeutic area. This, in turn, can help lead to establishing a reputation in the field, especially if the firm has aspirations of eventually becoming an innovator.

And when a specialty drugmaker reformulates an end-of-lifecycle product—either by means of a new dosage, a new indication, or some kind of line extension—the product can return to the market to capture more sales. King Pharmaceuticals, for example, has mastered this art. This Tennessee-based company, founded in 1993, has steadily acquired more and more branded products. Currently it has a portfolio of 40—and although none were developed in-house, the company's 2005 sales totaled $1.77 billion. The end-of-lifecycle firms may see their products maintain market viability as innovator pipelines go through a dry spell (see "New Drug Approvals") and as new products hit snags (see "Safety Drug Withdrawals").

At the end of the day, the end-of-lifecycle is a viable market segment—and specialty pharmas that corner it show every sign of growing stronger in the future.

Albert I. Wertheimer, founding director of the Center for Pharmaceutical Health Services Research at Temple University School of Pharmacy, can be reached at albertw@temple.edu; Ellen F. Loh, a research fellow at the Center for Pharmaceutical Health Services Research, at ellenloh@mac.com; and Laurence G. Poli, a managing partner at the Center for Performance Excellence, LLC, at lgpoli@rxmarketing.net.