Pfizer’s Lipitor strategy worked… pretty well!

It’s been almost 3 months since Pfizer’s Lipitor lost exclusivity so it’s not a bad time to assess how the company’s strategy of maintaining market share has worked so far.  Keep in mind that Pfizer really broken new ground with this strategy.  Most R&D-based pharmaceutical companies practically abandon all sales and marketing efforts once a drug loses patent protection since within a month or two almost all of their market share is wiped out by the lower priced generics.  However, Lipitor is not your typical drug as shown by its $10B+ per year revenue numbers.  If Pfizer could keep even 10% of that market share, they would have a revenue stream that a lot of pharmaceutical companies would kill for.

Before we look at the numbers, how about a quick primer on how the generics market works?  When an R&D-based pharmaceutical company first gets a new (small-molecule) drug approved, it’s via a New Drug Application (NDA).  Based on either the patents around the new drug, or the market exclusivity awarded through the NDA, the company has the sole right to sell the drug.  The logic behind this right is that it allows a company to recoup the costs associated with R&D over a defined period of time.  The period of exclusivity ends when a generics company gets an ANDA (Additional New Drug Application) approved after the patent “runs out” (or sometimes before it runs out by proving the patent is invalid).

Now here is the important part.  The ANDA has its own period of exclusivity.  The first generics company to get an ANDA approved gets 180-days of exclusivity as the sole provider of a generic alternative to the branded drug.  Again, the logic behind this is to provide a financial incentive to offset the costs of getting an ANDA approved and that incentive is substantial.  During the 180-day period, the price of the drug drops only 10-20% (so the generic manufacturer gets almost the same profit margin as the branded-manfucturer did, but only for 180 days).  Once that 180-day period of exclusivity runs out, any generics company can get an ANDA approved and sell the drug, thus competition drastically increases and drug prices drop to maybe 10-30% of the branded drug’s price.  At this point, profit margins are razor-thin and the drug is basically a commodity.  Due to the rather steep price cuts that come along with generics, the brand name drug typically loses all of its market share within a month or two of the first generic hitting the market, as most brand name manufacturers have little interest in competing on price.

In the case of Lipitor, Ranbaxy was awarded with the first ANDA approval and with a little help from Teva, they were able to overcome some manufacturing (and regulatory) difficulties and got their generic version of Lipitor to the market just after Pfizer’s last patent ran out.  The other generic was a so-called “authorized generic”, which is in fact a generic version of Lipitor produced under the approval of Pfizer (which the rules allow).  That version is produced by Watson and Pfizer gets a pretty nice slice of that pie as a result of the arrangement (70% of revenues according to this article).

Now with all the background out of the way, how has Pfizer’s strategy fared so far?  Pretty good.  As of mid-February, Pfizer still has approximately 41% market share of all atorvastatin prescriptions.  If we run some rough numbers based on Lipitor sales for 2010 ($10.7B), a 41% market share would bring in over $2B in revenue for the 180-day ANDA exclusivity period (the only time Pfizer has a chance of keeping market share).  Lipitor had been slowly losing market share even before the patent expired, so let’s assume a more conservative $1.5B.  All of the effort that Pfizer put into keeping market share (PBM contracts, co-pay cards) doesn’t come cheap, so let’s knock the figure down to $1B.  However, Pfizer’s cut of sales from Watson’s authorized generic (which by some simple math has about 20% of the market) probably pushes that up to $1.25B.

Not bad at all!  Rather than leaving Lipitor to the generics companies, Pfizer spent a little time and money and has successfully held onto a sizeable chunk of the market and gets to put another $1B or so in the bank.  A wise investment by any stretch of the imagination.

What will be interesting to see is if any of the other R&D-based pharmaceutical companies follow suit.  There are some big drugs going off patent in 2012 (Seroquel, Plavix, Singulair) and Pfizer may have just proven that a little effort can provide some big pay offs.  Keep a look out for more stories like this in the coming year!

UPDATE (3/15/2012): Adam Fein over at Drug Channels just put up a great post about Pfizer’s Lipitor strategy and it has some more recent data.  I suggest you check it out!