Generic drugmaker stocks dip amid reports of competition from health systems

Generic drugmakers faced a tumultuous trading day on the stock market Thursday following the news that four large health systems plan to enter their line of business.

Intermountain Healthcare, Ascension, SSM Health and Trinity Health announced Thursday its aggressive plan to try to rein in the cost of drugs.

Pharmaceutical company stocks were down early in the day, ending with significant drops for both Teva Pharmaceuticals and Endo Pharmaceuticals, both of which make sterile injectables, an area the systems hope to enter. Teva was down 3.58% and Endo was down 4.42%. Valeant Pharmaceuticals saw a similarly large drop: 3.18%.

Mylan, a major generic player, didn't see a steep drop. By close, its stock price was down 0.59%. And branded drugmakers were close to flat. Novartis was down 0.54% and Pfizer shares were down 0.66%.

An advisory board member to the effort, Dr. Don Berwick, president emeritus and senior fellow, Institute for Healthcare Improvement and former CMS administrator said he expects the announcement caught the attention of drug companies.

"I hope it's a wake up call, a wake up call to the responsible components of the current pharmaceutical industry that are tolerating behaviors among their colleagues that should not be tolerated," Berwick said. "It should be a wakeup call to those that are behaving irresponsibly and unfairly to look at their own behaviors and say, 'This has got to stop.'"

Analysts say they were slammed with calls about the announcement's impact on pharmaceutical stocks and the competition it will present in the generic market, once the business is up and running, estimated to be one to three years.

But the financial services firm Cantor Fitzgerald cautioned against overblowing the importance of the effort in a report Thursday morning. It wrote that it will take years for the business to be operational, given the time necessary for drug approvals and plant inspections.

"Only a handful of small market generic opportunities were mentioned in the article, so we do not think it will impact the industry much, even if hospitals were ever successful in this endeavor," the report said.

Lou Fierens, Trinity's senior vice president of supply chain, said it will take between one and three years to get the operation up and running. If the acute drug shortage problems are corrected by then, "then we solved the problem," he said.

Details of the business model, including whether the systems will manufacture themselves or contract out, are still being worked out. The four systems will work in consultation with the U.S. Department of Veterans Affairs. All told, the group encompasses more than 450 hospitals across the country.

They'll start with a small group of drugs and grow from there, focusing first on with those that have seen rapid price increases, are in short supply and are critical to certain patient populations.

"We're going to look at all the drugs that people are taking, look at where the major increases are, where we can bring competition to the market for generic drugs and really focus on those," said Anthony Tersigni, Ascension's CEO.

The question remains whether the new competition will prompt drugmakers to lower prices on some generics.

Fierens said he expects to see market reaction to the announcement. In the future, if the group commits to making a product and the price drops afterward, "society wins," and it will honor its ongoing agreements.

"If we happen to march down a road and magically the price drops by 300%, wonderful," he said.

Bob Ripley, Trinity's vice president and chief pharmacy officer, cautioned that doesn't solve the supply issue.

"It is about a stable, sustainable supply as much as it is about cost," he said.

Many crucial pieces of the systems' business plan are still being determined. None of the systems have manufacturing capability currently, so the operation at least initially will likely rely more heavily, if not solely, on contract manufacturers. Contracting will offer quicker entry into the market at the outset, Fierens said. After that, he said the systems may add joint ventures or even invest in their own manufacturing capabilities.

The whole idea is to bring down drug prices that systems say have hurt their bottom lines and drug shortages that harm patients. To the first goal, Fierens said taking the pharmaceutical company out of the equation—or becoming the pharmaceutical company—cutting out the tactic drugmakers have taken of spiking prices on generics.

"What will be eliminated is the profiteering motive," he said.

The systems were mum on which drugs they'll seek Food and Drug Administration approval to create, revealing only that they'll prioritize sterile injectables, tablets and patches.

Trinity for the past several years has struggled to obtain even basics that are critical to patients like sodium bicarbonate, calcium, magnesium and potassium. Injectable local anesthetics and opiate medications have also been a problem.

"Securing a stable supply of that is important," he said.

Randall Stanicky, an analyst with RBC Capital Markets, emphasized in a note that lack of clarity around which drugs it will include—among some other important unanswered questions--in an email to investors. He downplayed the effects of the systems' announcement, arguing that despite Thursday's downturn, reminding that drugmaker stocks have been performing well.

Stanicky also emphasized that sourcing generic drugs takes time, in addition to the time it will take to establish infrastructure and get FDA approval, which he said is an expensive process that takes several years.

Bob Joyce, U.S. Bank's senior vice president and group head of healthcare and food industries, said in an interview the significant pressure to lower prices pharmaceutical companies already face has not had a significant effect to date, but they will pay close attention to this announcement. He said the size of the systems involved is noteworthy, especially given reports that Ascension is in talks to merge with Providence St. Joseph Health, a deal that would create the country's largest health system.

"These are some of the biggest players in the sector," he said. "So obviously having conversations and trying to think about ways of doing as such, I think at least puts the pharmaceutical companies on notice. Whether it has an impact will depend upon exactly where they go from here."