Generic Drugs and Private Label Products: Loss of Innovation?
By Al McClain
The rise of private label products in the CPG industry, combined with the growth of generic drug alternatives, have many concerned about losing the economic motivation for new
product innovation.
With respect to generic drugs, a recent article in Forbes reported that top-sellings such as Zocor, Zoloft, Allegra, Pravachol, Flonase, and Biaxin have already lost their
patents, or are about to. By 2011, up to 25 percent of all current drug sales will be exposed to generic alternatives. The percentage of prescriptions that are generic is expected
to increase to 75 percent in 2011 from 56 percent now.
Of course health plans push generics, and according to Forbes are in some cases asking patients to switch from one branded product to a generic version of a different
branded product.
Drug makers are fighting back by patenting drugs multiple times, protecting not just the chemical makeup, but the manufacturing process or uses as well. And, some drug companies
are reducing the price on their branded products to compete with or even undercut generic versions.
Meanwhile, on the CPG side, there is seemingly a private label version of almost every branded product, and the branded manufacturers aren’t wild about investing in new product
R & D only to have retailers put a nearly identical PL version right next to it on the shelf.
As the quality of private label CPG increases, the products are drawing a more upscale consumer base. And, retailers like Costco for example, have built much of their reputation
around the quality of their Kirkland products.
So, private label products and generic drugs are growing like weeds, generic weeds. Beyond the obvious positive of savings for consumers, how much of a downside could there be
to innovation?
Moderator’s Comment: Are the systems that allow generic drugs and private label CPG products fair to the manufacturers who make the original branded
products? What should the manufacturers do to make sure they have enough revenue and profits to plow back into R & D? –
Al McClain – Moderator
Each item on the list of tactics that could be used by drug companies has holes in it. The only long-term effective solution for them would be to lobby harder in favor of laws giving their patents broader and longer protection. I’m not saying that as a consumer I like this idea; I’m just answering the question.
Awwww diddums, is somebody threatening drug company profits? How’s about they spend just a little bit less on marketing and try to live with more reasonable prices to consumers? I see one of the comments in the article is that some of them are already cutting prices in order to compete with generics – why can’t they do that across the board and then perhaps customers will distrust and dislike them less? Also, I may be wrong in this but I thought that patents protected them for a certain period and that generics came out some time later. Which means that they have a head start and could just conceivably structure their business plan to make most of their profit in the initial stages (or would that not be enough for them?). I have never bought into the argument that they need to spend so much on marketing or have to put quite such high prices on in order to cover r&d costs. This is an industry that does not give an impression of responsible self-regulation.
As for food manufacturers, again I was under the impression that the vast majority of private label products were made by the biggest companies. While this may detract from sales of their own high profile brands, they’re not exactly backwards in coming forward with adjusted recipes in order to sell the same product under multiple names. I realise that there are some specialist manufacturers who only do private label but they don’t by any means have a monopoly. Even though consumers can’t necessarily figure out who makes what thereby affecting loyalty, and margins may be somewhat tighter (although I believe allowances are made for this in the reformulation of recipes), in terms of bottom line I don’t think many of the big players are losing out. If they are, then perhaps the answer is the obvious one – come on in, the water’s fine.
One other major strategy: some drug companies are paying generics producers to delay releasing generic versions.
The big picture: whenever a new product is conceived, the producer (drug manufacturer, food manufacturer, or any other branded supplier) has to ask: (1) how will competition respond and what will be my response? (2) how long will competitive responses take? (3) what will be the product life cycle? (4) what will be the margins, and how will they change over time?
And just because generics arrive (or private label copies), the branded original doesn’t necessarily die a no-profit death. Many branded products remain profitable, even though they’ve been copied over and over. Bufferin, Windex, Robitussin, and Ativan are all profitable, with major market share, yet have numerous copycat generics/private label versions.
As to what Pfizer is doing with its number one drug that is losing its patent — making a generic version — Bravo! And it will priced to be competitive to any other generic. But common sense says, “consumers will be loyal to Pfizer and its generic version.”
As for CPGs being copied by PL, the CPG marketers must come up with new and improved items, or some additional benefit that the PL companies can’t match. It has been done and will continue to be CPGs answer to piracy! Hmmmmmmmmmm
Interesting topic and rather a perplexing one from where our company sits. We work with retailers to increase their profits, wholesalers to optimize their inventories and manufacturers to speed item launches. In other words, I can’t win with my statement.
That being said, I do have some advice for manufacturers. 1) Don’t stop innovating — this is the one major advantage you have in the market and the one thing that increases sales of your products; 2) Stop whining — we are a “free market” that enables competition. Wishing for some miraculous market change and crying “woe is me” will not win customer good will; 3) Legislation is not the answer — there is no magic bullet that will restrict fair trade. As long as patents are not being infringed upon and demand remains strong, private label manufacturers have every right to compete in the space.
Wait a minute, am I dismissing the responsibility of retailers and wholesalers? Absolutely not. They each have a responsibility to their respective customers. If consumers prefer branded items, retailers must carry them on the shelves. And if retailers must carry them on their shelves, then wholesalers need them in their inventory mix. It’s a supply-demand model that has worked for centuries and will continue to be the foundation of product flow from manufacturer to consumer.
Bottom line? I believe with smart marketing and strong products there is a place for brands and private label products.
Petitions to FDA Sometimes Delay Generic Drugs – The Washington Post
This is a timely article that raises yet another issue regarding brand name vs generic drugs. Obviously both sides have valid points and the FDA cannot favour one or the other without reasonable investigation but it does make you wonder whether the big pharmaceutical companies aren’t using their vast resources to be just the teensiest bit disingenuous and obstructive (or self-defensive?).