The truth about generic drugs

By Jessica Shambora

Health care reform is front and center -- and an insanely complicated issue. When someone talks about simple solutions, it's time to listen. So we were all ears when Jacqueline Kosecoff, CEO of Prescription Solutions, came by Fortune last week and sat down with us to talk about generic drugs.

Up in New York City after a day on Capitol Hill, Kosecoff was eager to talk about how her UnitedHealth Group (UNH) unit, which is a Prescription Benefits Manager (PBM) accounting for $13 billion of UnitedHealth's $81 billion in revenue, can save the system millions of dollars. Her claim is based on a new study, released by Prescription Solutions this week, that shows a big void in consumer understanding about generics -- what they are and what savings they bring.

You may already know that generics are identical to brand-name drugs, but the study found that nearly one-third of Americans either don't know or don't believe that. Among people who do not take generics, only 58% say it's because there isn't a generic alternative available. Moreover, two-thirds of survey respondents don't realize that brand-name drugs typically cost 50-70% more than generics.

Says Kosecoff: "Many Americans erroneously believe that the most expensive drug is always the most effective drug."

Generics have already saved the health-care system $734 billion over the past decade, according to market researcher IMS Health. Koseocoff says that a 1% uptick in generic use equates to 1.7% savings for payers, such as employers. And consumers enrolled in its drug plans typically save $20-60 per prescription by switching.

This is why Kosecoff is pushing generics hard: She talks about a "triple win" for consumers, for payers, and for Prescriptions Solutions. If  her unit delivers more value, it's likely to get more volume and make more money. And it's all about value these days. The study also showed stretched consumers have been cutting back on prescriptions: 27% of survey respondents said that they delayed filling, didn't fill or didn't take a drug in order to save money.

As the generic market grows, the biggest loser is Big pharma, whose brand-name drugs inevitably lose share. Through 2013, $134 billion in branded drugs are at risk from generic competition in eight key drug markets, according to IMS Health. Popular drugs like Pfizer's (PFE) Lipitor, GlaxoSmithKline's (GSK) Valtrex, and Boehringer Ingelheim's Flomax are among the drugs with patents set to expire fairly soon.

As Kosecoff works to spur that generics market -- and cut costs for Prescription Solutions' customers -- she's pushing another item on her agenda: cheaper alternatives for biologics. These drugs, such as Amgen's (AMGN) arthritis drug Enbrel and Abbott's (ABBT) Humira, also for arthritis and for Crohn's Disease, are the fastest-growing area of pharmaceuticals -- a market expected to hit $90 billion this year, up from $40 billion in 2005. But generics don't exist for biologics, which are made from living organisms rather than the small molecules of conventional pharma.

Kosecoff wants to change that. And she's calling for Congress to help make it happen. "A regulatory approval pathway for follow-on version of thes biologic drugs must be created," she says.

(To read an update on the debate this Postcard ignited, click here.)