Express Scripts Inc.'s proposed $29.1 billion buyout of Medco Health Solutions Inc., a pharmacy-benefits manager (PBM) looks unsettling for pharmaceutical majors as they anxiously await expiry of their patented drugs in the next couple of years. 

The proposed merger seems to come at a time when most brand name drugs are slated to go off patent in the next 14 to 16 months. As a third party administrator of prescription drug programs, the proposed merged entity could benefit from better price bargains as drug manufacturers aggressively try and push their products for a slice of the market share.

PBMs offer drug benefits to around 210 million Americans nationwide through a network of Fortune 500 employers and public bodies such as Medicare Part D and via the Federal Employees Health Benefits Program. A study conducted by the IMS Institute for Healthcare Informatics, Ernst Berndt of the Massachusetts Institute of Technology and the National Bureau of Economic Research noted that at least eight drug classes prescribed under Medicare Part D cost $1 daily for therapy in December 2010 as against $1.50 in January 2006.

In the wake of such discounted price bargains, pharmaceutical giants will have to deal with the discounted benefits segment, which is currently getting slammed by cheaper generic versions of their brand name counter parts. To shore up lost revenues on branded drugs, drug manufacturers are now eligible to enter the generics segment by promoting cheaper version of their block buster molecules.  Depending on the drug category, generics are priced 20 to 80 percent less than their branded versions. In the short term, and close to expiry of their patent products, it makes business sense for pharmaceutical majors to switch to a generic class that is made available through the pharmacy benefits model or corporate plan.

The IMS report, 'The Global Use of Medicines: Outlook Through 2015', notes that expiring patents for branded products will yield $98 billion in net savings to payers in developed countries through 2015, compared with $54 billion in savings realized in the five years to 2010. Patent expiries will save payers $120 billion by 2015, offset by $22 billion of expected generic spending for these medicines and that the U.S. will experience the largest expansion of generic spending.

As biotech and pharmaceuticals continue to invest on R&D the loss of patent will be critical in the long run. This year pharmaceutical companies witnessed approval of 20 drugs and there are many more in the pipeline in the coming year or two. With suave marketing and production strategy, pharmaceutical big wigs either enter contract manufacturing with other players to leverage on the expired brand names or enter the generics fray to leverage lost revenues.  

Although slow, the IMS Institute for Healthcare Informatics has reported that global spending for medicines will reach nearly $1.1 trillion by 2015. This reflects a slowing down in the compound annual growth rate of three to six percent over the next five years. This is as against 6.2 percent annual growth over the past five years. One of the reasons attributed has been on the ongoing impact of patent expiries in developed markets.

In the final fray, health policy measures remain critical; the much awaited Affordable Care Act in the U.S. could be one frontier in expanding health insurance coverage to around 30 million Americans. In the current loop, the PBM's and patients can look to gain on their drug prices.