Everyone knows market competition isn't pretty, but the battle between Big Pharma and generic manufacturers is often downright nasty. That's especially true as some generic companies fight Big Pharma—and one another—to stop a practice they find particularly abhorrent: authorized generics. The only thing everyone agrees about is that no one knows where the issue goes from here—to Congress or the Supreme Court.

Even a federal judge recently said the practice might stifle competition. That's because, in essence, authorized generics are just brand drugs with a generic label. A pharmaceutical company supplies its drug to a carefully chosen generic firm and allows that firm to market the product as a generic in return for royalties. Sometimes brand companies create their own companies or subsidiaries to manufacture authorized generics.

Last year the Food & Drug Administration ruled that "authorized" generics do not have to abide by the 180-day market exclusivity provision granted by the Hatch-Waxman Act to the first generic on the market. The issue is turning the natural rivalry among generic manufacturers into an internecine war. Some companies, among them Watson Pharmaceuticals and Par Pharmaceutical, say that partnering with brand-name companies is a good strategy and allows consumers to benefit from the availability of at least two less costly alternatives to a brand-name drug during the 180-day period of exclusivity given the first generic to market.

A threat to the industry?

That's the kind of action that leads three of the largest generic drug manufacturers—Mylan Pharmaceuticals, TEVA Pharmaceuticals, and Barr Laboratories—to say the practice of authorized generics is potentially devastating to the industry. They contend authorized generics mean that fewer generics will come to market in the long run, and the Generic Pharmaceutical Association (GPhA) supports them in that contention. The FDA, however, maintains that authorized generics increase, not diminish, competition and favor the consumer by lowering prices.

"The FDA ruling in favor of authorized generics is a bad one just on the face of it," said Christine Simmon, VP of public affairs and development for GPhA, which opposes the practice. "Authorized generics harm consumers by decreasing the amount of patent challenges and the willingness of generic companies to seek market entry," she reasoned.

Simmon's point is what makes the discussion about authorized generics so nasty. It touches on the two thorniest issues in a free market economy: antitrust and market consolidation.

TEVA and Mylan officials admit they face a tough road. TEVA CEO Israel Makov told market analysts last summer that authorized generics would lead to significant industry consolidation by pressuring companies with weak drug pipelines. Mylan officials, also in a public statement last summer, warned investors that the FDA's decision in favor of authorized generics "changed the rules of engagement for the generic pharmaceutical industry."

A lawsuit brought by Nebraska's attorney general and several other state attorneys general against Aventis and generic drugmaker Andrx shows the legal and financial risk involved for companies competing with authorized generics. Aventis manufactures Cardizem CD, a drug that relieves chest pain and angina. According to the suit, Aventis allegedly agreed to pay Andrx $90 million to keep its generic version of Cardizem CD off the market in 1997.

The state attorneys general filed suit, claiming the agreement violated antitrust legislation and kept the cost of Cardizem (diltiazem) artificially high. Andrx claimed that the agreement was actually "pro-competitive," saying the money it received from Aventis enabled it to reformulate the drug to avoid patent infringement and market a generic drug faster than if it had not received the payment.