Generic Drug Makers Face Challenge Despite Predictions Of Increased Sales Health Maintenance Organizations Are Demanding Big Discounts And More Variety

Generic drug companies that make discount knockoffs of brand name medicines are coming up against some big obstacles, even as the number of Americans using their products swells rapidly.

Health maintenance organizations and other cost-conscious managed health care plans use generics heavily and these plans are gaining new members every day. This leads some analysts to predict that by the year 2000 generics could make up 50 percent of the prescription drug market, up from 20 percent a decade ago.

That’s good news for consumers who will get ready access to medicines at discounts typically between 30 percent and 50 percent off brand names.

But it’s no guarantee of profits for the drug makers.

For one thing, the HMOs are demanding even bigger price reductions while at the same time insisting the drug makers supply a broader selection.

Then the drug makers have to deal with an army of strict regulators from the Food and Drug Administration who have shut offending plants and ordered recalls several times this year.

In addition, the supply of generic drug candidates - brand name drugs whose patents are expiring - is declining.

Industry leaders say they’re still confident of maintaining strong profit growth, but only if they meet these challenges.

“There will be those that do well, those that survive and those that won’t have a critical mass of products, and will either do poorly or not survive, or will become part of a bigger company,” said Phillip Frost, founder and chairman of Ivax Corp., the Miami-based industry leader.

Getting that critical mass has usually meant buyouts or alliances. Ivax, for instance, bought No. 7 generic drug maker Zenith Laboratories of Northvale, N.J.

Brand name drug maker Eli Lilly & Co. signed a deal with generic company Mylan Laboratories for the right to sell Mylan’s cimetidine, a generic copy of SmithKline Beecham PLC’s successful ulcer drug Tagamet.

Most analysts see these loose alliances, like Lilly and Mylan, as better choices than costly acquisitions.

“The generic companies that want to access the (managed care) channel team up with brand name drug companies by becoming suppliers,” said Jack Lamberton, drug industry analyst at NatWest Securities in New York. “The brand name company that wants a wide range of drugs finds that the easy way is to team up with a generic drug company.”

Most big brand name companies sell their own products as generics to protect their share of the market, but analysts say this has been a money loser, partially because the low-profit generics eat away at sales of the high-profit brand name versions.

Also, brand name companies, which are used to plush offices and executive perks, simply aren’t structured to make money in the low-overhead world of generics.

“It would be like having Mercedes manufacture Volkswagens in the Mercedes plants and expect them to have reasonable prices,” said Paul Hansen, a health industry specialist with the management consulting firm Towers Perrin in New York.