When a drug goes off patent, its market share is supposed to plummet. That's not what happened with Zocor, Merck & Co., Inc.'s blockbuster cholesterol drug. By the end of the first month after Zocor's patent expired in June, the company managed to hang on to about 50 percent of new prescriptions, according to data from Wolters Kluwer Health. Typically a brand-name company loses 70--90 percent of the market.

Merck managed the feat without going to court. Instead, the drug company cut deals with a generic drug maker and with managed care companies, including UnitedHealth Group, Incorporated, to sell brand name Zocor at generic prices.

The rush to make generic Zocor began in 2001. IVAX Corporation (now owned by Israeli giant Teva Pharmaceuticals Industries Limited) and Ranbaxy Laboratories Limited were the first to file applications at the Food and Drug Administration seeking to market the drug when it went off patent. Under the 1984 Hatch-Waxman law, the first company (or companies) to file at the FDA wins a limited monopoly--six months of market exclusivity that begins the day the generic hits drugstores.

Instead of filing a patent suit against the generics, Merck tried something new. It asked the FDA to remove the Zocor patent from the "Orange Book," the FDA's list of all approved pharmaceuticals and related patents. Merck believed this would prevent the generics from getting market exclusivity.

In response, Ivax and Ranbaxy sued the FDA in federal district court in Washington, D.C., demanding that the agency put the patent back on the list. While that litigation raged on, Merck hedged its bets by authorizing Dr. Reddy's Laboratories, Ltd. to produce generic Zocor during the six-month exclusivity period. The deal would only go into effect if Ivax and Ranbaxy won their case against the FDA. They did: On April 30, Judge Richard Roberts ruled that Ivax and Ranbaxy were entitled to a six-month monopoly on generic Zocor. Merck, of course, could continue to sell brand-name Zocor. And the company could also license the drug to a generic company, to act as Merck's "authorized generic." Since the FDA had already approved Merck's drug, that other generic company would not need its own FDA approval.

On June 23 when generic Zocor hit the shelves, it was sold by Ivax, Ranbaxy, and Dr. Reddy's, which sells Merck-manufactured Zocor under a different name.

Merck was not the first pharma company to authorize a generic. Johnson & Johnson holds that distinction. And it was GlaxoSmithKline's authorization of generic Paxil in 2003 that woke the industry up to the practice. Merck was able to set a different precedent by offering managed care companies cut-rate Zocor. Under UnitedHealth's current pricing plan, a patient pays $10 for a month's supply of brand-name Zocor and $40 for a one-month supply of the generic. The insurer says that it will reevaluate pricing once the six-month exclusivity period ends and the market opens to more generic competition.

Pfizer Inc has already fended off a suit challenging the practice of authorized generics. Now consumer groups are considering going after Merck for cutting deals with insurers. Senator Charles Schumer (D--New York) accused Merck of "colluding" with insurance companies to raise the price of generic Zocor and urged the Federal Trade Commission to investigate what he referred to as Merck's "anti-competitive" behavior. In July, Schumer and two other Democratic senators introduced a bill to outlaw authorized generics.

Even without a legal challenge or new legislation, the fate of deals with managed care companies is still uncertain. Industry analysts are wary that such agreements will be profitable. Chad Landmon, an associate at Axinn, Veltrop & Harkrider who represents branded and generic drugmakers, says that Merck's success will depend on the kinds of deals it can get from insurance companies. "If you don't see more insurance companies signing on," he says, "I don't think this is going to become widespread."

In the meantime, Merck is portraying its overall strategy as an attempt to level the playing field. "We've expanded the market from two to three providers and created more competition," says Merck assistant general counsel Paul Matukaitis. "This benefits patients and payers," he says, adding, "This benefits Merck, too."