The recent Indian Supreme Court’s verdict of patent denial for a branded drug is undoubtedly a major boost for further proliferation of generics drugs including biologics. However, conflicting opinions continue to impair their future prospects. While demand for generics is expected to continue to grow given its high market penetration, long term growth appears uncertain given that only a fewer blockbusters will lose patent exclusivity post 2016. Consequently, generic firms are dabbling with questions on their future business models in an attempt to outsmart market challenges. These firms have to now make strategic decisions to define their future path: merge for scale, complement the generic portfolio with a branded portfolio, and add revenues through new offerings and services.
Generics are the most widely used prescription drugs worldwide
The market is poised to grow to $358 billion by 2016, with emerging economies all set to lead the pack, mainly driven by increased access through reforms and economic growth. Pharmaceutical companies have begun to capitalize on this opportunity by entering the forecasted $115 billion emerging market. For example, Pfizer purchased partial stake in a leading Brazilian generic company, Teuto in 2010 for approximately US$240 million. Additionally, Japan, a market with relatively low generics penetration is emerging as an attractive market, largely driven by its ageing population, expiry of major products, and government initiatives.
The global market for generics is highly consolidated with leading players such as Teva, Sandoz, Mylan and Actavis controlling approximately 40% of the market share. Most of these companies earn major share of their revenue from established markets. Many smaller companies like Polpharma, Sagent, Nichi-Iko, and Glenmark are growing at a rapid pace. Nichi-Iko, a Japanese company, reported sales of $1.3 billion in 2011, having concluded a JV with Sanofi and partnered with some other Asian firms to create a strong foot-hold.
Future attractiveness of the generic segment given the challenges that lie ahead
- Fewer blockbusters drugs are going off-patent post 2015, resulting in a dearth of opportunities for generic companies. For instance, the value of patent expiries drops from $63 billion in 2009-11 to $27 billion in 2016-20. The declining value of expired branded drugs and of “first-to-files” will challenge future growth of the generics segment.
Price erosion driven by:
- Competition and payer reimbursement pressure
- Customer consolidation and emergence of large buying groups which have increased the overall buying power. Not surprisingly, generic companies have a significant percent of their annual revenues from big retail chains (for instance in the US: Walmart, CVS Caremark).
- Pharmaceutical strategies to address the generic threat ahead of loss of exclusivity have become more sophisticated and include multi-pronged approaches including pricing strategy, launch of Authorized Generics, or even ever-greening (patent extensions). Most pharmaceutical companies have by now also established their own generic arm (e.g. Sandoz for Novartis).
- The expected difficulties of generic firms to compete against traditional pharmaceutical companies in biosimilars due to regulatory hurdles and manufacturing complexities. If this segment is to grow significantly, the latter are likely to benefit from their established history in biologics manufacturing and more established quality control processes.
- The FDA backlog of Abbreviated New Drug Application (ANDAs) to be reviewed has delayed the market entry of generic drugs. In the last five years itself the number of ANDA applications has grown by 300%.
- Perception issues among the patient and physician communities about generic drug quality and safety have seen a different battle altogether. There have been few cases of lapses in manufacturing quality control of generic products that highlighted the negative perception on efficacy of generics despite measures from FDA.
The path forward
- Creating a portfolio with premium pricing, expanding into branded products with higher risk and higher margins, or creating differentiation through supergenerics—drugs that differ from ‘me-too’ generic drugs by demonstrating an improvement in the product—or diversifying into innovative drugs to escape the intensely competitive market.
- As an example, Sandoz has built on its injectables platform by acquiring Ebewe and launching its own product range. Also, TEVA recently announced the launch of its New Therapeutic Entities, “known molecule that is formulated, delivered, or used in a novel way to address specific patient needs”. Such strategies offer insulation from competition without imposing the heavy costs of drug innovation.
- Entering or reinforcing presence in specialty areas or even in biologicals, where traditional pharmaceutical techniques have proven very effective and where product switches can be more complex, is another promising strategy. Almost all Indian generic firms are venturing into specialty drugs, largely catering to their domestic markets. For example, Ranbaxy, launched its drug Synriam for malaria in 2012. Other global generic players, such as Teva, have also seen a significant growth in their specialty drug sales.
Merging for scale and driving costs of operations down. As generics remains a volume business, scale and ability to optimize operations are key requirements. For instance, Sandoz acquired several companies specializing in generics manufacturing to offer a large portfolio of drugs through optimized operations. Having a scaled and cost effective operation can allow generic firms to:
- More effectively compete and address price erosion more competitively
- Offer contract manufacturing services
- Or even, realize vertical integration and enter the distribution segment. For example, Actavis has developed its own distribution unit, Anda, which is now the fourth-largest wholesale distributor of generic pharmaceuticals in the U.S.
The generic industry has witnessed remarkable growth in the last decade. Despite challenges the industry is facing its future looks bright. Given the economic pressures, generics have a high appeal to payers in both mature and emerging economies. The trend of consolidation is likely to continue with firms looking to increase scale, and / or pursuing a diversification strategy towards higher margin branded products. The path forward for pure generic players will be difficult, especially in the wake of increased competition from pharmaceutical companies having taken a strong marketshare in the generic space; however, carefully planned strategies will certainly trigger growth going forward.
About the Authors:
Jean-Marc Neimetz is Capgemini Consulting’s global Life sciences Leader, based in New-York. He advises life sciences companies on corporate strategy and transformation programs, innovation and product life cycle management. He can be reached at firstname.lastname@example.org
Ekta Prithyani is a senior consultant in Capgemini Consulting Life Sciences practice, based in Mumbai, India. She recently published Capgemini Consulting’s perspectives on “Biosimilars market: What we need to know”.