Issue Date: October 17, 2011
Names such as Pfizer, Merck & Co., and GlaxoSmithKline have long been synonymous with the discovery and sale of proprietary, high-priced small-molecule drugs. But the realities of health care markets today are leading many firms to broaden their definitions of what they do. As conventional markets wane and new geographies emerge, many of the biggest companies are outlining new strategies.
Between now and 2015, about $138 billion in drug sales across eight major developed markets will be at risk to generic competition, according to the market research firm IMS Health. As a result, multinational pharmaceutical companies are seeking opportunities elsewhere, particularly in generic products and emerging markets. For these firms, a lot is riding on how well they balance the new and old businesses.
“A well-balanced portfolio that offers both patented and generic products is increasingly important as countries around the world look for ways to achieve cost savings and reform their health care systems while increasing patient access to important medicines,” says Don DeGolyer, president of Sandoz’ U.S. arm. One of the world’s top generics suppliers, Sandoz is part of the drug giant Novartis, which considers generics a key pillar of its business strategy.
“Cost-containment pressures on health care systems worldwide continue to be one of the main drivers of growth for the generics industry,” DeGolyer explains. But pricing pressures threaten profitability, he adds, and companies want new sources of income to maintain their investments.
Novartis is unique for having both large generic and proprietary drug divisions. Other companies have tried mixing them before but found it hard to run two sometimes-conflicting businesses.
Over the past 40 years, pharma companies have “come into generics, gone out, and now come back in again,” says Alan Sheppard, IMS Health’s global head of generics. Whether getting in is a short-term strategy is not yet clear, but many firms have made generics part of well-defined game plans for entering emerging markets, he adds.
The U.S. and Europe together accounted for about 60% of the $856 billion in 2010 global pharmaceutical sales, but their markets are expanding by only a few percent per year. Growing at nearly three times that rate, emerging markets are expected to rise from 18% of total sales today to 28% by 2015, IMS reports. Meanwhile, generics are projected to grow from 27% of total sales to 39%, with 70% of sales occurring outside developed markets.
Volume is another story. In the U.S., where a generic drug is sold under its substance or International Nonproprietary Name (INN), about 75% of prescriptions are for generic drugs. But with prices only 10–20% of the original patented product, the margins are slim. In most other countries, generics are sold as branded products at up to 80% of the original price. It’s this latter market that most big drug companies are pursuing.
One benefit for companies pursuing generics is that use varies widely from country to country, Sheppard says. In Italy, Spain, and Japan, for example, generics account for less than 15% of drug sales. “So there is an opportunity in certain countries for generics companies to actually grow volumes,” he explains, “and that is going to happen because of the austerity measures you are seeing now in many countries.”
Although many governments have tried to cut health care costs through greater generics use, a few, such as Spain, are taking bigger steps. “Spanish health authorities have realized that their current measures in health care have not generated the savings that they require,” Sheppard explains. “They have decreed that INN prescribing will be the norm and not branded generics.”
Spain expects this move to save $3 billion per year, and other countries could follow suit. In this environment, small and midsized firms that operate in local branded-generics markets will find it tough to compete against the global players, Sheppard says. “If they aren’t acquired, they will struggle to stay in business.” Some with a technology focus may be able to carve out a market niche, he adds, “but those are few and far between.”
Growth seems more ensured in emerging markets, particularly the BRIC nations of Brazil, Russia, India, and China, where health care spending is rising. “For a long time, big pharmaceutical companies did not want to go into emerging markets because they were concerned about intellectual property protection and pricing issues,” says Peter Wittner of London-based Interpharm Consultancy. “They didn’t need to worry too much about the emerging countries because they could manage without them.”
But faced with cost-benefit analyses and price restrictions in the West, leading drugmakers have reconsidered. “The margins in many of the Western countries are dropping quite sharply, and the big pharma companies are having to compensate by going into markets where populations number in the billions, so that even if they have to chop the price they are compensated by huge increases in volume,” Wittner says.
Acquisitions are helping large companies enter emerging markets and expand market share in developed ones. “Some are acquiring for geographical expansion, some for technology, and some for a different business opportunity,” Sheppard notes.
Sandoz has been built over a decade through acquisitions. Recent ones include EBEWE Pharma, a maker of generic oncology injectables in Austria, and U.S.-based Oriel Therapeutics, which develops generic inhalation products. “We strategically invest in growing our pipeline and portfolio of differentiated products beyond our own internal development,” DeGolyer says.
France’s Sanofi has also diversified its generics business, and it now ranks second in generics among big pharma firms. In 2009, it acquired Zentiva in the Czech Republic, Laboratorios Kendrick in Mexico, and Medley Indústria Farmacêutica in Brazil. This year, Sanofi unified its European generics businesses—including those in Western and Eastern Europe, Russia, and Turkey—under the Zentiva name.
“The emerging markets have become our largest and most important market segment, more important than the U.S. and Western Europe,” said Hanspeter Spek, Sanofi’s president for global operations, during a September investor update. About 30% of the firm’s overall sales and 65% of its generics sales are in emerging markets. Sanofi takes an “opportunistic approach” in emerging markets and “a more defensive attitude” in the U.S., where it has launched generics that are authorized by the originator, Spek explained.
In 2010, Sanofi established a generics joint venture with Japan’s Nichi-Iko Pharmaceutical Co. Although Japan is the world’s second-largest pharmaceutical market, only about 10% of its products by value are generics, and the Japanese government is encouraging increased use.
Japanese drug companies, meanwhile, are looking beyond their country’s borders for generics opportunities. Daiichi Sankyo paid $4.6 billion in 2008 for a majority stake in India’s Ranbaxy Laboratories.
Although the pairing had a rocky start because of manufacturing and regulatory issues at Ranbaxy, Ranbaxy is now one of two firms, the other being Watson Pharmaceuticals, that have deals with Pfizer to launch authorized generic versions of Lipitor in the U.S. next month. And Daiichi recently set up a subsidiary in Mexico.
Among Western companies, Abbott Laboratories has taken big steps to embrace generics. In late 2010, it acquired Piramal Healthcare’s generics operations, gaining a leading position in India. Abbott also signed a deal in May 2010 with India’s Zydus Cadila to sell 24 Zydus products in 15 emerging markets and has the option to add another 40. And its 2009 purchase of Solvay Pharmaceuticals added generics in Eastern Europe and Asia.
Generics fall within Abbott’s Established Products division, which was created in 2010 to sell branded products outside the U.S. The division’s sales grew 36% to $2.6 billion in the first half of this year. Emerging-market sales accounted for about 58% of the total, with particularly strong performance in Russia, India, and China.
Established Products is the name Pfizer has used since 2008 for its generics business unit, which includes its 18-year-old Greenstone subsidiary. Although many of Greenstone’s products originated within Pfizer, the subsidiary also sells commodity-type generics and works with originator companies to develop authorized generics. This year, Pfizer added a generics division in Spain called Pharmacia Genericos.
In reporting first-half 2011 earnings, Pfizer Chief Executive Officer Ian Read called the division a “pillar of our growth strategy” and put to rest rumors that Pfizer might sell it. “We see Established Products as being important for three reasons: one, the economic growth is occurring in the emerging markets; two, the cash flows come from that business; and the potential growth in that segment as wealth increases,” he said.
Taking a regional approach, Pfizer is crafting local solutions through staged buy-ins and partnerships, according to Read. In 2009 and 2010, it signed deals with the Indian firms Aurobindo Pharma, Claris Lifesciences, and Strides Arcolab. Also in 2010, Pfizer spent $240 million for a 40% stake in Brazil’s Laboratório Teuto Brasileiro and $200 million for four generic insulin products from India’s Biocon.
As part of a restructuring at GSK in recent years, CEO Andrew Witty has stated his desire to move away from “white pills” and “Western markets.” Like Pfizer, GSK’s approach has been a mix of partnerships and purchases. In 2009, it took a 16% stake in South Africa’s Aspen Pharmacare and joined with Dr. Reddy’s Laboratories in India to access emerging markets. Last year, GSK paid $253 million to buy Laboratorios Phoenix in Argentina and $110 million for 10% of South Korea’s Dong-A Pharmaceuticals.
Similarly, Merck’s emerging-markets and generics strategy focuses on partnerships. In 2011, the company expanded a deal to sell new generic and combination drugs developed by South Korea’s Hanmi Pharmaceutical and partnered with Hanwha Chemical on biosimilars.
Merck has taken this route to avoid the “land rush” and overpaying, CEO Kenneth C. Frazier said at a June conference for stock analysts. Although Merck plans to have 25% of its sales in emerging markets by 2013, he said “the better approach would be finding people who actually have a vested interest in those markets,” rather than trying to manage them from the U.S.
With India’s Sun Pharmaceutical Industries, Merck is creating a joint venture for differentiated and branded generics in emerging markets. “We’re not just interested in commodity generics and slapping the Merck name on it,” Frazier told the analysts when referring to the venture. “We don’t think that’s a durable way of approaching emerging markets.”
As big pharma companies beef up business in generics and emerging markets, they face potential pitfalls. “You have to understand the local market, because each one of the emerging markets has very different characteristics, drivers, and dynamics,” IMS Health’s Sheppard cautions. Companies will need a strong local presence to compete in unfamiliar markets against entrenched indigenous suppliers.
Pricing pressures are only likely to increase as countries undertake further reforms. In Asia, governments are finding that increasing access to medicines for millions of people is stretching their reserves, Sheppard explains. “There have been significant price reductions in China, and now in India, and the 30–40% growth that we’ve seen in China might be cut back significantly by the drive to reduce costs.”
Looking ahead, Interpharm’s Wittner believes that more countries will move away from branded generics. “The people who pay the bills will be asking the simple question: ‘Why should I pay four times the price for a branded generic when I could have an unbranded one?’ ” he says. “The generics business will survive, but I think you are going to end up with fewer, but larger, players because the small companies just won’t be able to compete.”
Pricing issues only get knottier when the same company sells both proprietary and generic products, but Sheppard sees a possible solution. “The strategy can be to offer the payer a package of products that cover the spectrum of needs for the patient, some of which are the latest advances and some of which are the gold-standard generic products,” he explains.
While originator companies embrace generics, most of the major generics firms have been adding R&D and proprietary products. In recent years, they’ve purchased biotech firms, entered into R&D collaborations, and expanded into new geographies. “The company of the future is probably going to be a hybrid company,” Sheppard says, with its fingers in R&D, biotech, generics, and possibly diagnostics.
Meanwhile, a few stalwarts still define themselves by their R&D focus. For example, Eli Lilly & Co. CEO John C. Lechleiter talks about his firm staking its future on “biopharmaceutical innovation and not on generics, consumer products, or diversification into other unrelated businesses.”
Similarly, Roche’s management believes that improved health care is best achieved through innovative products, even for developing countries. Eventually, these markets will behave exactly like the U.S. and Europe, suggested Pascal Soriot, Roche’s chief operating officer for pharmaceuticals, when reporting first-half 2011 earnings.
“The place you see today for branded copies will disappear, and those markets will polarize between generics and innovative medicines,” he said. “Trying to promote branded copies like some of our peers are doing, we don’t believe is a good use of our cash from a long-term perspective.”
Certain companies may have jumped into generics because everyone else is jumping in, Wittner says. “Maybe it is a herd instinct rather than a logical strategic decision,” he speculates. Companies that haven’t might be taking the right approach because they know their expertise—or they could be missing an opportunity, he adds.
Big pharma firms know how to promote brands, and generics firms know how to sell products, he says. Simply speaking, big pharma is slow-moving, works with big budgets, and looks at the long term, whereas generics companies tend to move quickly, spend less, and focus on today, he explains.
One particular problem consultants point to is manufacturing, where big pharma companies are unaccustomed to the volumes and flexibility that are required for generics. Because few big pharma firms can manufacture cheaply, they will be easily beaten by lower cost producers in India. Some of the more successful hybrid companies, such as Novartis, have purposely kept generic and proprietary drug businesses separate, the consultants say.
According to DeGolyer, Sandoz does take advantage of its connections. “As part of Novartis, Sandoz benefits from a wealth of expertise and access to development and manufacturing capabilities,” he says, which are particularly useful for complex and difficult-to-make products, such as biosimilars. “Sandoz partners with Novartis pharma R&D on development projects, and we regularly discuss opportunities to optimize overall group value over product life cycles,” he adds.
If the pharmaceutical market continues to evolve the way it has been, including significant growth in biosimilars, IMS predicts that the generics sector will exceed $400 billion in annual sales by 2015. “Whatever happens, generics are still going to be the foundation of cost containment and medicine access in the future,” Sheppard says. “Who will be selling and developing those generics is open to debate, but one thing is for sure: We are moving ever more into a generics world.”
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