30 Years Of Generics

In September 1984, the Drug Price Competition & Patent Term Restoration Act, commonly known as the Hatch-Waxman Act for its congressional sponsors’ names, was signed into U.S. law. By creating a new regulatory path for generic medicines and launching a new business, the act was a watershed in the history of the pharmaceutical industry.

Much has changed from that turning point 30 years ago. The complex regulations have been tested, interpreted, and updated. The compliance burden for companies has increased with new rules that help regulators keep pace with a rapidly growing industry and improve their oversight of manufacturing and quality issues.

Meanwhile, generics companies have become more aggressive in challenging innovator drug patents. To compete, they are expanding geographically and building portfolios through mergers and acquisitions. And as the pharmaceutical industry on which they rely undergoes its own changes, generics companies are finding new products to imitate, including a new generation of biologics.

The Hatch-Waxman Act was designed to balance the competing interests of innovator and generic pharmaceutical companies. For innovators, it provided a period of data exclusivity and restored patent life lost while waiting for federal approval. For generics firms, it created an approval pathway. But along with the intended consequences came many unintended ones.

One of these arose within the first five years after enactment, when the emerging generics industry became embroiled in a major scandal. In a rush to win approvals, generic drug makers flooded the Food & Drug Administration with applications, many of which were found to be fraudulent, and bribed regulators to manipulate reviews.

A government investigation eventually brought charges of fraud and bribery against dozens of company and agency employees. To remedy the situation, the Generic Drug Enforcement Act of 1992 gave FDA new powers and tightened review processes. To ensure safety and restore public confidence in generic drugs, FDA reinspected facilities and tested products.

RAPID GROWTH

The generics industry quickly put this setback behind it. In 1984, generic drugs were just 19% of prescriptions in the U.S., according to the market research firm IMS Health. By 2013, they had reached 86%.

“Among first-line treatment alternatives, nearly every therapeutic class and disease state currently has at least one generic medicine available,” points out Sigurdur Olafsson, chief executive officer of Teva Pharmaceutical Industries’ global generic medicines group. Israel’s Teva, which sells both generic and brand-name drugs, leads the generic drug industry in sales, followed closely by Sandoz, the generics arm of Switzerland’s Novartis.

In the U.S., generics have become “the pillar of health care,” says Peter Goldschmidt, president of Sandoz U.S. As such, “we have a responsibility to ensure, together with the FDA, that high-quality medicines come into this country or are produced here.”

According to the Generic Pharmaceutical Association, the U.S. has saved nearly $1.5 trillion over the past 10 years by having inexpensive generic alternatives to high-priced branded drugs. It’s a result that no one could have predicted 30 years ago, says the trade group’s CEO, Ralph G. Neas. “The Hatch-Waxman law has yielded hundreds of unprecedented medical breakthroughs by rewarding innovation and trillions of dollars in savings from encouraging competition.”

Although Hatch-Waxman accelerated the speed at which generics come to market in the U.S., its impact has been global. “We are seeing ourselves in a far more generic world,” says Alan Sheppard, IMS Health principal for generics.

In 2012, global generics sales reached $260 billion. And the market is predicted to experience double-digit annual growth through 2017. A large number of patent expirations and a push by countries toward affordable medicines are among the drivers of recent growth, Sheppard adds.

Although sales of generics are only a quarter as large as those of patented drugs because of generics’ significantly lower prices, those sales are growing at least twice as fast. In recent years FDA has been approving about four times the number of Abbreviated New Drug Applications (ANDAs) for generics compared with applications for brand-name drugs.

Behind the increase is a significant shift in the sources of those applications toward Indian firms, says Molly Bowman, senior manager at the research firm Thomson Reuters. In the 1990s, companies from the U.S., Israel, and a few other countries were heavily represented in the U.S. generics market, but that has shifted to include many other parts of the world, Bowman explains.

In 1990, about 50% of ANDAs came from U.S. firms and 15%, from India. By 2012, U.S. company filings had dropped to 30% and Indian ones had grown to 40%. Over the past 10 years, Indian filings have risen to around 200 per year, while the companies involved have increased fivefold to about 25.

CONSOLIDATING SECTOR

Although the global generics industry remains fragmented, the top four companies account for more than 40% of combined sales for the 60 biggest firms, reports the market research firm EvaluatePharma. To reach this scale, the leaders have leaned heavily on mergers and acquisitions.

“Established generics markets continue to be dominated by large pharma companies,” Teva’s Olafsson says. “There are very few large, global generics companies—most companies have a regional focus.

“The fastest-growing markets over the next five years will continue to be the emerging markets,” he adds. “The challenge in entering these markets is that they are currently supplied primarily by local companies.” To compete successfully in such markets, companies such as Teva often target local players for acquisition.

Olafsson expects industry consolidation to continue, in parallel with the consolidation he sees among customers. In the U.S., customers include the large prescription benefit management firms, such as Express Scripts. Teva itself built a large portfolio of generic medicines in part through acquisitions made between 2006 and 2011. Looking ahead, Olafsson notes, his focus will be on organic growth.

Industry acquisitions peaked in number and value in 2008, when about $70 billion was spent on roughly 150 deals, according to Thomson Reuters.

More recently, third-ranked Actavis was involved in transactions worth nearly $40 billion. In 2012, U.S.-based Watson Pharmaceuticals merged with Actavis. Under the Actavis name, the combined firm then acquired Warner Chilcott, along with new headquarters in low-tax Ireland, in 2013. In July, it completed the purchase of the U.S. specialty drug firm Forest Laboratories.

Fourth-ranked Mylan of the U.S. became a global company in 2007 when it acquired a controlling stake in the Indian active ingredient supplier Matrix Laboratories and bought the generics business of Germany’s Merck KGaA. In July of this year, Mylan agreed to buy Abbott’s non-U.S. developed markets specialty and generic drugs business for $5.3 billion.

Major generic drug suppliers such as Teva, Actavis, and Mylan have been diversifying not only geographically but also across generic, branded, specialty, and over-the-counter product lines. “More and more, companies aren’t strictly generic anymore,” Thomson Reuters’s Bowman says. “Companies are expanding and changing, and that makes sense because they have to adapt.”

Some big pharma companies, including Merck & Co. and Eli Lilly & Co., eschew generics. But others such as Novartis, Sanofi, and Pfizer have built subsidiaries that rank them among the top generics suppliers.

Although Sandoz is part of a large pharma company, Goldschmidt says, “we are a true generics company, and I think that fits very well to the market needs.” That said, Goldschmidt adds, “I have much more in my ‘bank’ that I can use” to address technical, development, and other hurdles because of the possibility to collaborate with other Novartis divisions.

As one of many amendments to the 1938 Federal Food, Drug & Cosmetic Act, the 1984 Drug Price Competition & Patent Term Restoration Act—or the Hatch-Waxman Act—created the Abbreviated New Drug Application (ANDA), which streamlined the process for approving generic drugs. It also established a mechanism for patent litigation and extended patent life on innovator drugs to compensate for delays caused by the Food & Drug Administration approval process.

GROWING THREAT

Brand-name drugs generate almost all their sales between their launch date and the appearance of a first generic, and as the generics industry has matured it has learned to narrow this profit window.

In a recent analysis supported by the Pharmaceutical Research & Manufacturers of America trade group, Duke University professor Henry G. Grabowski and collaborators found that this period averaged 12.9 years for drugs with generics launched in 2011–12. Ten or more years ago, drug firms enjoyed about 13.5 years of pregenerics sales.

Generics competition now usually appears immediately after patent expiration. One year after generics entered in 2011–12, sales for the branded drugs rapidly declined, hitting an average market share of 16%, Grabowski found. For drugs with sales of at least $250 million, the drop was to just 11%. In comparison, drugs seeing generics competition in 2000 were able to maintain a 45% share.

The rapid capture of market share by generics is due in large part to the fact that they are often sold at 10% of the original drug’s cost, Sheppard says. “Over the past 30 years, we have seen an acceleration of generic erosion and in the level of price decreases.” The combination “is a major challenge for innovator companies,” he says, and has pressured many to redouble their research efforts to come up with new products.

Innovator firms have tried to maintain some market share by selling or licensing an “authorized generic,” which is manufactured under the original drug approval, rather than an ANDA. These versions are identical to the original drugs but usually have different markings and packaging. Pfizer’s Greenstone unit, which claims to have pioneered the authorized generics market, makes at least three dozen, including versions of the firm’s cholesterol drug Lipitor and antihypertensive Norvasc.

Generics firms without an authorized product try to win the 180-day market exclusivity that is provided under the Hatch-Waxman Act. A company can get this exclusivity by being the first to file an ANDA and either not infringing or successfully challenging the originator’s patents.

Winning a patent suit also lets the generic enter the market sooner than waiting for the patent to expire. Moreover, the 180-day head start allows a generics firm to build market share at a price lower than the branded product but higher than would be possible if up against competing generics. If an authorized generic is being sold, the normal generic competes with it.

Grabowski found that patent challenges are occurring more frequently and earlier. More than 80% of new drugs experiencing initial generics competition in 2011–12 had faced at least one such test. This level was up from just 9% in 1995. These challenges also were filed, on average, within seven years of the brand-name product’s launch, compared with waiting 19 years in 1995.

Both measures also point to more aggressive legal activity for high-priced drugs. In these cases, even if a generics firm is unlikely to win, it may be willing to take the risk because the potential return is large. Brand-name companies win just over 50% of the time. And many times, although controversial and under regulatory scrutiny, settlement deals are reached in which the innovator pays the generics firm to delay the launch of its product.

Because the “first-to-file” status is determined by the calendar day—rather than the exact time—of filing, companies vying for 180-day exclusivity can end up in a competitive muddle. “We have seen more and more companies going after that same period of market exclusivity,” Bowman says. Because multiple companies can end up sharing the period, “it has really lost what was lucrative about it,” she adds.

For patients, drug availability can be better when multiple generic versions come to the market simultaneously, Bowman points out. But if companies believe they won’t make their profit goals or can’t compete against multiple or larger competitors, they “may decide not to launch the product and drop it entirely,” she adds.

Not surprisingly, generic drug makers target the highest value drugs. Looking back to 1999, Grabowski reported that a drug with less than $100 million in annual sales will see two or three generic entrants. The number jumps to about seven for drugs with sales between $250 million and $1 billion. For $1 billion-plus blockbusters, up to 11 may emerge.

REGULATIONS EXPAND

Increasing competition also is reflected in a snowballing number of ANDAs. Between 1984 and 2012, FDA approved more than 8,000 generic equivalents of brand-name drugs. However, by 2012 it also had developed a backlog of nearly 3,000 ANDAs awaiting review.

The remedy was a new regulation: the Generic Drug User Fee Amendments (GDUFA), which FDA implemented in 2012. The agency hopes to bring in $299 million per year in fees paid by generics firms to offset the cost of reviews and inspections. By 2017, FDA aims to cut review times from nearly three years to 10 months and reduce the backlog by 90%.

Although the generic drug industry initially resisted paying fees, it eventually supported a move that would speed up approvals. The trade-off is facing extra costs to compete in the U.S. market. These range from about $30,000 to file a Drug Master File (DMF), which shows the intent to make an active ingredient, to nearly $60,000 for an ANDA, and more than $250,000 for inspection of a foreign finished dosage plant.

As a result, companies are “scrutinizing their portfolios and becoming a bit more selective about what products will actually be profitable for them,” Bowman says. In the past, companies also used DMF filings as “marketing tools.” Because DMFs now come with a price, the number of frivolous filings is expected to decline.

FDA also wants to use GDUFA money to inspect more facilities, both foreign and domestic. In recent years, manufacturing and quality issues have become a significant stumbling block for the generics industry. Currently, FDA has banned imports from facilities owned by the Indian companies Ranbaxy Laboratories, Wockhardt, and Sun Pharmaceutical Industries.

Although attention has focused on these Indian suppliers, Boehringer Ingelheim, Apotex, and Sandoz have had manufacturing setbacks as well. Boehringer eventually gave up on fixing its problems and sold its U.S. injectable generic drug business and plant to London-based Hikma Pharmaceuticals.

Sandoz received FDA warnings in 2011 regarding three North American facilities. The plants have addressed the issues and very recently got “the green light from FDA,” Goldschmidt says. “We produce all over the planet and are committed to keeping production in the U.S.” Sandoz is still working on issues raised in 2013 concerning its Unterach, Austria, plant.

Manufacturing and selling generics is not only about keeping costs and prices low, Goldschmidt emphasizes. “If you want to have generics that continuously improve and retain quality, it costs a lot of money,” he says. “Quality also means supply reliability and fewer drug shortages.”

Indeed, manufacturing issues can result in shortages or delay generics competition. For example, because of Ranbaxy’s problems, AstraZeneca hasn’t yet faced a rival for its blockbuster ulcer drug Nexium. Although the patent expired in May, Ranbaxy’s hold on the 180-day exclusivity has blocked other generic versions. In the meantime, Pfizer, which licensed rights from AstraZeneca, has launched over-the-counter Nexium.

Shortages can easily arise for mass-market or older products, such as the cancer drug doxorubicin. “When the margins really get slim, the interest and motivation for companies to supply these products is low,” Bowman explains. If only one firm is willing to make a product and has a production issue, a shortage will result. “There need to be incentives for companies to be involved in these products and to stay in the market,” she adds.

Goldschmidt stresses that Sandoz doesn’t intend to abandon mass-market generics. Such products are “still valid, and we need these at good cost and quality levels,” he says. Goldschmidt points out, however, that a diverse product portfolio is also critical. “It is important to understand that a good generics company can be innovative.”

THE NEXT GENERATION

Innovation may come from necessity. Following a spate of patent expirations on top-selling drugs such as Lipitor, the prospects for creating knockoffs of easy-to-make pills are diminishing. “It’s true that there are fewer opportunities to ‘genericize’ multi-billion-dollar, small-molecule brand blockbusters than there were previously,” Teva’s Olafsson acknowledges.

Although some companies will stick with commodity generics, “the pharmaceutical industry has moved toward more advanced medications, so the generics industry has had to keep pace,” IMS’s Sheppard says. “We have moved from simple molecules to complex molecules to combinations and to different technology advances and delivery systems. So innovation in generics is present with us today and certainly wasn’t 30 years ago.”

Innovation takes money and a depth of research that not all companies have but that many are trying to build or buy. Openings for developing generic drugs are also changing significantly as the innovator pharmaceutical industry moves toward targeted, small-volume products.

As a result, large generic drug firms are developing more products to generate growth. “The more sustainable opportunities exist in the smaller, but more complex, products because companies like Teva can invest time and money into bringing these products to market,” Olafsson adds.

Alternatively, small companies that can’t compete against large players for tiny fractions of big markets seek opportunities to work in technology or therapeutic niches or on products with high barriers to entry.

Although the blockbuster era may be over, Sheppard notes that there are still many patents expiring in the next five years. IMS estimates the value of drugs going off patent by 2019 to be $94 billion, excluding biologics.

Biosimilars, or near copies of biologic drugs, may offer the next big opportunity. According to IMS, about $73 billion worth of major biologics will lose patent protection in developed markets between now and 2020, and their copies will sell at premium prices compared with small-molecule generics. Although they will generally be small-volume products, they are “a very attractive proposition, provided that you have the core capabilities and technology to develop a biologic,” Sheppard says.

In July, FDA accepted Sandoz’s filing for a copy of Amgen’s white-blood-cell-stimulant drug Neupogen, the first for a biosimilar drug under the Biologics Price Competition & Innovation Act of 2009. Entirely new regulations and approval processes are being established for this emerging area.

Biologics were not envisioned when the Hatch-Waxman Act took effect 30 years ago, and the U.S. is behind other countries in moving them to the market. Owing to unique product development and marketing challenges, the process is expected to be lengthy, costly, and uncertain. However, analysts expect the health care market to welcome cheaper biologics, just as it has other generic drugs.