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Generics

Turmoil in generics brings opportunity for fine chemicals firms

Change in the finished-dose generic drug business is creating openings, albeit modest ones, for pharmaceutical ingredient makers

by Rick Mullin
April 23, 2018 | APPEARED IN VOLUME 96, ISSUE 17

Credit: Shutterstock

“When I worked at Cambrex, I learned that generics are kind of boring,” says Kenneth Drew, senior director of North American sales and business development at Flamma, an Italian manufacturer of active pharmaceutical ingredients (APIs). Drew began his sales career at Cambrex in 2007, moving to Flamma in 2010. “All people wanted to talk about was price,” he says.

In brief

With price erosion and market saturation battering the generic drug industry and a new generation of high-tech specialized drugs poised to lose patent protection, the off-patent drug sector appears primed for transformation. Some manufacturers of active pharmaceutical ingredients see an opportunity to put specialized chemistry expertise to work on redesigning synthesis routes and beating the pack to the first wave of high-tech generics. Read on to see how the “boring” generic pharmaceutical chemicals business is perking up.

The sector was defined by an all-too-familiar and simple strategy, Drew recalls, whereby generic drug companies knocked each other out by selling cut-rate commodity versions of what often had been billion-dollar branded drugs. Competition in the generics market, he says, had the brutal qualities of an arms race.

Today, things are changing. Flamma and Cambrex, pharmaceutical service firms that emphasize the exclusive synthesis of APIs for customers developing branded drugs, now see an opening to grow their generics operations by putting special expertise in chemistry to work. With the traditional commodity-generics sector foundering, especially in the U.S., API makers’ skill in complex chemistry is emerging as a competitive advantage as they eye a new wave of low-volume, high-value generics, such as oncology drugs, set to enter the market.

The move by some contractors into formulation and final-dose drug manufacturing also comports with new strategies in generics, industry watchers contend. The ever-increasing inquiries from potential customers looking to shift business from Asia to the U.S. and Europe also hint at future growth in generics.

Meanwhile, the passage of the U.S. Generic Drug User Fee Amendments (GDUFA) last year is expected to lend predictability to the market by shortening approval times and weeding out noncompliant competition in low-cost regions such as India and China.

“Things have evolved,” Drew says of the current state of the generics market.

 

Big gorilla
Most drugs approved in the U.S. every year are generics.

Source: Clarivate Analytics
Big gorilla
Most drugs approved in the U.S. every year are generics.

Source: Clarivate Analytics
Big gorilla
Most drugs approved in the U.S. every year are generics.

Source: Clarivate Analytics

 

Big gorilla
Most drugs approved in the U.S. every year are generics.
Source: Clarivate Analytics
Big gorilla
Most drugs approved in the U.S. every year are generics.
Source: Clarivate Analytics
Big gorilla
Most drugs approved in the U.S. every year are generics.
Source: Clarivate Analytics

Beleaguered customers

The major generic drug makers that are the traditional customers for API suppliers are less upbeat, as they face extreme challenges, especially in the U.S., the largest arena for generics. Indeed, major generics firms are reeling.

The largest of them, Teva Pharmaceutical Industries, announced plans last year to cut about 14,000 jobs, a quarter of its workforce, and close multiple manufacturing and research sites. The company is responding to plummeting prices in the U.S., increased competition, and a huge debt load following its $45.5 billion acquisition of Allergan’s generic drug business.

Novartis is expected to sell its Sandoz oral-dose generics business in the face of price erosion in the U.S. And Sanofi just announced plans to sell its European generics business Zentiva to Advent International, a corporate carve-out investor, for $2.4 billion.

Meanwhile, at Mylan, U.S. sales, which account for nearly half its $12 billion in revenue, were down 12% last year. The company is still dogged by the charges of profiteering from its EpiPen that made headlines in 2016.

Part of the problem is that generics are no longer a growth business. “Generics penetration has reached a kind of nexus by volume,” says Graham Lewis, vice president of pharmaceutical strategy at the market research firm Iqvia, noting that even developing markets have reached “virtual saturation.”

Generics account for nearly 90% of pharmaceutical sales by volume in the U.S. and 80% in Germany. The range is between 85 and 90% in developing countries such as China, India, Russia, Turkey, and Mexico. “The only exception is Japan, which is at 60%,” Lewis says.

The problem is compounded by an oversupply of small-molecule generics, Lewis says. Drug retailers are taking advantage by demanding lower prices. Nor have generic biologic drugs, known as biosimilars, emerged, as many had predicted, as a savior for the big generics companies.

“There is little wiggle room” for generic drug suppliers, Lewis says. “We are not in a situation we would call normal supply and demand.”

 

Downward spiral
As branded drug prices hold up, generics are in free fall.

Source: Barclays Pharma Pricing Monitor, Iqvia National Sales Perspective
Downward spiral
As branded drug prices hold up, generics are in free fall.

Source: Barclays Pharma Pricing Monitor, Iqvia National Sales Perspective
Downward spiral
As branded drug prices hold up, generics are in free fall.

Source: Barclays Pharma Pricing Monitor, Iqvia National Sales Perspective

 

Downward spiral
As branded drug prices hold up, generics are in free fall.
Source: Barclays Pharma Pricing Monitor, Iqvia National Sales Perspective
Downward spiral
As branded drug prices hold up, generics are in free fall.
Source: Barclays Pharma Pricing Monitor, Iqvia National Sales Perspective
Downward spiral
As branded drug prices hold up, generics are in free fall.
Source: Barclays Pharma Pricing Monitor, Iqvia National Sales Perspective

Cost, consolidation, complexity

“This is a time of unprecedented change in the generics market, particularly in the U.S.,” says Brandon Boyd, a generics analyst at the data provider Clarivate Analytics. “The industry is now entirely globalized and heavily dependent on places like China and India for starting materials and raw materials.”

Competing on price, therefore, is a matter of efficiently managing a complex supply chain. “Today, more than ever,” Boyd says, “the conversation is all about cost—from the manufacturer to the wholesale and retail outlets.”

A wave of consolidation among buying groups—Boyd points to Walgreens’s purchasing partnership with Boots and AmerisourceBergen and a similar agreement between Cardinal Health and CVS Caremark as examples—has put tremendous pressure on finished-dose drug manufacturers to bring down their costs, pressure that is passed along to the API supplier.

Meanwhile, the U.S. Food & Drug Administration and other regulatory agencies around the world have accelerated the approval of subsequent-entry generics—“not just the first or second or third generic to market but the fifth, the sixth, the seventh, the 15th,” Boyd says. “If you take an established generic product with a new competitor coming to market, you will see price erosion from 15 to 20%.” This is after the price of the branded drug was decimated with the first generic entry.

Generic drug manufacturers have responded by consolidating, Boyd says. Endo acquired Par, Mylan bought Meda, and Teva took on Allergan’s generics unit. The strategy has not worked well in most cases.

“As these companies sought new products, new markets, and buying leverage, they just continually encountered further price erosion,” Boyd says. “Or else the regulators required divestitures far above what they’d planned.” Much of the value that generics companies expected to gain from acquisitions was lost.

Nor have attempts to creep up the value chain into more complex, less competitive products panned out. In addition to the unexpectedly slow debut of biosimilars, Boyd points to several complex products, such as drug-device combinations, that have flummoxed attempts to launch generic versions. Mylan’s epinephrine-delivering EpiPen and GlaxoSmithKline’s Advair respiratory device have both proved elusive for generics firms.

 

Generics nation
The top 20 medicines prescribed in the U.S. are all off patent.

Source: Iqvia
Generics nation
The top 20 medicines prescribed in the U.S. are all off patent.

Source: Iqvia
Generics nation
The top 20 medicines prescribed in the U.S. are all off patent.

Source: Iqvia

 

Generics nation
The top 20 medicines prescribed in the U.S. are all off patent.
Source: Iqvia
Generics nation
The top 20 medicines prescribed in the U.S. are all off patent.
Source: Iqvia
Generics nation
The top 20 medicines prescribed in the U.S. are all off patent.
Source: Iqvia

Upside, maybe

Any transformative crisis suggests opportunity for innovative companies, and if there is an optimistic player in the beleaguered generics market in 2018, it is the API manufacturer. The API business kicked off in the mid-20th century with the introduction of generic drugs and in more recent years flourished with a shift in attention to branded pharmaceuticals. The niche chemistry expertise honed at the major API firms is now viewed as precisely what is needed in the no-longer-staid generics field.

Some API manufacturing firms have also moved into formulation services and final-dose manufacturing, a capability that affords the option of manufacturing generic drugs.

The API maker Hovione, for example, provides particle design services for generic and other inhalant formulations.

Johnson Matthey, on the other hand, now works in partnerships that develop and manufacture finished generic drugs. One example is a partnership with Mayne Pharma Group in Adelaide, Australia, to manufacture and sell dofetilide capsules, a generic version of Pfizer’s Tikosyn, an antiarrhythmic agent. Under such agreements, Johnson Matthey’s partners commercialize the drugs in what Paul Evans, vice president of generic products at Johnson Matthey, calls a flexible profit-sharing arrangement that in some cases involves special pricing for its API.

James Bruno, president of the consulting firm Chemical & Pharmaceutical Solutions, notes that such downstream services translate well to generic drugs, where low cost will continue to hold sway as more complex molecules enter the market. “Contractors have looked at shorter synthesis routes, different solvents that are easier to recover and reuse, and spending more time on efficiency,” he says.

API makers are also getting to work on better ways of synthesizing drugs years before their patents run out, Bruno notes. “I have seen generic drugs commercially available before the innovator gets approval for a generic version,” he says.

Consultant Roger LaForce notes that the general swing of pharmaceutical chemistry production from low-cost Asian countries back to the West also offers an opportunity for API firms in Europe and the U.S. But he questions whether companies will be able to move quickly enough to capitalize on opportunities in generics.

“European players are enjoying good growth in custom manufacturing but have somewhat neglected to furnish their pipelines of generics,” LaForce says. “In four or five years, the custom manufacturing will again settle down, and they will be happy to have other pillars of business, other income sources.”

The chemistry angle

API manufacturers have long maintained portfolios of generic drugs. These tend to be relatively small businesses at companies that emphasize exclusive synthesis, and in many cases they garner little corporate care and feeding.

But that is changing, in part because of gravitation in the service sector toward integrating API and finished-dosage manufacturing, a combination that can be applied to generics. Growth in oncology and other therapies requiring complex chemistry also offers opportunity for firms that specialize in high-potency chemistry and comparable high-tech capabilities.

“When I joined Flamma in 2010 we had our generic line, and we let it lapse,” Drew says. “We didn’t push forward to find newer things to bring into our pipeline. But three or four years ago, we started to find some targets that were good for us­—niche products for the chemistry that we do, such as high-value amino acid chemistry.”

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The company also looked ahead to see which drugs matching its expertise were scheduled to come off patent over the next seven years. For example, the company is at work on tasimelteon, a treatment for non-24-hour sleep-wake disorder that is expected to come off patent in 2021. Drew notes that generics were an impetus for opening a kilo lab to produce small volumes of APIs in Italy recently.

And Flamma’s new facility in China is also an asset, allowing the company to keep costs down by manufacturing its own starting materials and intermediates.

Flamma CEO Gianpaolo Negrisoli adds that controlling manufacturing from the start helps meet the increasing challenge of winning regulatory approval. “From the custom manufacturing business we learned a lot of things,” Negrisoli says. “The approach to synthesis, performing impurity profiles, and paying attention to quality. Now all these points are going into generics.” Filing an application for a generic, he says, has become as complicated as filing for a new drug.

Generics currently account for about 25% of Flamma’s business. While the firm is not looking to make a major change in that proportion, it now seeks to bring at least one generic into its pipeline every year.

Another Italian API maker, Fabbrica Italiana Sintetici (FIS), got its start in generics 60 years ago, adding exclusive synthesis in the 1990s. Today 20% of the company’s $650 million in annual sales accrues from its portfolio of about 60 generic APIs, according to Giuliano Perfetti, senior director of sales, marketing, and business development.

The company decided three years ago to make some changes. FIS opened a new facility at its main plant dedicated entirely to developing and launching generic APIs. With a staff of 20, soon to be increased to 35, and fully equipped labs, the generics operation will develop specialty APIs as portfolio products and in custom development agreements with customers.

FIS was motivated to make changes to its generics business by the decline of blockbuster drugs like Crestor and Lipitor. “The megabrand time is gone forever,” Perfetti says, and the market is evolving toward smaller-volume, higher-value products. “The strategy now is to target niche generics where we can fully deploy and exploit our expertise.”

Although FIS has invested millions of dollars to expand high-potency chemistry and add spray drying, Perfetti sees little likelihood that the firm will move into final-dose drug manufacturing.

“We want to stay in the API arena because in selective cases, we believe it is the API that can make the difference,” he says. “If it is truly difficult to make the API, the option of having an integrated proposition is not so relevant.”

Siegfried, a Swiss API specialist, significantly increased its size in 2015 when it purchased three fine chemicals sites from BASF. That deal doubled the company’s generics sales, according to Craig Douglas, head of its generic API business. The firm also made two acquisitions in sterile finished-dose drug manufacturing.

09617-cover-douglas.jpg
Credit: Siegfried
Despite growth opportunities, the generics business remains tricky, Siegfried's Douglas says.

“We have close to 70 APIs,” Douglas says, “just under half of which are legacy Siegfried products that we have had for many years, heavily in the controlled-substance narcotics category.” Douglas characterizes the products from BASF as diverse, including commodity substances such as ibuprofen and caffeine and “niche specialties where we make 5 kg every two years.”

Whereas Siegfried had been selling its generics entirely in the U.S. and Europe before the BASF acquisition, it now supplies 80 countries.

A sizable generics portfolio can provide stability in the face of the more volatile business of manufacturing branded APIs, Douglas says, just as having a business in exclusive synthesis provides a counterweight to any cycles in the generics business.

And traditional generic drugs are likely to cycle down in the years ahead, given the drop in new drug approvals by FDA for nearly a decade before 2014. Douglas, however, sees growth in developing efficient routes to high-tech generics that will begin to enter the market. The timetables established by GDUFA will lend needed predictability to these efforts, he adds.

“Before GDUFA, it was hard to put together a business case because you didn’t know if it would take three years or five years or eight years to get the new process and route to synthesis for an API approved for your customers,” Douglas says.

As for the legacy portfolio, he anticipates unpredictability in sales of pain management APIs due to the pressure on opioids but opportunities for growth in addiction treatment drugs, including naloxone and naltrexone, for which Siegfried has developed new syntheses.

Movement in the U.S.

Ampac Fine Chemicals, a specialist in high-potency chemistry and chiral separations, has long had a small generics business, according to CEO Aslam Malik. That business will get a boost from Ampac’s recent acquisition of a former Boehringer Ingelheim plant in Petersburg, Va., with controlled-substance manufacturing capabilities. Ampac announced earlier this year that it will begin producing APIs for Noramco, a manufacturer of controlled-substance APIs that is running short on capacity.

As for standard small-molecule generic APIs, Malik says Ampac is receiving an increasing number of inquiries from drugmakers looking to find alternatives to Indian and Chinese suppliers. It’s still impossible to beat the Asian producers on price, but he is optimistic the tide will eventually turn. “This is an interesting time with President Trump’s push for Made in America and Make America Great Again.”

Ampac is not making a particularly aggressive push, however. It has no plan to pursue business by developing efficient second-generation synthetic routes, for example, or by expanding into formulation and final-dose manufacturing.

“We have not gone over to the other side,” Malik says. “We want to focus on what we do best.” He is hoping for growth in generic controlled substances and what he calls specialty generics—“APIs requiring high potency and difficult chemistry that requires them to be made in the U.S.”

Unlike Ampac, Cambrex has a sizable generics business. Now the New Jersey-based firm is making its first foray into finished generic drug products.

“We make about 75 generic APIs. We have been in the category for a long time, and it’s been a successful business for us,” CEO Steven M. Klosk says. “But we have been thinking about whether it makes sense to use our position in generic APIs to extend in a limited way into generic drug product” with a partner that would develop and make the dosage form.

Last year the company moved ahead, filing three applications for new generic drugs, and Klosk expects to file more this year. “It is a relatively small number of molecules. We haven’t disclosed them.”

The company spent $4 million to develop generic drug products last year and will spend about as much this year, Klosk says.

Currently, generic APIs, most of which are manufactured at Cambrex’s plant in Paullo, Italy, account for 20% of the firm’s sales. “It’s a tough market right now because of price deflation,” Klosk says. “The good news is GDUFA. The FDA is definitely reducing the approval times, plus there are more inspections targeting quality issues that certain low-cost regions of the world are having. And we are getting more inquiries from people wanting to come back” from Asia to the U.S. and Europe.

Holding off

09617-cover-perfetti.jpg
Credit: FIS
Perfetti says FIS intends to apply high-tech chemistry to specialty generics production.

Not every API producer with a significant generics business is aggressively making changes. Hovione, which makes about half its sales from generics, is an example of a company disinclined to make big changes to a successful operation, CEO Guy Villax says.

If anything, the company is scaling back, selling a $40 million contrast agent business in China earlier this year. Villax says the company wanted to shift resources away from the commodity-like business. “We want to stick to generics where we can differentiate,” he says.

Although Villax acknowledges that the turmoil in generics suggests opportunities, he says he is not motivated to pursue them aggressively. “We are not opportunistic,” he says. “We don’t do that.”

Iqvia’s Lewis says Villax’s perspective is typical. Most of the API producers he speaks with tell him they are satisfied with the status quo. Few indicate they are interested in adding downstream services to support final drug production, he says, though some say pressure is mounting on them to do so. How this would impact the generics business is unclear.

Siegfried’s Douglas notes that his company is unlikely to put its finished-dose capabilities to work on producing generic drugs. “We have a strict policy that we will not compete with our customers,” he says.

On balance, the business will remain tricky, according to Douglas. “Customers are shaving more and more on the price and also signing shorter contracts, so the ability to forecast demand is becoming less and less,” he says. “There will be periods of feast and famine. This will remain a challenge for the industry going forward.”

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