Because of the ever-increasing costs of healthcare provision the world over, many governments are enacting legislation to promote generic prescription in order to keep costs down. With drugs worth $160 billion in sales coming off patent by 2015, it would seem a good time to be in the generics industry. However the generics market is not without challenges.

The rise in healthcare expenditure internationally has led to governments implementing a variety of cost-containment policies, with increased generic use being a fundamental part of these. In the US, for example, the growing cost of healthcare provision is affecting the ability of companies to be competitive. Meanwhile in France, it is predicted that if healthcare spending continues to grow at the current rate, the health system will be bankrupt by 2020.

Consequently, governments and healthcare providers are implementing a range of policies to promote the use of cheaper generic products. These include allowing pharmacists to substitute generic drugs for branded ones, increasing patient co-payments for branded drugs while waiving them for generics, and imposing generic prescribing and dispensing targets on physicians and pharmacists, respectively.

This drive to increase generic use in each of the seven major markets is expected to lead to considerable growth in generic volume sales. However, due to greater scrutiny of drug prices with price cuts being implemented in many countries, this growth is unlikely to directly translate into a significantly higher value for the generics market. Rather, it is expected that the raft of blockbuster patent expiries that will occur over the next 10 years will lead to a rise in the volume of the generics market.

Generic competition

2006 is expected to be a very significant year for patent expiries, with the key blockbusters Merck & Co's Zocor (simvastatin) and Bristol-Myers Squibb's Pravachol (pravastatin) already having lost patent protection. Several more blockbusters are also expected to become subject to generic competition, including Pfizer's Zoloft (sertraline), Sanofi-Aventis' Ambien (zolpidem), GlaxoSmithKline's Zofran (ondansetron) and Novartis' Lamisil (terbinafine) family. Consequently, billions of dollars of product sales will be exposed to generic competition.

This wave of patent expiries will continue over the next decade, with a range of key products losing patent protection in this period: Pfizer's Norvasc (amlodipine), Lipitor (atorvastatin) and Viagra (sildenafil), Merck's Zetia (ezetimibe) and Cozaar (losartan), GSK's Avandia (rosaglitazone) and Johnson & Johnson's Levaquin (levofloxacin) and Topamax (topiramate).

Within the next five years an estimated $80 billion in 2005 product sales will be exposed to generic competition, while a further $77 billion will be subject to generic incursion between 2011 and 2015.

With such significant opportunities being presented for the generics companies, many are readying themselves to take advantage, following both cooperative and competitive strategies for success. Central to growth through cooperation has been the consolidation that has swept through the generics industry, with several multi-billion dollar transactions taking place over the last two years.

Teva finalized its acquisition of major US player Ivax in January 2006, sealing its dominant position and creating a company forecast to generate over $7 billion in sales in 2006. The second leading generics company, Sandoz, a division of Novartis, has also been highly acquisitive, with two major deals being completed in 2005 - the acquisition of Hexal in June and of Eon Labs in August.

The M&A activity has continued into 2006 - Watson has had a $1.9 billion bid accepted for fellow US company Andrx, while Pliva recently announced it would be willing to be acquired by Barr for $2.2 billion after rejecting a lower offer from European newcomer Actavis, although both companies have since raised their offers.

The Indian generics companies, most notably Ranbaxy and Dr Reddys, have also been participating in this consolidation, strengthening their global presence through acquisitions in Europe, including Romania's Terapia and Belgium's Ethimed, which were bought by Ranbaxy, and German company Betapharm, which was acquired by Dr Reddy's in February 2006.

Authorized generics

An alternative cooperative strategy is partnering with a branded pharma company to market and distribute an authorized generic. Essentially, these are products that are usually manufactured by the originating brand company, but distributed and sold as generics. They can be marketed by the brand company itself or through a subsidiary, or the brand company may license the product to another company for marketing in return for royalties.

Under such an agreement, a generics company or, in some cases, the generic subsidiary of a branded company, will market a generic immediately after patent expiry - sometimes impinging on the 180-day marketing exclusivity period obtained after a successful patent challenge. This exclusivity period - a reward for taking on the risk and cost of challenging a patent - can be highly lucrative and is much coveted by generics companies as it provides six months of sales with no other competition. At least, that is until authorized generic agreements became the norm.

These agreements are beneficial for branded pharma: in addition to providing ongoing revenue from an off-patent product, either through royalties or a share of the profits, they can solve excess manufacturing capacity issues and also serve as a useful tool for settling patent litigation. The creation of an authorized generic agreement with a patent challenger can provide a mutually beneficial end to costly patent litigation, with the branded pharma company obtaining a guarantee that generic competition will not be launched for several years while the generic company gains a period of market exclusivity.

However, the generics industry is split on the issue of authorized generics, with the key failing being the increased competition that is generated, particularly with competitive agreements. Achieving first-to-file status and the 180-day market exclusivity that goes with it is crucial to many generic companies' future sales prospects: the additional competition generated by authorized generic agreements is seen by some as unfair and not in the spirit of the generics industry.

It is feared that the increased competition within the 180-day exclusivity period may act as a deterrent to future patent challenges, which could threaten the long-term profitability of the generics industry.

On the positive side, authorized generics can provide a boost for companies with weaker pipelines and leads to lower prices for consumers. However, it has been put forward that such agreements are, actually, anti-competitive and the Federal Trade Commission is currently investigating this claim.

Changes afoot

Pricing pressures, increasing competition and the rise of multi-billion dollar behemoths that dominate the generics market are threatening the future growth of smaller generics companies. However, there are several opportunities to be seized - including the major patent expiries in certain therapy areas such as HIV, cardiovascular and asthma, where novel approaches to developing generics could translate into considerable sales.

The biosimilars market also presents a good option for future growth, with the first products approved in the EU in April 2006 and, somewhat unexpectedly, the US in May 2006. Perhaps one of the most exciting prospects is the underdeveloped Japanese generics market - which is currently estimated to be worth between $3 billion and $4.8 billion, but only has a 5-8% share of the value of the total pharmaceutical market.

With generics so underutilized in Japan, the government has been implementing a range of policies intending to drive greater use, including a new prescription form to allow substitution and several awareness campaigns. The Japanese generics market is, therefore, expected to experience substantial growth over the next four to five years and has attracted the attention of major generics players - Teva and Sandoz have consolidated their presence there, while several Indian companies are thinking of establishing offices in Japan.

Key Japanese generics companies are also boosting their activities; Towa has recently expanded its manufacturing capabilities and is aiming to double its generics production capacity over the next four to five years while Sawai has undertaken several media-focused awareness campaigns.

The growing commitment to the Japanese generics market, both from local and foreign firms, demonstrates the optimism with which future sales prospects in this country are viewed. The strong growth expected in this market and the pricing pressures and stagnating growth in the more mature generics markets in the EU and the US, mean that Japan will become more important in driving the future development of the global generics market.

Related research:

 Global Generics Guide: Part 2 - Benchmarking country markets and strategic issues priced $15,200
 Global Generics Guide: Part 1 - Benchmarking the key players priced $7,600
 Biogenerics 2005: A New Level of Complexity priced $11,400

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