Neil Turner

In this first report (see second report), the take home message for delegates at IIR’s Global Generic Strategies conference, held in Barcelona in March-April 2004, was that the traditional line between research-based pharma companies and generics house is blurring, as companies on both sides of the industry divide finally come to realise the benefits of a mixed portfolio. Neil Turner of PPR Communications, a division of IMS Health, reports on why big pharma is getting into generics and how generic companies are moving up the value chain.

Big pharma looks to generics...
Keynote speaker Rory O’Riordan, President of the European Generics Association and COO of Clonmel Healthcare (a subsidiary of German generics giant Stada), opened proceedings. "Big pharma is getting into generics and generic houses are getting into drug discovery," he said. "Novartis, for example, does everything – prescription originals, biopharmaceuticals and generics. Fixed definitions don’t work anymore," concluded O’Riordan, "They’re all pharma companies."

In big pharma’s case, even the largest, most research-focused companies are looking at the generics sector. Pfizer, for example, acquired several generic businesses as a result of the Pharmacia takeover: Greenstone is a separately run generics business that helped retain 70% of alprazolam volume after Xanax went off patent. "Pfizer seems to realise the value of a generics business when the company’s products come to the end of their patent lifecycles," commented O’Riordan, "Well over a year after the merger with Pharmacia, Pfizer still owns these generic businesses." Furthermore, he predicted that several big pharma companies will buy generic companies in the next two years.

...while generics look to raise margins
On the other hand, generic companies have a strong interest in entering the branded market with patent-protected products. "Generic prices vary up to 35% in the UK market, for example," noted O’Riordan, "It’s a very volatile market, so the stability of the patented market – especially in terms of higher, more predictable prices – is extremely attractive in terms of market planning."

O’Riordan cited several examples of generic companies moving up the value chain by diversifying into the originals sector. Clonmel’s own parent company, Stada, has been acquiring mature brands as a counterpoint to the exposure it has on the generic side. While such relatively small brands might not have a place in the portfolio of larger research-based companies, they can turn a useful profit in the hands of more specialist marketeers like Stada.

Teva has gone a step further. With its development of Copaxone (glatiramer acetate) for relapsing-remitting multiple sclerosis, Teva has challenged the historic divide between generic companies and the fully integrated R&D-based pharma giants. Importantly, adds O’Riordan, "Teva doesn’t run Copaxone through its generics company – it’s managed separately."

Ranbaxy is another company that has shown ambitions beyond both its domestic market in India and its core business in generics. The company’s controlled-release formulation of the antibiotic erythromycin is a prime example of a product that adds value to the original, in this case through the incorporation of a modified release mechanism. In addition to moving away from the low margin commodity approach to generics by investing in higher margin ‘supergenerics’, Ranbaxy also has an active research pipeline, with four new molecular entities in clinical development.

Having espoused this brave new world, O’Riordan finished by playing devil’s advocate. Citing a recent report, he said that while some big pharmas were entering the generics market in an ambitious way, others were still leaving it. Aventis, for example, recently sold its generics business. And with total sales of around $2 billion each, the world’s two largest generics businesses – Novartis' Sandoz and Teva – are still smaller in size than a major branded blockbuster.

Germany leads the way
In his talk on biogenerics, Federico Pollano, Head of Business Development with BioGeneriX, the biopharmaceutical unit of the ratiopharm/Merckle group, highlighted the favourable operating environment in Germany, Europe’s leading generics market:

• a well-established generics sector that is accepted by both patients and healthcare practitioners alike (generics take a 68% share of the patent-free market)
• high growth potential owing to increasing pressure on healthcare expenditure
• high margins because of comparatively low price erosion
• few restrictions on initial pricing
• limited restrictions on reimbursement

The positive attitude to generics in Germany, which accounted for 51% of European generic sales of $7 billion in 2002, is demonstrated by take-up rates. Four years after launch, average generic penetration reaches 45% at a discount of 30% to the original. Generics’ overall position is broadly similar to Germany in the Netherlands and even stronger in the UK. The less developed generic markets of southern Europe, where price differentials between originals and generics are on average less, still have some catching up to do: in 2002, generics accounted for only 4% of the Spanish pharmaceutical market.

Generic take-up rates and price differentials in selected European markets

Source: IMS MIDAS

Wake up call
Summing up, conference chairman Graham Lewis, IMS' Vice President Europe, Pharma Strategy, cited the example of generic simvastatin, Merck & Co's Zocor, in Germany as evidence of the changing shape of the generics market. "With simvastatin in Germany, we have seen a generic event on a major product that has cannibalised market share from other statin brands," he said. "This has not been seen before in the US and Europe."

Though the German effect has not been repeated in the UK, where patents have also lapsed on simvastatin, IMS forecasts a bright future for generics. "We predict that topline growth in the pharmaceutical industry to 2008 will remain at 8-10% but real growth will be 1-1.5% lower because of discounts and clawbacks," commented Lewis. "The provision of a Medicare drug benefit will add approximately 1% to growth from 2006. But, above all, generics will grow ahead of originals."

In a final wake up call to big pharma, he warned: "The status quo won’t work going forward. None of the top 10 pharma companies grew strongly last year and five of the top 10 grew below the market average." And while big pharma obsesses over the loss of sales to parallel trade, Lewis believes the industry should be much more concerned by the threat of reference pricing – a development only made possible by the growing influence of generics on the pharmaceutical business.

Neil Turner is Editor at PPR Communications, a division of IMS Health: for further information about PPR, please visit pprconciseguides.com. The PPR Concise Guide to Generics can be bought direct at IMS' Online Store.

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