By Mahesh Sawant, Program Manager, Healthcare Practice, Frost & Sullivan, India.

Introduction
The generics industry is facing a period of unprecedented growth, with $82 billion worth of global blockbusters set to face US patent expiry by 2007. The changing dynamics of the generics market are driving strategic evolution of leading players, with portfolio management, geographic expansion and alliance networks determining success and failure. With cost-containment a focus for all healthcare players, the growth of the generics market is outpacing the branded sector by a considerable margin. However, the operating environment for generics is becoming increasingly competitive pushing existing players further up the pharmaceutical value chain. Brand and generics companies alike must be prepared for this new competition. With 79.7% of 2003 blockbuster sales potentially exposed to generic competition by 2010, equating to $103.7 billion worth of products at 2003 sales value, the growth opportunities in the generics sector are significant. However, understanding how different country dynamics shape the competitive landscape is critical to evaluating risk and return.

Effective portfolio management is critical to future success in the generics market. Maintaining breadth of portfolio and low cost supply is critical for commodity generics players, forcing many players to evaluate higher value generic sectors, thus generating new competitors to brand pharma. In the US, the generic Injectables sector retains high barriers to entry, but in Europe, competitive analysis suggests that the market place is more crowded. As such, injectable products may represent a less valuable proposition to European generics players than US analysis would suggest.

How does the generics market look?
The top 500 drug entries of 2004 represent total sales of $292.55 billion. The top-selling prescription drug of 2004 was Pfizer Inc.’s Lipitor. Launched in first-quarter 1997, the HMG-CoA reductase inhibitor generated 2004 sales of $10.86 billion, an increase of 17.7% compared with 2003 sales. Another cholesterol drug was the No. 2 seller of 2004. Merck & Co.’s Zocor, which was introduced to the market in 1992, recorded sales of $5.2 billion, representing growth of 3.7% compared with sales in 2003. The third-best-selling prescription drug of 2004 was Advair/Seretide. Marketed by GlaxoSmithKline since 1999, the asthma medicine had sales growth of 24%, coming in at $4.5 billion. Another Pfizer product was the No. 4 best seller in 2004, the antihypertensive medicine Norvasc. Available since 1992, Norvasc sales increased 2.9% for 2004 to $4.46 billion. At No. 5 is Eli Lilly and Co.’s Zyprexa for schizophrenia. Launched in 1996, Zyprexa sales were $4.42 billion last year, a 3.3% increase compared with 2003 sales.

The US, UK and Germany are mature generics markets experiencing substantial price competition. This is reflected by the fact that, while generics make up 55% of all global prescriptions, generic market sales equate to only 17% of total sales. However, less mature markets also exist, including France, Spain, Italy and Portugal. These markets offer better growth opportunities as generics' current market share is comparatively small.

Commodity generics have low barriers of entry and low margins of profits due to competitive pricing, while specialty and supergeneric drugs are reformulations of off-patent drugs and have higher margins. Merck has been predominantly catering to the specialty market in the US, through its Dey affiliate.

Crucial to generics companies' strategies in the US is the use of Paragraph IV patent challenges to gain lucrative market exclusivity periods. Being the first to market a new generic drug makes for exceptionally attractive market share and profit margins. However, these profits are short-lived, thanks to rival launches coming at the end of the exclusivity period. This means generic companies must continually launch new products to maintain their margins.

Merck already has a presence in the US market, deriving 31% of total generics sales from this sector. This predominantly stems from DuoNeb and EpiPen, supergeneric respiratory therapies marketed by Dey. Merck derives its sales from its chemicals and pharmaceuticals businesses. In 2004, 51.5% of its pharmaceutical sales came from generic products, which made $1,986 million. Pharmaceutical sales were $3,857 million, a 26.7% increase on 2003 figures, which is primarily attributable to the company's generics division.

The integration of Dey into Merck's generics business in 2004 now makes this unit the company's largest pharmaceutical division in terms of sales. In the recent past, a trend of consolidation has swept across the generics market, with Teva's acquisition of Ivax being a recent example - one itself prompted by Novartis' purchase of Hexal and Eon Labs. These moves strengthened Teva and Novartis' leading positions in the global generics market and enabled the two companies to diversify geographically.

The following figure gives the world generics market growth.

Table 1 gives the compounded growth in the generics market in each of the potential countries

Source: Frost and Sullivan

The US generics market
In 2003 the U.S Pharmaceutical formulations market for Off patent molecules was valued at around $ 66 Billion and the Generics account for $15.7 Billion up 8.1 percent over the previous year. This component is likely to grow at a compound annual growth rate (CAGR) of 11.8 percent to reach $34.5 billion in 2010. Total savings from generic prescriptions in the United States is estimated at $39.30 billion; this is expected to grow by 6.7 percent per year, on an average, to reach $61.97 billion in 2010.

The following figure gives the forecast for the US Generics Market from 2000-2010

The following figure gives the market breakup of the major generic companies in US.

Table 2 – Molecules patent expiry dates

Source: Frost and Sullivan

Opportunity for India
The Indian Pharma industry will continue to grow at an accelerated pace by seizing greater share of the fast growing global generics market. The industry is expected to significantly boost its share of the generics market on the back of its expertise in process engineering and its low cost advantage. The global generics market is growing significantly, and drugs worth USD 40 bn are likely to go off patent by 2005 and another USD 70 bn drugs will go off patent by the end of year 2008. Indian companies are expected to grab around 30 per cent share of the increasing generic market in the future.

US is the world's largest market for generics, and with some of the blockbuster drugs likely to go off-patent in the near future and increasing preference for generics by managed care organizations, the US generics market and, therefore, the global generic pharmaceuticals market is expected to grow at a rate higher than the global pharmaceuticals industry. The generics market offers immense opportunities to the developing countries like India, where the cost of production is low and quality manpower is readily available. Many Indian companies continue to aggressively file Abbreviated New Drug Applications (ANDAs) in the US and have good track record of receiving approval for the same.

Increasing focus on research and development
Major Indian companies such as Ranbaxy, Dr Reddy’s Laboratories, Nicholas Piramal, Cipla, Lupin and Wockhardt are increasingly focusing on research and development (R&D). The R&D activities of Indian companies are targeted both at New Drug Development (NDD) as well as Novel Drug Delivery Systems (NDDS). The R&D expenditure of leading Indian pharmaceutical companies has jumped significantly to cross Rs 1,000 crore during FY04. In value terms companies like Ranbaxy Laboratories and Dr Reddy’s Laboratories led the way in R&D spending. Ranbaxy Laboratories topped the list with an R&D expenditure of around Rs 238 crore in the year ended Dec ’03 followed by Dr Reddy’s Laboratories, with R&D expenditure of about Rs 191 crore in the year ended Mar ’04. In relative terms i.e. as a percentage of sales, Dr Reddy’s Laboratories recorded R&D expenditure at 11 per cent of its gross turnover and Ranbaxy Laboratories at 7.3 per cent of its total turnover. Also other companies including Sun Pharmaceutical Industries, Cadila Healthcare, Cipla, Wockhardt, Lupin and Nicholas Piramal had recorded R&D investments in excess of Rs 30 crore in FY04.

CRAMS another big opportunity
Indian pharma industry, particularly small and medium size drug units, is increasingly looking at contract manufacturing as one of the best survival options in the product patent regime. Domestic pharma companies who do not have the strength to establish their own brands and compete with the leading players in the industry are likely to grab the contract manufacturing opportunities. Several MNCs are also exploring the possibility of outsourcing drugs at various stages of production, including the finished dosages, to these companies.

Indian Pharma companies can leverage their strength in terms of low cost of production and availability of quality manpower to grab a greater share of global research spends leading to sustainable and significant growth for the industry in foreseeable future. Indian production costs are almost 50 per cent less compared to developed countries. In view of this cost advantage, domestic companies have additional business opportunity to become contract manufacturers for global MNCs. Also, low clinical trial costs and easy availability of patients for clinical trials, will encourage the global pharma players to conduct clinical trials in India.

Contract Manufacturing
Indian pharma companies are eying the US generic drug market with pharma manufacturers filing as many as 143 drug master files (DMF) with the US Food and Drug Administration (USFDA), in the first half of 2005. The 143 Indian DMFs make up around 35% of the total 411 DMFs filed in the first half of this year (upto end of June).

The cost of setting up an FDA approved plant in India is almost half of that in the USA. With the government now allowing 100% FDI, many foreign companies are planning to outsource the manufacture of their off patent drugs to Indian companies and concentrate more in the development of new products. For Indian companies, this is an area of large potential. Indian companies have already started capitalizing on this opportunity. Nicholas Piramal Ltd. has recently entered into an agreement to manufacture various Allergen Inc products.

Indian companies have the strengths — world-class plants and formidable chemical synthesis skills — to compete in the generic markets. Generics have gradually inched up 22% of the prescription market in 1985 to 47% of a much larger market in 2002. Even though competition will be intense in global generic markets that hold a lot of promise, Indian companies have the capability to succeed in this space.

Conclusion
India's leading pharmaceutical companies are truly global players - they have a presence in major markets world-wide. Except for Teva and Sandoz, most other generic companies are country-specific. India’s capacities -- and costs -- are spread over several markets. And, unlike generic companies elsewhere, India have a large domestic market.

The pharmaceutical industry will have its ups and downs, like any other industry. Pricing pressure hurts American and European generic firms more than Indian companies.

The only weak link for Indian companies has been market access to the US. To complete the value chain, Indian companies have been forming partnerships with US firms, acquiring US companies, or setting up marketing subsidiaries. Eight to 10 companies today are active in the US either on their own or through their partners. Most Indian acquisitions until now have been small. But it is a sign of the times that leaders like Ranbaxy and Wockhardt are now talking about acquiring billion dollar companies in the US.

At the end of the day, the generic industry is price-driven. Cost pressures are fueling consolidation in the global generic industry. It will mean fewer competitors. It will also mean more pricing discipline. India is still a small player in the $25 billion US generic market with a share of only about $1 billion. India has a long way to go before emerging as a substantial player in the generics market but yes it has the qualities to become one.

This article originates from Frost.com

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