Comment

For those who harboured positive thoughts about the global generic drug industry despite the economic downturn, here’s some bad news.

IMS Health, the reference point for global pharmaceutical business data and intelligence, has reported that annual prescription sales of generics grew by a minuscule 3.6% for the 12-month period ended September 2008.

This is disturbing, since average growth for the corresponding period a year ago was a healthy 11.4%. Needless to say, most pharmaceutical players who have generics businesses as their mainstay will have their heads spinning with this data. Multinational players like Sanofi Aventis and Daiichi Sankyo, which made large-sized acquisitions of Zentiva and Ranbaxy, may now have to recalculate their projections.

Still, this may not be an exceptionally bad year. Though, the US generic market has shrunk by a billion dollars to $33 billion, some key markets such as Japan, Italy, Spain and France have grown in double digits.

But two important issues must be noted here:
· First, the US has become less and less attractive for companies which cannot present a complete offering of products to large distributors with low-cost, back-up manufacturing.
· Second, all large markets will over time frame laws that result in low margins for generic drug makers.

Therefore, some of the bigger generic companies in the US, such as Par and URL Mutual may find it tougher to continue in a fiercely competitive environment. The bargaining power of the three large companies — Teva, Sandoz and Mylan — will grow in terms of controlling the market and the rest will be pushed to the fringes and may eventually get driven out by the market forces.

The IMS Health report indirectly draws comparisons between the pains of the generic industry and the branded products companies. It says, “Global generics products generated $78 billion in audited sales in the twelve months through September, reflecting the changing industry dynamics that also are affecting branded pharmaceutical products.”

As pointed out earlier in these columns, the world pharmaceutical industry is witnessing a seismic change and the conventional departmentalisation between brand companies and generic companies will get blurred.

The IMS Health report corroborates that view. “Many of the largest R&D companies have stated their intention to expand their generics businesses to compensate for slower growth in the branded sector. At the same time, large generics manufacturers are looking to capitalise on their development expertise and technology to produce new chemical entities and establish their own R&D businesses. This will give leading generics companies advantage in building market share over many smaller local manufacturers,” it states.

That change is bound to happen over the next few years and generic companies may even emerge as smarter players against their peers in branded drugs business. For instance, Teva, which is benchmarking performance every year, calls the shots in the generic drugs industry.

As per IMS, Teva has a firm grip over 11% share in the global generics industry, followed by Sandoz at 9% and Mylan at 8%. Unlike most branded drug companies, Teva works on an extremely tight manufacturing set up. Even after it acquired Ivax a few years ago, it could rationalise the manufacturing structure and got rid of product duplication.

In good time, Teva branched into drug discovery and put at least two big products into the market. Knowing Teva’s grit to achieve aggressive targets, it may well become an enviable company in the next five years as it builds its discovery pipeline. Remember, Teva’s ex-chief, Israel Makov, had told analysts a few years ago that his company’s pipeline may look better than the pipelines of many established brand players in the coming years.

The same kind of generics-to-brand transformation may work for Mylan. With the acquisition of Merck’s generics business and a solid back-end manufacturing support from Matrix in India, Mylan may see a better product flow. As for Sandoz, being part of Novartis itself brings in several competitive advantages. Novartis chief Dan Vasella has appropriately pointed out on various occasions that Sandoz remains a big support for the brand company.

In contrast to these generic companies who have a future to look at, brand companies are looking increasingly helpless. After all, to what extent can costs be controlled or field force be slashed to shore up bottomlines?

None of the large-sized companies has a late-stage pipeline that fills the holes left by products that are off-patent now.

Analysts are also not sure if two weak companies can merge to become one strong company as past experiences have proved otherwise. So, while the largest companies may perish due to a pipeline drought and an inflated cost structure, the feeble ones from the generics space may also die down due to lack of innovation. A decade or two from now, we may have hybrid companies and also the pure-play biotech giants who may survive at the back of targeted therapies and personalised medicines.

Pillman is an executive closely linked to the global pharma industry.