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The pendulum swing of generic drug prices

Published on 18/08/17 at 10:05am

The prices of generic drugs have been driven lower as companies compete to undercut one another. This has led to dramatic changes in the fiercely competitive market, as BCC Research's Laurie L. Sullivan and Paul Evers discuss.

The pharmaceutical industry is facing challenges and changes more radical than any in the past 50 years. The worldwide economic recession has had a profound impact on a sector that is normally resilient to market ups and downs. In addition to cutting costs and restructuring, the industry has had to confront the fact that its trading environment has fundamentally changed because its customers are more cost conscious than ever. At this critical time, the pharmaceutical world has also stumbled upon the so-called patent cliff: R&D pipelines have not been able to produce a sufficient supply of replacements for blockbuster drugs that have lost patent protection.

Hence the door was thrown wide open for generic drug producers to do what they do best—provide low-cost alternatives to branded pharmaceuticals. In addition, over the past two decades, advances in biotechnology have led to a generation of biologic medicines that are often more efficacious than traditional small-molecule drugs at treating their target diseases. The oldest of these biologics are now losing their patent protection too, offering yet another opportunity for the manufacture of generic copies (in this case, called biosimilars). Biosimilars open up a new market for generics companies that have (or are prepared to buy) the technological expertise required to create them.

Research by BCC Research predicts that the global generic drugs market will reach $533 billion by 2021, driven by originator drugs facing patent expiry, pressure to control healthcare costs, the rise of biosimilar drug technologies, and high-growth market activity in emerging regions. BCC Research’s study, Global Markets for Generic Drugs, reports that the generics sector has consistently outperformed the sales of original branded drugs for the past five years. It seems set to continue growing at an annual rate significantly higher than the pharmaceutical sector overall, as cost-containment efforts intensify and many of the blockbusters mature and go off patent.

Loss of Patent Protection is Generics’ Gain

The value of small-molecule products facing patent expiry in developed markets from 2014 to 2018 is estimated at $121 billion (IMS Institute for Healthcare Informatics). The price of a generic copy may be roughly 60% of the original brand immediately after patent loss, whereas after a year, when several generic copies have been launched, the average price may be less than 20% of the original. Generics, which already dominate several leading classes, are rapidly becoming the first-line option in many key therapy areas as fewer new pharmaceutical products reach the market.

BCC Research examined strategies used by companies specializing in generics to meet the challenges of this highly competitive market, while also summarizing strategies used by originator companies to forestall generic competition. Originator companies are deploying formidable tactics to protect their franchise, including marketing their own branded generics.

Initially, generics suppliers relied on low cost as their main market advantage. It was a potent strategy, as government health departments in most European countries operating national health schemes began introducing measures designed to curb pharmaceutical expenditure. In the United States, developments in managed care had a similar effect. Everywhere, these cost-cutting exercises favored generics.

However, the low-cost argument that served as the main rationale for generic products began to work against the commercial promise of this industry sector. Competing to introduce low-cost copies, generic drug makers were driven to undercut each other to the point where, a year after patent expiry of the original brand, the mean price of copycat products may have fallen to less than 20% of the original. In addition, generic price competition was fueled by government reimbursement measures, which favored low-cost drugs and thus tended to trigger further price cutting among generics contenders.

This development had two far-reaching effects. First, it began to weed out the weaker generics companies in favor of those with the means and the resolve to exist in an environment where profit margins were severely cut, often to less than 10%. One survival strategy adopted by these companies was to broaden their appeal beyond mere cost cutting, to include, for example, “super generic” products with added value, often on the basis of special delivery formulations. The fierce price competition that put some companies in difficult positions because of slashed profit margins also led to a wave of mergers and acquisitions.

The second effect was that it led some of the mainstream multinational pharmaceutical companies, which had been developing plans to enter the global generic marketplace, to reconsider this strategy. Generics no longer seemed to be such an attractive option, and some companies reverted to their core activity of developing and marketing new pharmaceutical products.

More recently, there has been a trend toward price increases in the generic sector. As such, while continuing to offer a price advantage over original brands, generic drugs have become more attractive to the companies offering them.

Market Size and Evolution

The international landscape is changing for generics as it is for all pharmaceuticals. The global generics market was valued at approximately $320 billion in 2015. Among the countries analyzed by BCC Research, the generics market is worth more than $249 billion. Of the latter figure, the five major European markets (France, Germany, Italy, Spain, and the United Kingdom) account for 13%, the United States for 33%, and Japan for 6%.

Generic penetration varies from country to country. In Europe, for example, generics account for almost 22% of the German pharmaceutical market by value and for 25% in France. The Western European average share is nearly 21% compared with 19% of the US pharmaceutical market and 14% of the Japanese market. However, generic sales should register consistent growth in the five major European markets, aided by loss of patent protection on an anticipated $20 billion of marketed products.

Global Market for Generic Drugs by Region, 2014–2021

Summary Table

Global market for Generic Drugs, by region, through 2021 ($ billions) 

Region

2014

2015

2016

2021

CAGR%
 2016-2021

North America

61

88

112

180

10.0

Major Europe

29

32

35

47

6.1

Japan

12

14

17

26

8.9

BRIC markets

103

115

132

219

10.7

Rest of world

56

71

56

61

2.7

Total

261

320

352

533

8.7

 

Source: BCC Research

Summary figure

Global market for Generic Drugs, by region, 2014–2021 ($ billions)  

Source: BCC Research

The BRIC nations (Brazil, Russia, India, and China) are among the rising centers of generic activity. “The generic drug markets in the BRIC region are taking off, as evidenced by the region’s leading 10.7% CAGR from 2016 to 2021,” notes Kevin Fitzgerald, BCC Research Editorial Director. “In China, generic sales are easily outpacing the overall pharma market growth. The increasing sophistication among domestic producers seems to be galvanizing the growth of generics.”

By 2021, BCC Research expects that the total value of the global generics sector will represent more than 35% of all pharmaceuticals. Overall, the global generics market seems likely to increase at a five-year CAGR of 8.7%. This compares with an anticipated annual growth rate of 5.5% for the pharmaceutical sector overall.

Generic Penetration by Indication

There has been substantial generic penetration in six global therapeutic markets, with good potential for future generic introductions. These include infectious diseases, cardiovascular diseases, CNS disorders, rheumatoid arthritis and related diseases, respiratory indications, and oncology. In recent years, oncology has become the third-largest therapeutic market after cardiovascular and CNS drugs. However, there has been much less innovation in the CNS sector. As a result, it now includes many off-patent drugs and there is a substantial generic presence. The respiratory drug market is dominated by two indications: asthma and chronic obstructive pulmonary disease.

With so many antiinfective agents widely available as generics, this market is highly driven by price. Companies seeking to scale the upper slopes of the antiinfective market will be watching patent expirations on some of the more mature leading brands. Because antiviral blockbusters are losing patent protection, the antiinfective generic market is expected to show healthy growth in the immediate future.

The global generics market for cardiovascular drugs is expected to grow rapidly due to the growing populations of patients with dyslipidemia, thrombosis, and hypertension in developed countries, as well as patent expiries of major blockbusters such as Lipitor (atorvastatin), Plavix (clopidogrel), and Diovan (valsartan). These patent expiries have triggered generic competition in the cardiovascular therapeutics market. Other cardiovascular products for which patents have already expired include ramipril (Altace), isradipine (DynaCirc), and fenofibrate (TriCor). The global market for antihypertensive agents is estimated to exceed $8 billion, and the market for cholesterol-lowering drugs is more than $12 billion.

The global market for drugs used in musculoskeletal disease is approaching $50 billion. With an overall five-year CAGR of approximately 5%, the total market should amount to more than $64 billion by 2018. Rheumatoid arthritis and osteoarthritis currently represent more than half of this total market. The rheumatoid arthritis market is worth an estimated $12 billion, and the osteoarthritis segment is valued at $33 billion.

The decade that began in 2011 will be seen in retrospect as the 10 years when generic pharmaceuticals came into their rightful inheritance. This is not because they introduced a magical new ingredient to the pharmaceutical melting pot; rather, they are relatively unaffected by many of the problems and threats faced by traditional pharmaceuticals. These include the enormous time and cost required to bring a new product to market; increasing price controls in a cost-conscious age; declining R&D productivity; and the growing burden of compliance with stringent regulatory requirements. Indeed, this is a time of growth and change for the generic pharmaceutical sector.

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