Outlook bright for generics

pharmafile | December 11, 2003 | Feature | Sales and Marketing |  generics 

Traditionally the US has been seen as the most attractive location for generics players with a combination of market fragmentation, lower brand prices and data exclusivity rules stifling growth in many European markets. However, the favourable position of the US has led to a high level of generic penetration (51% by volume in 2002 according to the Generic Pharmaceutical Association) and increased competition in the commodity generic market, leaving many US players exploring alternative options to maintain margins and provide growth.

Although Datamonitor continues to predict strong growth for the US generics market (with a forecast CAGR of 13.5% between 2002 and 2008, taking the market value to $32 billion), this will primarily be driven by the large volume of products losing patent protection over the period. Focusing on blockbusters alone, Datamonitor estimates that over $84 billion worth of drugs with sales in excess of $1 billion in 2002 will be at risk from generic competition by 2008.

Regulatory reform a key driving force in Europe

Growth in Europe is expected to be stronger than in the US, with a forecasted CAGR of 15.3% taking the market from an estimated $7 billion in 2002, to over $16 billion in 2008. This is primarily based on an expectation of increased generic penetration throughout Europe, but predominantly in the southern European markets.

A key driver of this growth will be regulatory reform, which aims to address some of the main barriers to generic entry in Europe, including its fragmented market, the disharmony in Summary of Product Characteristics (SmPC) and data exclusivity periods across markets and the lack of US-style 'Bolar' provision. This latter point prevents companies from conducting the necessary development work for a generic ahead of patent expiry.

The Mutual Recognition Process (MRP) was meant to address the fragmented market when it was introduced in 1995 with the aim of smoothing the path for pan-EU approval and launch of all pharmaceutical products. The original idea being that other Member States   (MS) would recognize the authorisation of the first Member State (RMS). However, Datamonitor primary research suggests that for generic manufacturers (which are forced to take this route if they wish to gain approval in more than one market), the process causes major problems, since a generic product must have the same SmPC as the originator product in an individual national market, yet originator SmPCs may differ across MS'.

The Review 2001 of EU pharmaceutical legislation begins to address this, and the other points noted above. In July 2001 the European Commission adopted a proposal for comprehensive reform of pharmaceutical legislation, and on 29 September 2003, the European Council agreed common positions on these legislative proposals. They have now been sent to parliament for a second reading, with a view to its adoption before the next EU enlargement on 1 May 2004. From the point of view of generics, the review made the following proposals.

EU administrative data protection to be harmonised at 10 years – currently products receive 10 years exclusivity if approved via centralised procedure and six to 10 years (depending on the individual member state) for national authorisations.

A Bolar-like provision whereby generic companies may prepare for submission of an application two years prior to the end of the originator exclusivity period, but could not be marketed until 10 years of data protection has expired.

Introduction of an annual plan for harmonisation of SmPCs of existing reference products to simplify generic products' approval via the MRP.

Datamonitor believes that this last proposal is an extremely important development for the generic industry, but expects the number of products to be pushed through this process each year to be low due to resource limitations. The generics industry has had a mixed response to these proposals: while welcoming the ability to begin product development prior to the end of the exclusivity period, companies are disappointed that data exclusivity has been harmonised at the upper rather than lower limit of the current range of exclusivities.

Reference pricing may hinder uptake

Several European countries have implemented measures to increase generics usage, but in established generics markets such as the UK, Germany and the Netherlands, cost containment measures for patent-protected products aimed at increasing generic penetration rates have been coupled with pricing pressures on the generics themselves.

For example, in 2000 the UK government capped the maximum price that can be charged by a supplier to a pharmacist for a wide range of generics. International generics player Alpharma reported once again in 2002, that its sales in the UK had been negatively affected by these price cuts. The pricing of generics in the UK is however currently under review, and it is thought that the Department of Health (DoH) may return to a free pricing scheme for generics.

Meanwhile, in Germany a 2002 law (aut idem) allowed pharmacists to substitute off-patent drugs for a cheaper generic, provided that the prescribing physician does not explicitly inform them against doing so.

Under the aut idem rule, products are grouped according to active substance, dose strength and pack size. The pharmacist must dispense a product from the cheapest third of this group. So it is likely that prices will fall as generics are priced to ensure that they fall into the substitutable price range. In addition, patients must pay the difference between the reference price and the actual price of the drug, resulting in products being priced close to the reference level.

This is expected to be compounded by the increase of the patient co-payment as part of the law on modernization of the German health insurance system, which was passed in the upper house (Bundesrat) on 17 October 2003, and will come into effect from 1 January 2004.

There is a danger that using a lowest price reference price system could spark downwards price spirals as branded manufacturers reduce the price of the brand in order to qualify for reimbursement status and generic manufacturers cut prices to below reference levels in order to maintain market share.

Market opportunities in southern Europe

Despite these issues, Datamonitor analysis suggests that the net benefit of regulatory reform and cost containment measures will be positive for the European generics industry, particularly in those markets where generic penetration is currently very low.

The differences in average drug prices across European markets result from discrepancies between the pricing policies of each country. It is clear why the northern European markets of Germany and the UK have higher levels of generic penetration than other parts of Europe, as the high prices both increase the incentive for payers to use generics while also increasing the potential margins for generic players.

Another key reason for the low use of generics in some European markets is the late introduction of patent laws. In several EU countries, including Spain, Italy and Portugal this has hindered generic penetration due to the presence of unregulated copy products breeding distrust for non-branded products among patients and physicians. Actions are now being taken in each of these markets to encourage use of generics.

According to Infarmed, the Portuguese pharmaceutical regulatory body, generics held 6.2% of the market by value as of July 2003, compared with 2.6% in 2002 and 0.5% in 2001. This growth is attributed to a number of efforts aimed at increasing generic uptake, including a law in 2002 making it compulsory for physicians to use the INN on prescriptions when a generic is available.

The country has also introduced a reference price scheme, with the reference price based on the cost of the highest priced generic in the reference group. In October 2003, the Portuguese Health Ministry passed a new law to encourage pharmaceutical companies to convert their older copy products into authorised generics. The Ministry has said that the EU pharmaceutical legislative reform, and discussions by the G10 group on boosting the generics market to release resources to pay for innovation, were driving factors behind the introduction of this law.

Even in the low cost French market, cost containment measures are beginning to be introduced, many of which aim to increase generic usage. The French government is aiming for generic penetration of 14% by volume in 2004 and 25% by 2007. An agreement was formed in June 2002 between the physicians and CNAMTS (the French National Health Insurance Agency) that resulted in doctor's consultation fees being raised to Euro 18.50-20.00, in exchange for writing at least 25% of prescriptions by their INN, at least 50% of which should be for drugs contained in the official list of substitutable products.

As a result of the opportunities for growth identified in these markets, some of the major generic players in the UK and German markets are establishing positions in southern Europe. Teva acquired the generics operation of Bayer France in 2002, and has a start-up operation in Italy. IVAX, whose European representation was mainly limited to the UK acquired Merck & Co's French generics business in 2002 and German player Stada recently made acquisitions in Italy and Spain.

These emerging European markets are not only attracting European players, in November 2003, Indian firm Ranbaxy is said to have acquired French generics company RPG Aventis.

Indian pharma companies challenge European players

Datamonitor's primary research suggests that Indian generics players are seen as a major threat by European generics companies. With fully integrated operations and low development and labour costs, these players can maintain margins at significantly lower price levels than their EU counterparts, putting them at an advantage in increasingly cost-constrained markets.

The Indian players have an advantage because they begin to identify opportunities for a molecule as soon as it is launched globally. At this stage, they are able to launch a version in India and other emerging markets. The prior marketing of products in the domestic market has been an advantage when it comes to launching generics in Europe, where there is currently no Bolar provision. Since European companies are currently prevented from carrying out generic product development in Europe ahead of exclusivity expiry, the Indian players have a good chance of being the first company to market.

One company that has made its presence felt in European markets is Ranbaxy. The company established its main European bases in the UK and the Netherlands in the late 1990s, and generated total revenues of around $65 million from the European markets in 2002, a rise of 6.6% from 2001. In April 2000, Ranbaxy agreed to acquire Bayer's German generics business, giving the company a direct presence in the largest of the European generics markets, and in November 2003 it is thought to have acquired French generics company RPG Aventis.

While the Indian pharmaceutical players offer one source of cheap generics, companies from central and eastern Europe (CEE) are another rapidly growing source of low-cost products. Most of these companies, including Pliva, LEK, Gedeon Richter, Egis and Krka, are targeting the Western generics markets as a source of higher margins ,over the next five years, in an attempt to move away from the instability of the CEE markets. Pliva, for example, has acquired the Czech Lachema business, through which it markets a number of products in Germany.

The potential of biogenerics

With competition from non-EU players increasing, one option is for European companies to look higher up the R&D value chain, entering 'barrier-to-entry' markets to escape the competition seen in the commodity market.

Datamonitor believes that this strategy will dictate the success of companies in the US over the medium-term, with specialty players such as Andrx and IVAX predicted to be the strongest performing US players over the next five years. In the longer term, Datamonitor also believes the most successful European players will be those companies that combine this strategy with pan-European expansion,  uch as Teva, Stada and Sandoz.

With an increasing number of biological products reaching the market, and at very high cost, Datamonitor believes the demand for biogenerics will grow rapidly, and Europe is expected to be the first Western market to establish an approval pathway for such products. Biogenerics represent the ultimate barrier-to-entry generic, and are expected to provide significant returns to those players able to enter the market.

Novartis' generics subsidiary Sandoz is a key participant in the development of a European biogenerics market, and recently received a positive opinion from the Committee for Proprietary Medicinal Products regarding marketing authorisation of its human growth hormone Omnitrope. The company expects to launch it as the first biogeneric product on the European market in the first quarter of 2004.

With Europe expected to be ahead of the US in approving generic biologics, and with marketing of such products already possible in eastern Europe, it is easy to see Europe's attraction to the otherwise US-based company SICOR, which Teva recently signed an agreement to acquire. Although SICOR's injectable generic product line is only marketed in the US, the company markets biogeneric versions of human growth hormone and Schering-Plough's INTRON in eastern Europe following the acquisition of Lithuanian company Biotechna. In preparation for approval of biogenerics in western European markets, the company recently formed a partnership with ratiopharm's BioGeneriX subsidiary. SICOR's advanced biogenerics pipeline is likely to have been a major factor in Teva's decision to acquire the company in October 2003, and SICOR's biogenerics capabilities combined with Teva's European distribution capabilities should make the company a major player in the field.

Although dominating the generics market in almost every other area, from the point of view of both its geographic range, and the breadth of its generics portfolio, Teva's lack of biogeneric capabilities meant it looked set to lose out to European players such as Sandoz and Stada, both of which have established biogeneric R&D pipelines (Stada is developing versions of Johnson & Johnson's Eprex and Amgen's Neupogen) and are well placed to negotiate with EU authorities in establishing an approval pathway.

Although Sandoz is still expected to become the first company to market a biogeneric in Europe, Teva's acquisition of SICOR will ensure Sandoz faces intense competition in this market. The involvement of the top two generics players of 2002 illustrates the anticipated potential of the biogenerics sector.

Success strategies for European generics

Although the European market is set to generate significant growth, this will be accompanied by an increased competitiveness as has been observed in the US. Cost containment policies which will drive the uptake of generics in the southern European markets are likely to increase price pressure in the developed European generics markets of Germany and the UK, while reduced complexity in the market place (through increased harmonisation efforts of the regulatory process and patent and exclusivity terms) will encourage the entrance of non-EU players.

If EU players are to maintain market share and minimise the challenge from outside Europe, they must capitalise on the rapidly growing southern markets, or follow the lead of the US players and move up the R&D value chain into higher margin barrier-to-entry-markets, such as specialty products  and biogenerics. If this happens they can turn business opportunities into growth.