Generic drugs compete in game of differentiation

The year 2012 is coming to an end, and it’s been a big year for 
generic drugs.

It’s the year that the most lucrative drug of all time, Pfizer’s cholesterol-lowering medication Lipitor (atorvastatin calcium), went from being worth more than $7 billion in annual sales to becoming commoditized. The drug had lost patent protection in November 2011, when Ranbaxy Labs became the sole company legally authorized to market the generic version of the drug. Ranbaxy itself lost market exclusivity in May 2012. It’s also the biggest year of the so-called patent cliff, the period during which numerous top-selling branded drugs are expected to lose patent protection and face 
generic competition.

It’s the year that Watson bought Swiss generic drug maker Actavis for $5.6 billion, becoming the world’s third-largest generic drug maker after Israel-based Teva Pharmaceutical Industries and U.S.-based Mylan. As a condition for the merger, Watson and Actavis had to divest rights to nearly two dozen drugs, selling most of them to Par Pharmaceutical Cos. and Sandoz, the generics arm of Swiss drug 
maker Novartis.

And it’s the year the Food and Drug Administration released draft guidance for biosimilars regulations. The Patient Protection and Affordable Care Act mandated the creation of a regulatory approval pathway for biosimilars — a long-awaited prize for generic drug makers and a few brand drug makers as well — but it will likely be some time before the regulations are actually put into place, and even longer before the market becomes fully mature. 

All of these events speak to some of the most important trends in the world of generics, trends that are often interrelated.

“The profitability of the generic industry is driven by first-to-file and exclusivity periods,” IMS Health VP industry relations Doug Long told Drug Store News. “Those periods are the most profitable before [drugs] become multi-source — when you have more players, the price gets lower.” This means that the generic drug company that is the first to win approval from the FDA for a drug has the most to gain because, under FDA regulations, it is entitled to 180 days in which to compete exclusively against the branded version, notwithstanding the possibility of the branded drug’s manufacturer making a contract with another company to market the branded drug at a discount, known as an authorized generic; an example would be Watson Pharmaceuticals’ marketing of authorized generic atorvastatin calcium while Ranbaxy was marketing the generic version and Pfizer marketed the branded version. After those 180 days, the generic exclusivity period ends and any company that passes muster can market a generic version. It’s been pretty smooth sailing, as top-selling drugs ranging from Lipitor to 
Bristol-Myers Squibb’s and Sanofi’s blood-thinning drug Plavix (clopidogrel bisulfate) and Takeda’s Type 2 diabetes drug Actos (pioglitazone) have lost patent protection, providing generic drug makers with ample opportunities to rake in huge profits. But in the next few years, that supply of expiring patents will start to dry up, causing greater commoditization in the marketplace.

This, Long said, is likely to lead to a lot of merger and acquisition activity among generic drug makers. The Watson-Actavis merger is only the largest one in recent memory. Others have included the $1.9 billion purchase of Par Pharmaceutical Cos. by investment firm TPG, which also owns IMS. Another notable one was Sandoz’s acquisition of Melville, N.Y.-based Fougera for $1.5 billion, a purchase that Long attributed to Sandoz’ desire for Fougera’s expertise in dermatological drugs like creams and ointments. That same motivation is also behind India-based Sun Pharmaceutical Industries’ efforts to acquire Israel-based Taro Pharmaceutical Industries, also a major manufacturer of generic topical drugs. Those kinds of drugs are harder to develop than oral solids and liquids, which results in fewer players in the marketplace. “Generic companies have been moving up the value chain, and moving up the value chain means moving out of or reducing your exposure to the oral solids and oral liquids,” Long said. “So they’re moving up the value chain and trying to get into places that are less crowded and that have higher barriers of entry.” In other words, it is a game of differentiation. Injectables are another kind of drug that can be hard to make, and companies like Hospira and Sagent Pharmaceuticals have worked to gain leadership in that market, as their most recent drug launches show. But mergers and acquisitions are likely to continue for the foreseeable future, Long said.

Another tactic in this game of differentiation is biosimilars. Notwithstanding the lack of a real regulatory structure for biosimilars, it’s hard to tell whether they constitute another tactic or another game altogether. Long noted that while it costs about $1 million to $2 million to bring a generic pharmaceutical drug to market, the cost for a biosimilar is going to be about $100 million to $200 million, due to the added requirements of things like clinical trials, which aren’t needed for generic drugs. This will likely restrict biosimilars to a small handful of companies. That will include established players like Teva Pharmaceutical Industries, Sandoz and Hospira, which make biosimilars for the European market; companies like Watson, which has a deal with Amgen; and Mylan. Some Indian companies are looking to get in on the action as well, and Long mentioned Dr. Reddy’s and Ranbaxy as possible players, as well as South Korea’s Samsung, which has been developing a biosimilar version of Genentech’s and Biogen Idec’s cancer drug 
Rituxan (rituximab). 

And it would be neglectful not to mention the Generic Drug User Fee Amendments to the reauthorization of the Prescription Drug User Fee Act. GDUFA, as the amendments are called, create a system of user fees expected to raise about $299 million per year from the generics industry, which will allow the Food and Drug Administration to clear out a backlog of more than 2,000 generic drug regulatory applications currently 
awaiting approval.

Click here for the full 2012 Generics Report.

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