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And it’s the year the Food and Drug Administration released draft guidance for biosimilars regulations.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.
Walmart works to narrow the pharmacy gap
Walmart’s pharmacy footprint is poised for its most meaningful expansion in decades, thanks to shifting capital expenditure priorities that have begun to favor more aggressive expansion of smaller stores.
The move is significant because ever since the advent of the Walmart Supercenter, net increases in pharmacy count have been minimal, as Walmart swapped discount stores with pharmacies for supercenters with pharmacies. That kept a lid on the type of gains in pharmacy count chains like Walgreens and CVS experienced, due to the combination of organic growth and acquisitions. Now it appears Walmart could be looking to narrow the pharmacy gap by opening its smaller Neighborhood Market stores at a faster pace, while continuing to experiment with an even smaller Walmart Express concept as the supercenter conversion cycle decelerates over time.
“Supercenters remain our primary driver of growth and returns,” Walmart U.S. president and CEO Bill Simon said recently during Walmart’s annual investor conference. “Because we see increased momentum in comp and total sales and traffic performance, we will continue to accelerate the rollout of Neighborhood Markets.”
Walmart expects to add between 15 million and 17 million sq. ft. of U.S. selling space next year, compared to a projected 14 million to 15 million by the end of the current fiscal year. Virtually all of the increase in planned square footage growth is attributable to an acceleration of smaller format stores like the approximately 45,000-sq.-ft. Neighborhood Market, and to a lesser extent, the approximately 15,000-sq.-ft. Walmart Express. Walmart plans to open 125 supercenters next year, roughly the same as last year, with most coming from conversions or expansion. However, the company is planning to add between 95 and 115 smaller format stores, primarily Neighborhood Markets, compared to about 80 that will be opened during the current year. While that is a relatively modest acceleration from the current year total, Walmart went on to say it expects to have 500 of the Neighborhood Market food-and-drug combination stores operational by 2015, and these stores are expected to generate annual sales of approximately $10 billion.
From a productivity standpoint, that equates to average annual sales of $20 million per unit and sales per square foot in the vicinity of $450, assuming an average store size of 45,000 sq. ft.
Productivity of the smaller stores has long been the impediment to expansion, but company executives more recently have indicated that the smaller stores now generate returns on par with larger stores. They are also a lot easier to open, since suitable locations are more abundant. The same is true of the small Express concept, but Walmart has indicated the returns are not yet high enough to warrant a more aggressive rollout.
Report outlines challenges in pharma industry through 2020
NEW YORK — Spurred by health reform and other factors, a "golden era" could be approaching for drug companies as they reinvent themselves, according to a new report by PwC.
The report, "Pharma 2020: From Vision to Decision," said that the industry was on the verge of an era of renewed productivity and prosperity, but its success was not guaranteed.
"A healthy, vibrant and responsive pharma industry is vital to society for the development of new medicines," PwC global pharmaceutical and life sciences advisory leader and report author Steve Arlington said. "More needs to be done to support and encourage long-term investment in the discovery and development of medicines to treat serious disease. We need to all work together to improve the well-being of populations."
The report said that health reform is accelerating the need for big changes in the drug industry and its response to rising demand for medicines, major scientific and technological advances, economic pressures and sociodemographic shifts — in both developed and growing markets around the world. It found that while the industry could experience "unprecedented" global growth in the future, its prevailing business model and management culture were ill-suited to capitalize on the opportunities over the next decade. Drug companies that make it through the next few years can prosper if they can prune their pipelines, address rising consumer expectations and poor scientific productivity and cultural barriers, the report said.
Among the challenges the industry faces is rising healthcare costs. Demand for medicines could result in global drug sales increasing by 40% to $1.6 trillion by 2020; but with economic difficulties and rising costs, the industry has to be in a position to be a part of the solution, the report said, and it’s faced with a choice: Offer more value without charging more or justify premium pricing by proving it can remove costs from another part of the healthcare system.
The report also suggested tailoring pipelines to meet demands in the market and also increase collaboration, noting that the culture in the pharmaceutical industry has changed little over the past few decades.