The generic industry in the US continues to grow in importance, fuelled by the twin pressures of therapeutically significant products coming off patent and health provider demands for lower prices. On the back of the industry's increasingly strong market position, driven by favorable political environment.
At the moment, industry and investors are re-evaluating the role the generics sector will play in the pharmaceutical industry of the future. For many, the generics market is coming of age. No longer just a peripheral provider of low cost basic medicines, the ethical industry, investment community and the generic manufacturers themselves are waking up to the trends which are transforming the generics sector, and the important role emerging markets are playing in it.
The US market is the worlds largest for generics. The USA is home to some of the leading global manufacturers, such as Pfizer, Merck & Co, or Bristol-Myers Squibb. And the US FDA operates one of the worlds most authoritative and respected systems of drug regulation.
The market, while lucrative, is highly litigious, as well with battle lines drawn between manufacturers of branded and generic drugs. The generic drug sector looks set for rapid growth over the next few years, as a number of certain block-buster products come off patent. The generic industry is not without its problems, however. Several companies have been under investigation for excessive price rises and collusion with branded manufacturers. In late 90s, the generic drug industry was a relatively lackluster sector besieged by difficulties in gaining approval to market drugs facing patent expiration. In 2002, however, the climate for generic drugs is much brighter. The industry is being supported by government's cost-containment measures and favorable patent legislation that have facilitated the ease of generic drug introductions. Pricing also has become more favorable to generics manufacturers, resulting in higher profits that allow increasing investment in product development, including proprietary products.
Consolidation in the generics industry has contributed to growth as well, with stronger international players emerging. The U.S. prescription generic drug market is projected to grow to a size of over $22 billion in 2006, representing an average annual growth rate of 11.4%. The major growth in the U.S. generic drug market is projected to derive from the respiratory, central nervous system, gastrointestinal and anticancer therapeutic categories. Cardiovascular drugs alone represented nearly 21% of the generic prescription drug market. Anti-infectives (14.4%) and ant arthritics/analgesics (14.0%) are the next largest generic drug categories.
Competitive Pricing :Mantra for Indian firms
For the past couple of years Indian companies are planning in a big way to make an entry in the lucrative US generic market. Companies like Ranbaxy, Dr.Reddy's, Cipla, Wockhardt, Unichem are gearing up their marketing teams and manufacturing facilities to meet the demand coming out of generic markets. So far Ranbaxy, Dr.Reddy's and Cipla though made headway in catching up with the markets, in the recent past these companies are facing many road blocks.
However, for the Indian companies to succeed in the long run, they need to concentrate basically on competitive factors which includes: Right timing, pricing, R&D and ability to form alliances and joint ventures.
Key Success factors
1. Competitive pricing of generic drugs
2. Ability to file ANDAs
3. Lobbying skills in convincing US FDA
Several Indian companies are entering into JVs and making acquisitions to increase their product portfolio. There are opportunities for generics to complement existing product lines in specific disease categories. Companies offering a wide range of generics products has advantages over those with only 2-3 products.
In the United States, however, despite the huge potential that lies ahead, companies are for the moment finding it difficult to generate profit margins as generic prices continue to drop. This is not expected to last because the smaller companies that initiate the price drops are unlikely to survive in the long term.
However, prices of generic drugs tend to fall and find a kind of rapid life cycle as new players enter the market. Based on an estimation, the prices drop to 35% with the first entrant as the third player enter the generic business with the similar formulation the prices may drop to 70-90%.
In the recent past, the 180-day exclusivity to patent challengers ruined authorized generics. The $20-billion US generic pharmaceutical market is increasingly becoming a tough nut to crack for Indian companies.
Ranbaxy Laboratories Ltd, India's largest pharmaceutical company, saw its January-March turnover in the US decline from $105 million in 2004 to $80 million in 2005. Dr Reddys Laboratories, too, witnessed a fall in its January-March revenue in North America, of which the US is its principal market.
The biggest reason for the fall in turnover is that prices of generic drugs across various therapeutic segments have dropped sharply. Thus, ciprofloxacin has seen a price erosion of almost 97 per cent in the last one year, while citalopram prices have tumbled by 95 per cent. The reason for this is not far to seek. There has been a huge jump in the number of generic producers all over the world and most of these companies are targeting the US. In fact, Dr Reddy's cited "intense competition" as the reason for the decline in its North America business. 10 years ago, a company mulling entry into US generics space calculated a penetration ratio of 80-85 per cent and price erosion of 65-70 per cent in its valuation model. Now, they peg the two ratios at 90 per cent each.
Indian companies privately complain that it is becoming increasingly difficult to access the US market as local companies are trying hard to guard their turf. To begin with, a number of US innovator companies are roping in a partner to produce the generic version of a drug going off patents. Following a recent order of a US Federal Appeals Court, such "authorized generics" can market a drug even during the 180-day exclusivity period bestowed upon the successful challenger to a patent.
Though challenges exist for the Indian companies their cost effectiveness and pricing strategies will make them very competitive with any other players from the world over.
(The author is Country Head, Firstcall India Equity Advisors Pvt.Ltd, Mumbai, India)