Generics have come full circle for Big Pharma

Pfizer’s proposed Hospira acquisition is the latest in a long line of deals that have moved generic drugs into the mainstream of Big Pharma corporate strategy. Once seen as threats eating away at their expensively-built revenue streams, generics now have a distinct role in many Big Pharmas’ business models.

In the early 1990s, generics were the “enemy”, to be fought tooth-and-nail in order to maintain one’s own product exclusivity (and corresponding high prices) for as long as possible. At the time, much of the generic drug volume was supplied by small local companies or arms length subsidiaries of multi-nationals, most of which you could not honestly say had any kind of longer-term strategy nor scaleable business model. With one prominent exception (Novartis), none of the Big Pharmas at the time saw generics as a major business opportunity. It was left to smaller entrepreneurial companies like Alpharma, Andrx, Barr, Hexal, Mylan, Ratiopharm, Schein, Teva, Watson and others to begin building the professionally managed multi-national groups that now dominate today’s vibrant global generics industry.

Big Pharma now takes generics seriously

Yet over the past decade in particular, most of the Big Pharmas have adopted small molecule generics in one shape or form into their overall business model. And many of them openly talk about the “innovation headroom” that a healthy low-priced generics market enables i.e. the money saved on off-patent drugs can be used to fund high-priced new innovations. They have recognized that they cannot fight the realities of aging populations and healthcare economics.

Where I look at what the Big Pharmas are doing in generics, I observe three distinct strategies for how they have chosen to participate in the generics industry, some of them adopting more than one of these:

  1. Authorized Generics
  2. Emerging Market Branded Generics
  3. Fully-fledged Generics Divisions

Of the twelve pharmaceutical companies with the highest global revenues from prescription pharmaceuticals in 2013, only Abbvie and Hoffmann-La Roche are not proactively adopting at least one of the above strategies. In fact, one of them (Teva) is actually more well-known as a generics company (despite a strong portfolio of patented products), having been one of the generics pioneers. In the remainder of this article, I will discuss the strategies being pursued by the other nine Big Pharmas.

Authorized Generics

The innovative pharma industry has recognized that simply withdrawing from the market once a small molecule product has gone off-patent leaves money on the table. However, although the product can still be promoted as a brand, its volume in this guise will usually be very low given all the mechanisms that payers have adopted worldwide to encourage dispensing of generic medicines. So the response of most innovator companies has been to embrace the concept of authorized generics. In this business model, the original product’s formulation continues to be manufactured with the original regulatory documentation, for distribution and sale as a generic by either a separate generics company licensed by the originator, or sometimes by the originator’s own dedicated subsidiary. The physical product either continues to be made at the Big Pharma’s original facility or is transferred to a contract manufacturer or to the licensed marketer’s facilities. This enables the originator to continue exploiting supply chain scale economies and to capture value that would otherwise have gone to other generic companies.

Unlike a regular generic, an authorized generic does not require an ANDA application; it is marketed under the original NDA. One important consequence of this subtlety is that the launch of an authorized generic in the United States does not fall into the Paragraph IV regulations granting 180-days’ exclusivity to the first generic company on the market. This means that the authorized generic can be launched to compete with the Paragraph IV entrant, reducing the commercial value of such an entry and thus acting as a partial deterrent to generic companies seeking to enter the market early. Nevertheless, there is a net benefit to the consumer – a 2009 report by the US Federal Trade Commission concluded that “drug prices are lower when authorized generics are marketed against a single generic drug than when they are not”, and furthermore an independent study in 2007 concluded that “while authorized generic entry reduces the gains of generic manufacturers that are eligible for the 180-day exclusivity period for these high-revenue drugs, there are still substantial incentives for filing paragraph IV certifications”.

These days, an authorized generic appears for almost every major small molecule drug that comes off patent. Increasingly the Big Pharmas have their own specific subsidiaries dedicated to marketing their authorized generics e.g. Johnson & Johnson’s Patriot Pharmaceuticals.

Emerging Market Branded Generics

The high growth emerging markets are where the Big Pharmas need to be now (even if the current average pharmaceutical price level is low) in anticipation of those markets becoming more fully developed (and higher priced) in the future. However, the revenue obtainable in these markets for on-patent high-priced innovative drugs (that are the Big Pharmas’ usual mainstay) is too small to build a substantial business that can become embedded into the local healthcare ecosystem. So to establish themselves in these markets, many Big Pharmas have started marketing branded generics as part of their overall local product portfolio i.e. products that are off-patent but nevertheless marketed as branded products, albeit at a substantially reduced price compared to the historical on-patent price in the developed markets.

For example, Eli Lilly established Lil Therapeutics in India in 2013 as an extension of its oncology division, launching four branded generic products for breast and colo-rectal cancer in parallel to its two on-patent innovative products for lung cancer. While these generic products of course compete with similar generics marketed by Indian companies, this strategy nevertheless enables Lilly to build stronger relationships with local oncologists, oncology clinics and healthcare payers.

As another example, Amgen spent US$700 million in 2012 to acquire the Turkish injectable generics company Mustafa Nevzat. Sometimes, these ventures are conducted via alliances with local generics companies – for example, the joint venture between Merck & Co (“MSD” outside North America) with Supera in Brazil, and GSK’s investment in and business arrangements with Aspen of South Africa that even includes a 25% stake in Aspen’s new Japanese subsidiary.

Although the emerging market branded generics strategy makes strategic sense, it is not always an easy one to implement. Some governments and payers would rather encourage local generics companies and/or unbranded generics markets (where essentially lowest price rather than physician choice determines whose product is dispensed at the pharmacy). In early 2014, Actavis, one of the world’s largest generics companies, announced it would end its presence in China because of the “difficult business climate”. In another case, AstraZeneca signed a deal in 2010 with India’s Torrent Pharmaceuticals to supply the latter’s generics to many of the former’s emerging market subsidiaries. But by early 2013, AstraZeneca’s new CEO had announced that with the exception of China, it was withdrawing from branded generics sales in other emerging markets.

Fully-fledged Generics Divisions

Today, the top ten generics marketers in the world include (in addition to Teva) Novartis, Pfizer and Sanofi, all three of which now operate substantial dedicated generics divisions.

Novartis was the pioneer in building its own fully-fledged generics subsidiary with a separate divisional headquarters and its own business culture. The 1996 Ciba Geigy and Sandoz merger integration process (to create Novartis) resulted in the creation of a separate generics division from various small generics businesses (Azurpharma, Geneva, Multipharma, Rolab, etc.) owned by the two companies. Over the next seven years, it then acquired (amongst others) Apotheccon in the United States, BASF’s European generics business (through which it entered France, Italy and the United Kingdom), Grandis in Germany and Lek in Slovenia (through which it entered new markets in Central and Eastern Europe), as well as entering Argentina, Mexico and Spain organically. In 2003, the combined generics division was renamed with the Sandoz brand to give it a separate identity. Further acquisitions followed in 2004 of Sabex (Canada) and Durascan (Nordic region). In 2005, Sandoz acquired one of its major competitors, the German-based Hexal and its sister company Eon Labs in the United States (a leading supplier of ‘difficult-to-make’ generics), enabling it to stand toe-to-toe with Teva as the joint largest generics companies in the world, a position which it continues to maintain.

Pfizer had inherited the US generics business Greenstone when it acquired Pharmacia in 2003. Initially, Greenstone became a vehicle for Pfizer’s authorized generics but within a few years, Pfizer had begun to see generics as a sound global investment case closely aligned with its emerging markets strategy. In 2009, it announced a separate division (“Global Established Pharmaceuticals”) and signed deals with two Indian companies (Aurobindo Pharma, Claris Lifesciences) for the supply of more than 150 generic products to be marketed by Pfizer in more than 70 countries through Greenstone in the US as well as other Pfizer subsidiaries in emerging markets. In addition to generics, this division also includes Pfizer products nearing the end of their patent life as well as certain emerging market subsidiaries where the bulk of the revenues are off-patent, thus creating a logical grouping of closely related revenue streams. In 2014, Pfizer deepened its interest in generic injectables by acquiring the specialist firm Innopharma, a path which subsequently led to the most recently announced deal to buy Hospira, the world’s largest generic injectables company.

Sandoz began a concerted effort to build up its own generic division in 2008, with an emphasis on emerging markets and consumer health, acquiring the Czech-based Zentiva that year, the Brazilian-based Medley and the Mexican company Laboratorios Kendrick in 2009, the Polish business Nepentes and the Chinese company BMP Sunstone in 2010, and the Colombian company Genfar in 2012 amongst others. It also focused one of its US subsidiaries (Winthrop) on supplying its own authorized generics.

Biosimilars are Next

There is press speculation that Pfizer’s Hospira acquisition is the precursor to the spin-out of its established pharmaceuticals division as a separate entity, much like what it did for its animal health business Zoetis in 2013. This is also a route that Abbott took when spinning off Abbvie as a separate innovative pharma business, leaving in the original company a mixture of generics, diagnostics, nutrition and medical devices i.e. businesses with similar risk-return profiles and marketing & sales characteristics.

However, I do not feel that a corporate break-up is the primary driver for the Hospira deal, although a spin-out might still ensue in due course. The more likely primary driver is a strategy to exploit the market for biosimilars, a domain in which Hospira is well positioned. Biosimilars have inherently higher barriers to entry compared to small molecule generics. With lower development costs (compared to a new biologic), a biosimilar can deliver a very good return on investment despite being sold at a significant discount to the originator’s price. Biosimilars are being fought over by not just the major global generics companies and many of the Big Pharmas, but also by various local companies encouraged by governments in emerging markets seeking to keep biologics affordable for their populations. Even biologics originators like Amgen are entering the biosimilars domain. Sandoz (part of Novartis) is already a leader in this space with several approved biosimilars. Pfizer had already begun building its own biosimilars pipeline (within its established pharmaceuticals division), but by buying Hospira, Pfizer would inherit several approved biosimilars and add Hospira’s pipeline and capabilities.

Unlike small molecule generics, many of the Big Pharmas will not leave it to other companies to create the biosimilars sector. They have learnt that they cannot buck global trends in healthcare economics and need to be part of building this rapidly-evolving domain.