Branded Drug Firms Expand Into Generics

Through 2013, pharmaceutical companies are expected to launch innovative products for treating osteoporosis, respiratory ailments, thrombosis, multiple sclerosis, and cancer. Yet as valuable as these pharmaceuticals will be, they are not expected to generate the same amount of sales as will be lost by drugs set to lose patent protection over the same period, according to Michael Kleinrock, director of thought leadership at the market research firm IMS Health.

That’s a big problem for branded pharmaceutical firms. The imbalance between new product introductions and patent losses is “the primary factor limiting global pharmaceutical market growth to the mid-single digits through 2013,” Kleinrock says. Recognizing that their losses are generics firms’ gains, some pharmaceutical companies are diversifying into their competitors’ realm.

The growth rates for generics are enticing. In the 12 months ending in June of this year, global generics sales rose 8.2% to $80 billion compared with growth of only 3.9% for the overall drug market during the same period. In 2009, drugs with U.S. sales of $22 billion will lose patent protection, including Takeda Pharmaceuticals’ Prevacid for treating heartburn and acid reflux disease, GlaxoSmithKline’s Valtrex for genital herpes, Ortho-McNeil-Janssen Pharmaceuticals’ Topamax for migraines, and Boehringer Ingelheim’s Flomax for male urinary problems.

In addition, products that today generate an unprecedented $137 billion in sales worldwide will face generic competition from 2009 through 2013, according to IMS Health. They include blockbusters such as Pfizer’s Lipitor for high cholesterol and heart disease, Bristol-Myers Squibb’s blood thinner Plavix, and GSK’s Seretide for asthma.

Big pharma firms that pursue generics will be joining Novartis, which has long been a generics supplier through its Sandoz arm. “We have seen several major pharmaceutical companies build on their generics businesses” this year, particularly in the world’s emerging markets, says Jeff George, chief executive officer of Sandoz.

For example, Sanofi-Aventis agreed to acquire the Czech firm Zentiva, which markets generic pharmaceuticals in the Czech Republic, Slovakia, Romania, and Turkey and is expanding into other Central and Eastern European countries. It also agreed to buy Medley, the number one generics company in Brazil, and Kendrick, a leading Mexican generics company.

In another move, GSK extended its strategic alliance with South Africa-based Aspen this month by acquiring a 19% stake in the firm. Pfizer is also taking a keen interest in generics for emerging markets. This year, it entered into major licensing agreements with two Indian-based pharmaceutical companies, Claris Lifesciences and Aurobindo Pharma.

Sandoz, too, has been “taking steps to further strengthen our differentiated portfolio,” George says. In September, the company completed the $1.3 billion acquisition of the generic anticancer injectables business of Austria’s EBEWE Pharma.

Sandoz has also been trying to expand its business in biosimilars—generic versions of brand-name biologic drugs that are similar, but not identical, to the original biologics. Market potential for these products is limited by the fact that the Food & Drug Administration has no framework to approve them. But generic drug producers are hoping that one will be developed as part of U.S. health care reform efforts.

Even without such legislation, Sandoz was able to launch Zarzio, a recombinant granulocyte-colony-stimulating factor, in Europe this year. Sandoz also launched somatropin as the first biosimilar in both Japan and Canada. Owing in part to these efforts, Sandoz’ biosimilars business grew 68% in the first nine months of 2009, according to George.

Merck & Co. is also eager to tap into growth in biosimilars. Late last year, it created Merck BioVentures to develop biosimilar products that will capitalize on expiring patents for currently marketed biologic therapies.

However, as companies expand into generics, competition is heating up. “We have seen price erosion of 9 to 10% annually over the last few years,” George says, “which means that we must re-create over half of our profits every year to continue to show profit growth.”

Despite competitive pressures, “we remain confident in the outlook for 2010,” George says. “Growth will continue to be driven by demand in both emerging markets and in key mature markets, as well as by expansion into differentiated product segments such as biosimilars.”

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