H E A LT H C A R E

GROWTH STRATEGIES IN GENERICS

Innovative and aggressive strategies and their impact on
branded pharmaceuticals

By Peter Wittner
Peter Wittner

Peter Wittner is an independent consultant in the field of generic pharmaceuticals and

the author of a previous report on this topic. He draws on nearly 30 years experience in
the pharmaceutical industry in a variety of commercial positions right up to Managing
Director. He has spent the last 15 years specifically in the generic sector in a range of
roles, including European Sales & Marketing Manager for Norton and MD of Ranbaxy
UK at the time of its establishment in the UK.

Copyright © 2004 Business Insights Ltd

This Management Report is published by Business Insights Ltd. All rights reserved.
Reproduction or redistribution of this Management Report in any form for any purpose is
expressly prohibited without the prior consent of Business Insights Ltd.
The views expressed in this Management Report are those of the publisher, not of Business
Insights. Business Insights Ltd accepts no liability for the accuracy or completeness of the
information, advice or comment contained in this Management Report nor for any actions
taken in reliance thereon.
While information, advice or comment is believed to be correct at the time of publication, no
responsibility can be accepted by Business Insights Ltd for its completeness or accuracy.
Printed and bound in Great Britain by MBA Group Limited, MBA House, Garman Road,
London N17 0HW. www.mba-group.com

ii
Table of Contents
Growth Strategies in Generics

Executive summary 10
Introduction 10
Market overview 10
Successful US strategies 11
Successful European strategies 12
US legislation and its impact 13
European legislation and its impact 14
US barriers to generics growth 15
European barriers to generics growth 16
Future prospects and conclusions 17

Chapter 1 Market overview 20

Summary 20
Introduction 21
US vs Europe – differences and contradictions 23
Global opportunities – forthcoming patent expiries 27
Underdeveloped markets 29
Expand abroad or stay at home? 32
Multinational R&D companies’ involvement in generics 34

Chapter 2 Successful US strategies 38

Summary 38
Overview of US generic market 39
Leading US generic companies 41
The road to success 42

iii
 Distribution of commodity generics 42
Manufacture and distribution of commodity generics 43
Acquisition 44
Patent challenges – Paragraph IV filings and first to file 46
Specialty generics - reducing the competition levels 48
Products with technologically challenging formulations 48
Controlled release generics 49
Products where significant regulatory support is required 49
Products with limited availability of the API 50
Proprietary drugs — branded and generic products together 50
Biogenerics 51

Chapter 3 Successful European strategies 54

Summary 54
Overview of European generic markets 55
Pricing 56
Intellectual property 57
Generic prescribing levels 57
Purchasing decision based on price 58
Pricing based on supply and demand 58
Leading European companies 59
The road to success 61
Distribution of commodity generics 61
Manufacture and distribution of commodity generics 62
Patent challenges 63
Be first to launch 64
Acquisition 65
Specialty generics - reducing the competition levels 66
Proprietary drugs - branded products alongside generics 67
Biogenerics 67

Chapter 4 US legislation and its impact 70

Summary 70
Overview of US generic legislation 71
Hatch-Waxman amendments 72
Benefits to the R&D side 72
Benefits to the generic side 73
Disadvantages of the legislation 75
McCain-Schumer legislation 77
Gregg-Schumer Act 78
The impact of new legislation 80

iv
 Single 30 month stay 80
Orange Book listings 81
180-day exclusivity 81
Authorized generics 82
Bioequivalence 82

Chapter 5 European legislation and its

impact 86
Summary 86
Overview of European generic legislation 87
Directive 2001/83 89
Directive 2004/27/EC 90
Benefits to the R&D side 90
Benefits to the generic side 93
The impact of new legislation 94
Definition of a generic 94
Bolar clause 95
“Is Marketed” 95
European Reference Product 97
Harmonization of SmPC’s 98
Disadvantages of the legislation – winners and losers 98
Other IP issues 99

Chapter 6 US barriers to generics growth 102

Summary 102
Introduction 103
Threats to the industry 103
Market saturation 103
Increasing wholesaler consolidation 104
Overseas competitors – India 105
Overseas competitors – Europe 107
Gaps in patent expiries 109
Reference prices 110
Parallel imports 111
Individual company strategies 114
Movement away from normal release oral commodity generics 115
Adjustment of product portfolio to include higher margin products 116
Investment in original R&D 117
Acquisitions 119
Expansion into overseas markets 120
Alliances with overseas manufacturers in India or Latin America 122

v
 Biogenerics 122
The role of trade associations 124

Chapter 7 European barriers to generics

growth 128
Summary 128
Overview 129
Threats to the industry 130
Market saturation 130
Increasing wholesaler consolidation 131
Overseas competitors – India 131
Overseas competitors – Europe 133
Reference prices 134
Parallel imports 136
Individual company strategies 137
Portfolio adjustment 138
Expand abroad 140
Attack patents – risks and opportunities 143
Form an alliance with multinational 145
Conduct own R&D 146
Biogenerics 147
Add parallel imports to the range 149
Enter OTC market 149
The role of trade associations 150
Lobby for legislative change 150
Lobby against legislative change 150

Chapter 8 Future prospects and conclusions 153

Summary 153
Overview 154
Trends in manufacturing 156
Movement of manufacturing facilities 156
Threats to generics companies 157
Trends in marketing 159
Movement upstream 159
Expansion overseas 161
Target areas for expansion 162
The future of generics in the US 164
US profit margins 164
Future legislative changes 165

vi
 The future of generics in Europe 166
Pan-European generics 166
Legislation 167
IP Problems 167
The generics competitive landscape 168
Generic superheroes 168
Consolidation of generic companies 168
Branded pharmaceutical company consolidation 169
Growth prospects for generics 170
Outlook by therapeutic area 172

List of Figures
Figure 1.1: Examples of differences between US and Europe (as at start of 2004) 25
Figure 1.2: Generic penetration in Europe 30
Figure 2.3: Significant factors necessary for the development of a healthy generic market 39
Figure 2.4: Branded sales and sales growth of the leading generics companies, 2000–01 50
Figure 3.5: Factors necessary for the development of a healthy generic market 55
Figure 3.6: European sales of leading generics players, 2001 59
Figure 6.7: The value of major US patent expiries to 2008 110
Figure 6.8: Generics R&D strategies – trade off between risk and competition level 119
Figure 6.9: Drivers and resistors to geographic expansion 121
Figure 7.10: European prices compared against reference price systems 135
Figure 7.11: Pharmaceutical prices and generic penetration in Europe 142
Figure 8.12: Generic penetration rates in Europe, 2003 154
Figure 8.13: Opportunities and saturation in generics markets 155
Figure 8.14: Threats to generics companies 158
Figure 8.15: The evolution of successful generics companies 160
Figure 8.16: Plans for overseas expansion 161
Figure 8.17: Target areas for expansion 162
Figure 8.18: Use of regional offices, subsidiaries, acquisition and local agents 163
Figure 8.19: The impact of recent changes in pharmaceutical law 165
Figure 8.20: Annual growth predictions for generic drugs, 2004, responses by type of company170
Figure 8.21: Annual growth predictions for generic drugs, 2004, responses by location of
respondents 171
Figure 8.22: Most attractive therapy areas for generic drugs growth 172

vii
List of Tables
Table 1.1: Size of key generics markets, 2001-02 24
Table 1.2: Best selling pharmaceuticals (2003) and their patent expiry dates 28
Table 2.3: Major generic companies in the US market 2002 41
Table 2.4: Generics players and their subsidiaries (selected list) 45
Table 3.5: Comparison of different national pharmaceutical price levels, 2000 56
Table 3.6: Generics players and their subsidiaries (selected list) 65
Table 4.7: Comparison of major legislative provisions in the US 79
Table 5.8: EU members and their date of accession 87
Table 5.9: Generic substitution by country in Europe (as at February 2004) 88
Table 5.10: EU data exclusivity times as at early 2003 91
Table 6.11: Key US patent expiries, 2001-2006 123
Table 7.12: European price comparisons, 1996-2003 129
Table 7.13: European reference pricing systems in each country, by type 134
Table 7.14: Biologics patent expiries, 2001-2006 148

viii
Executive Summary

9
Executive summary

Introduction

The aim of this report is to analyze core generics company strategies, both now and in
the future. It will also look at how legislative changes both in the US and Europe have
changed the rules and how generic companies have adapted to these and how they may
need to adapt again in the future. A further aim is to look at whether there are other
unexplored strategies that are not yet being used by generics companies and to suggest
how they could benefit certain generics players.

Market overview
The US pharmaceutical market already has a high level of generic penetration and
offers limited opportunities for further market growth. A small number of US
companies will seek to increase their presence outside the US market, but the
majority will continue to stay at home and depend on their domestic market.

Europe is split between Northern markets (e.g. Germany, UK, Denmark) with high
levels of generics and Southern markets (e.g. Greece, Italy, Portugal) with small
generic markets.

Growth opportunities will be limited in the mature generic markets of the North and
so Southern markets will offer greater generic growth opportunities.

Major patent expiries in the US will generate an extra US$84bn between 2002 and
2008.

The value of these expiries in Europe will be much smaller at US$3.6bn but will still
represent a major boost to the industry.

10
 Price controls in Germany and France may make it impossible for domestic generic
companies to compete. This could present an opportunity for low cost Indian
manufacturers to increase their market presence. Increased pressure on margins in
the US will also present opportunities for low cost Indian manufacturers to expand
their market presence.

Successful US strategies
The US generics market exhibits all the characteristics necessary for development of
a successful generics industry. These are high priced brands; strong IP legislation;
high levels of generic prescribing; high levels of competition for supply; pharmacists
purchasing on price; pricing levels determined by supply and demand.

The US market has also benefited from a uniform set of pharmaceutical laws
applying in all states by contrast with the variations prevalent in Europe. Recent
legislation (e.g. Gregg-Schumer) has further improved the environment created by
the original Hatch-Waxman Act.

Five of the top ten generics companies in the US market are exclusively focused on
the US market. However, the market leader is the Israeli company Teva.

Leading US companies are moving upstream. Many companies started out by just
distributing generics, then moved on to conduct their own manufacture to gain
greater control over profits. Increasingly, key players such as Barr, Mylan and
Watson are investing more in R&D.

The move upstream has partly been driven by high levels of competition, which have
historically meant intense price competition and rapidly eroding profit margins. One
of the most popular channels is diversification into modified release formulations and
alternative dosage forms to derive higher profit margins.

11
 Aggressive patent challenges and Paragraph IV filings have brought major short-
term benefits to more adventurous companies, as a result of the 180-day exclusivity
legislation. However, high legal costs make this a risky strategy for companies.

As yet, no biogenerics have been launched in the US, but several companies such as
Teva, Sandoz and Stada are looking at the possibility and this will certainly present
growth opportunities for the companies that can afford to enter this area

Successful European strategies

In contrast to the unified US market, the European generics markets differ
significantly between countries, in terms of legislation, key players, market
development and pricing. This demands that companies tailor their strategies by
market and has acted as a barrier to entry. For example, patent challenges must be
repeated in each territory due to the absence of a pan-European patent.

Pricing in most countries has been determined by governments, leading to wide price
differences. Where reference pricing has been introduced, governments have driven
down the cost of generic drugs.

Generic penetration is higher in Northern Europe than in Southern Europe, where

generics markets are less developed. However, low prices means that Southern
European markets are not automatically more attractive.

Key players in Europe are Ratiopharm, Hexal, Alpharma, Stada and Teva.

European companies are also concerned about Indian competition, following market
entry in several countries by key players such as Dr Reddy’s and Ranbaxy.

Registration through the mutual recognition system is still difficult but offers a way
to register in several countries simultaneously. Recent legislation (2004/27/EC) has
improved the environment for generics in the EU. However, some countries may
wait until October 2005 to implement the changes into local law.

12
 The new laws provide a mechanism for registering biogenerics. As a result, they are
forecast to appear in Europe before the US.

US legislation and its impact

The original legislation that affected US generics was the Hatch-Waxman Act of
1984. The subsequent McCain-Schumer Act of 2002 tried to amend what the
sponsors saw as abuses of the legislation by branded companies. The Gregg-
Schumer Act in 2003 extended the provisions of McCain-Schumer, particularly in
respect of patent listings in the Orange Book.

The new Act took into account the findings of an FTC investigation into abuses of
Hatch-Waxman provisions. Hatch-Waxman established one of the key benefits to
generics companies in the US - they no longer needed to wait for expiry of the
product patent to begin development of the copy, often referred to as the “Bolar”
clause.

Another key benefit was that the company that was first to file a new generic
application would enjoy 180 days’ exclusivity after they marketed their product.

Under the Gregg-Schumer Act, pharmaceutical companies who sue generics

companies can now only obtain one single stay on processing of the application by
the FDA. In addition, the new act set up a new mechanism to prevent the inclusion
of frivolous patents or those filed at the last moment as a blocking mechanism.

Gregg-Schumer also changed the previous system of 180-day exclusivity that

allowed individual generic companies to block competition if, for example, it had
either made a deal with the originator not to launch or else had agreed to take
product from the originator. Gregg-Schumer includes “forfeiture” provisions which
can result in the generics company losing its exclusivity if found to have made such
an arrangement.

13
 The legislation also enabled the FDA to determine what parameters are required for
proving bioequivalence.

European legislation and its impact

Directive 2004/27/EC was passed by the European Parliament in early 2004.
Individual countries may take until October 2005 to pass the requirements into local
law. The legislation reformed the earlier Directive 2001/83/EC. The new laws
include a specific definition of a generic. The directive also introduces a uniform
level of data protection at 10 years. Regulators can access the data in respect of a
generic application after 8 years but the generic copy cannot be launched until the
expiry of the 10-year period

A “Bolar” clause was included permitting development of generics within Europe

prior to patent expiry. This is a major benefit to generics companies. An additional
benefit is that if originator companies withdraw a brand before any generic versions
are marketed, the generics can still use it as a reference product – which closes a
tactical loophole exploited by branded pharmaceutical companies.

Directive 2004/27/EC contained a significant benefit to the R&D side: the

lengthening of data exclusivity periods from 6 years in many countries to 10 years
everywhere in the term of data exclusivity. Products are awarded market exclusivity
of 10 years if approved via the centralized procedure, the method by which
innovative products are approved for all EU countries simultaneously.

Under new legislation, the same product can be used as reference product for
generics everywhere in the EU even if not registered in particular countries. This is a
small step towards unification of European generic legislation.

One problem for generics companies is what is known as the “Sunset Clause”. The
clause allows for the cancellation of any marketing authorization for a product that
is not placed on the market for 3 years from the date of authorization. However,
legal challenges by patent owners could, in theory, prevent generics companies from

14
 applying for registrations more than 3-4 years in advance of a patent expiry even if
data exclusivity restrictions allowed them to do so.

New legislation also includes guidelines for registration of biogeneric products.

US barriers to generics growth

The US market is approaching saturation in terms of generic penetration. As a
result, the possibilities for organic growth are limited, forcing companies to move
out of commodity generics and move upstream.

The major boosts to growth for generics companies will come from major patent
expiries. However, after 2006 the value of major patent expiries will fall off sharply.

As a result, individual companies will feel increased competition from low cost
manufacturers including Indian producers. Low cost European and South American
manufacturers are also potential competitors. Low cost manufacturers will increase
pressures on margins in commodity generics.

The possible copying of reference price schemes from European models could also
push prices downwards. An extension of parallel importing from individual use to
commercial imports is another potential downward influence on prices.

Nevertheless the Congressional Budget Office (CBO) estimated that the removal of
restriction on imports would only reduce total drug spending by $40 billion over 10
years, or by about 1%.

Companies that are looking to move upstream are moving into modified release,
transdermal and injectable formulations. Larger companies that can afford the R&D
costs will also add biogenerics and proprietary brands to their ranges.

Increased price pressure in commodity generics and the entrance of low cost
manufacturers will bring about a shakeout of smaller, uncompetitive domestic

15
 players and will lead to mergers/consolidations as companies seek to leverage
economies of scale.

Expansion into overseas markets will also form a part of some company strategies,
although US companies have traditionally been highly reticent to move outside the
US.

European barriers to generics growth

Europe’s fragmented markets present a major barrier to generic growth. New
legislation (Directive 2004/27/EC) has tried to remove some of the other barriers.

Widely varying prices offer an opportunity for low cost manufacturers to find new
markets in higher-priced countries. This presents a considerable competitive threat
to established European players. As in the US, this will force market leaders to move
upstream, although geographic expansion offers another key route to growth.

Mature markets such as Germany, Denmark and the UK offer little prospect of
organic growth but have higher prices. However, newer generic markets such as
France, Greece, Italy or Spain are underdeveloped and most likely to provide
volume growth although at lower prices.

One of the key factors driving down prices is reference pricing schemes are acting to
force prices. Where domestic European companies leave the market, Indian
companies with a lower cost base will exploit the gaps. Similarly, East European
manufacturers will similarly be able to exploit their lower cost base to gain
advantage in the new EU markets that are available to them.

A pan-European market may result from commercial pressures rather than

regulatory measures as companies register particular products in all EU markets.
Furthermore, expansion by key players into new European markets and possible
consolidation could create pan-European generics players, which will lobby for
central European legislation to facilitate generics companies.

16
 Biogenerics will offer an opportunity to companies that develop R&D specialisms.
Biogenerics will probably appear in Europe earlier than in the US since the EU has
set up a specific mechanism to approve them.

Future prospects and conclusions

Generics growth will continue to be driven by governments’ need for low cost
medicines, although the short term future will be difficult for the industry in
countries with reference price systems as the price controls bite into their margins.
The generics market is forecast to grow strongly in both Europe and the US
although it is reaching its ceiling in mature markets such as the US, the UK,
Germany, the Netherlands and Denmark. In those markets the growth will for the
most part come from boosts caused by major patent expiries.

For the newly established generic markets growth will be a consequence of increased
prescribing and usage of generics: France and Italy will be among the most dynamic
due to the overall sizes of their pharmaceutical markets.

Manufacture will gravitate to India and Eastern or Southern Europe. For US

companies, manufacture will also gravitate to S America. Competition from Indian
manufacturers is considered by domestic US and European companies as a
significant threat to their business. Many companies are also highly concerned about
the effects of government cost controls.

Accordingly, successful generic companies are evolving from their current business
model into more complex organizations that resemble big pharma companies. For
example, Teva is becoming a generics/R&D hybrid as it develops core franchises
such as oncology.

The generics industry in both Europe and the US will see some consolidation and a
shakeout of smaller domestic commodity generics companies in mature markets. The
impact of foreign entrants into the main US and European markets will exacerbate
price pressure and high levels of competition and force generics companies to

17
contain costs further, diversify geographically, or by moving upstream into higher
value products.

The majority of survey respondents forecast growth or 5-10 % for the generics
market. Almost one third of respondents forecast annual growth in excess of 10%.

18
 CHAPTER 1

Market overview

19
Chapter 1 Market overview

Summary

The US pharmaceutical market already has a high level of generic penetration and
offers limited opportunities for further market growth. A small number of US
companies will seek to increase their presence outside the US market, but the
majority will continue to stay at home and depend on their domestic market.

Europe is split between Northern markets (e.g. Germany, UK, Denmark) with
high levels of generics and Southern markets (e.g. Greece, Italy, Portugal) with
small generic markets.

Growth opportunities will be limited in the mature generic markets of the North
and so Southern markets will offer greater generic growth opportunities.

Major patent expiries in the US will generate an extra US$84bn between 2002 and
2008.

The value of these expiries in Europe will be much smaller at US$3.6bn but will
still represent a major boost to the industry.

Price controls in Germany and France may make it impossible for domestic generic
companies to compete. This could present an opportunity for low cost Indian
manufacturers to increase their market presence. Increased pressure on margins in
the US will also present opportunities for low cost Indian manufacturers to expand
their market presence.

20
Introduction

Although generics are cheap, their cheapness can be interpreted in two ways:

Low in price or offering good value. These are clearly the more positive aspects of
the word and how the generics companies view the industry.

Poor quality or inferior. These negative connotations are not, clearly, how generics
companies see the industry. However, the trust placed in branded pharmaceuticals
compared with generic competitors belies a residual trace of prejudice against
generics.

In countries such as the US, which has a generic market share of over 50%, the image
problem is minimal. It is also minimal in the UK, where generic prescribing exceeds
75%. By contrast, in markets that are new to generics such as France, Greece and Spain,
for example, the generics industry has struggled to gain ground as generic penetration is
still relatively low. To remedy the low market share of generics (and the associated high
costs of branded drugs), health authorities and the generics industry have run PR
campaigns aiming to improve public perception of generic drugs. The recently formed
French generic association GEMME announced at a press conference in November
2003 that it was launching a public information campaign in French pharmacies using
posters and brochures under the title “Ces génériques, c’est génial” which translates
roughly as “Generics are cool!”.

In more mature markets such as Germany or the Netherlands, the industry’s other
problems are governments look to cut healthcare costs in the face of an ageing
population with a greater need for medication. While cost-cutting initiatives should, at a
first glance, drive generic companies’ profit growth. However, reference price schemes
introduced in those countries affect not just high priced brands but also generics. These
schemes have had the effect of drastically reducing generic drug prices, and continue to
do so. In Germany, the BGV generic trade association has already asked whether more

21
than a handful of manufacturers can survive these measures and if the domestic generics
industry itself is doomed to collapse.

Nonetheless, this report estimates the value of brands due to lose patent protection
between 2002 and 2008 amounts an anticipated $84bn worth of blockbuster products in
the US and patent expiries will generate $3.6bn in additional generics sales in Europe,
presenting a major growth opportunity for generics companies. However, even without
reference price schemes, price erosion in some cases has led to discounts of as much as
90% off the brand price within weeks of patent expiry and generic launch. There are
numerous examples of price erosion in the UK especially, and to a lesser extent in
Germany, the Netherlands and the US. In all of the mature generics markets, the price of
generic drugs is falling. As a result, profitability among European generic companies is
low, especially when compared with that of the branded pharmaceutical companies. If
reference prices continue to erode slim profit margins, there is a chance that in countries
such as Germany and France, governments may destroy some of their domestic generics
companies, and therefore risk their supply of low cost generics because generics
companies cannot afford to market them. Patent challenges can offer a way for a generic
company to gain an advantage over its competitors. However, this strategy is not
without its risks: there is no guarantee that the court will rule in favor of the generic
plaintiff and the legal costs can be extremely high. Pharmaceutical companies can use
patents to attack actual or potential infringers without waiting for the copier to actually
launch his product. Many pharmaceutical patent holders surround the original product
patent with numerous other patents, protecting such aspects as synthetic routes for the
API, new crystalline isomers and alternative formulations. Accordingly, generics
companies cannot simply wait for the expiry of a patent and then launch a generic copy
without considerable checking of Intellectual Property, thereby increasing both risk and
cost to the copier.

Generics companies therefore face considerable obstacles in both developing and

marketing their products. This report outlines the pressures and opportunities generics

22
companies face and the strategies they can adopt, and in some cases have adopted, to
react drive revenues and profits.

US vs Europe – differences and contradictions

This report examines only the two main generics markets – Europe and North America,
although it examines the impact of external forces from outside those areas, such as
India. As a first step, it is relevant to examine the major differences that exist in the
generic environments prevailing on the two sides of the Atlantic as these necessarily
have a major influence on the way the companies think and operate. Inevitably,
therefore, the market factors within North America and Europe will impact how
companies view the way ahead and the strategies that they might adopt.

The US is one large single generics market. Europe, by contrast, is a highly fragmented,
diverse collection of generic markets, all at different stages of their generic evolution.
Those who are members of the EU and thus affected by changes in EU pharmaceutical
legislation numbered 15 in 2003 and were set to grow by another 10 states In May 2004
as several former Communist countries of Eastern Europe joined the EU.

The US market for generics alone was estimated at US$15bn in 2002 and had grown to
US$16bn in 2003. The largest country market in Europe, Germany, was worth
US$22.7bn in 2003 for its entire branded and generic pharmaceutical market according
to IMS, of which generics totaled US$4.0bn. Estimates for the other significant
European markets (UK $1.7bn, France $0.5bn, Spain $0.2bn and Italy $0.1bn) are
added to Germany, the total for main markets in Western Europe still only accounts for
US$6.5bn.

23
 Table 1.1: Size of key generics markets, 2001-02

Region Generics market Generics market Growth 2001-02 (%)

size 2001 ($ bn) size 2002 ($ bn)

US 13.0 15.0 15.4

Germany 3.6 4.0 11.1
Japan 3.5 3.7 5.7
UK 1.7 2.0 17.6
France 0.5 0.7 40.0
Spain 0.16 0.20 25.0
Italy 0.1 0.15 50.0
RoW 3.7 4.0 8.1

Total 26.3 29.8 13.3

Note: Canada is omitted from this table. According to the CGPA, the generics market in Canada
amounted to Can$2.2bn in 2003, equivalent to around US$1.6bn.

Source: Business Insights, BGMA, GPhA, Stada, EGA, UK Dept. of Health Business Insights Ltd

Size aside, Europe and the US also have fundamentally different legislation relating to
generic drugs. For example, a US registration is automatically valid in all states with the
same presentation, packaging text and patient leaflet. In Europe, however, presentation,
packaging text and patient leaflet can vary by country with the additional complication
of the texts being in anything from one to four languages, as is the case in Belgium.
Despite efforts to facilitate the process of pan-European registration, generic companies
encounter regulatory authorities in each country insisting on slight amendments to the
documentation that was acceptable elsewhere. European markets are also highly diverse.
Some generics companies in these newer European generic markets such as Poland and
Hungary sell products that it would be difficult to describe as true generics since many
of them are really branded copies left over from the period when those countries did not
accept product patents. It is fair to say that these products are not true generics in the
sense that the companies that make them promote them by brand to doctors rather than
selling them on price alone as generics. Nevertheless, the price levels at which they sell
make them equivalent to generics and it is probable that some of these will end up in
Western European generic markets as unbranded generics.

24
 Figure 1.1: Examples of differences between US and Europe (as at start of
2004)

Aspect USA Europe

Generic market size US$15 bn US$ 6.5 bn

Development pre- Allowed by Hatch- Forbidden – constitutes

patent expiry Waxman patent infringement

Registration Valid all states Valid in individual

state only

First to file generic Obtains 180 day No advantage relative to

application exclusivity other applicants

Litigation by Blocks regulatory No effect on regulatory

originator against process process
generic applicant

Source: Author’s research and analysis Business Insights Ltd

The framework within which product development takes place prior to registration also
differs significantly. For many years, Europe has had no equivalent of the “Roche-Bolar”
clause that permits US companies to carry out development of generic copies during the
period of the original product patent without infringing the patent. A European “Roche-
Bolar” equivalent was due following approval by the European parliament at the end of
2003 of a revised version of the Directive (2001/83/EC) governing pharmaceuticals, but
there could be a delay of 1-2 years until these amendments are incorporated into
national legislation. However, the Bolar clause only has limited effect upon the rate at
which generic copies are launched in Europe post patent expiry. Companies that wish to
bring generic drugs to market on the first day after patent expiry on Day One have
already developed relationships with manufacturers in countries not affected by existing
product patent legislation either within the EU (for instance Greece, Italy, Spain) or
outside it (India and Iceland).

25
Another key difference between the US and Europe is that patent and regulatory issues
are handled separately in Europe, but are not in the US. For European regulatory
authorities, the criteria on which they must assess any request for a marketing
authorization whether for an NCE or a generic are safety, efficacy and quality. The
issues of patents and trademarks are not deemed relevant and are considered to be
outside the remit of the regulatory authorities. The only IP (Intellectual Property) issue
that enters into the calculation is that of 6 or 10 years’ Data Exclusivity and whether the
generic applicant can refer to the originator’s data.

By contrast, in the US, a range of patent issues intervenes when an applicant submits an
Abbreviated New Drug Application (ANDA). These issues can include the possibility
for the applicant to make a Paragraph IV declaration to the FDA under CFR
314.94(a)(12)(i)(a)(4) challenging certain patents filed by the originator. In response,
the originator can react by litigating against the copier claiming that it does infringe as
this, even if ultimately unsuccessful, can keep the generic off the market for 30 months.
The possibility of litigation by the originator is set to change in 2004 under the Gregg-
Schumer Bill passed in 2003, which sought to prevent spurious patent actions by the
originator from delaying generic products reaching the market.

26
Global opportunities – forthcoming patent expiries

Opportunities presented by the expiry of patent protection for major brands are not the
same in the US and Europe. Although the same molecules will lose their patents in the
respective geographies, patent expiry dates differ, as do the size of the market that they
protect. Pfizer’s Lipitor (Atorvastatin), ranked by IMS as the leading product
worldwide in 2003 with sales of US$10.3bn, is a key example.

In America, the product patent US 4 681 893, filed on 30th May 1986 and published on
21 July 1987, covers the invention. Normally, with a patent’s life stretching to 20 years,
this would expire on 29th May 2006 but as it is a pharmaceutical patent the USPTO
(United States Patent and Trademark Office) allowed an extension of the patent by
1,213 days until 24th September 2009. However, Warner Lambert, the inventors prior
to the company being bought by Pfizer, filed data with the FDA for pediatric use thereby
gaining an extra 6 months’ pediatric exclusivity, which protects it from generic
competition until 24th March 2010. For Europe, the equivalent patent is EP 0 247 633
B1, filed on 29th May 1987 and published on 30th January 1991. This should expire on
28th May 2007 after 20 years’ life, but in the UK for example an SPC (Supplementary
Protection Certificate) has extended its period of protection until 6th November 2011.
As a consequence, competition from generic Atorvastatin will begin in the US in March
2010, but will be delayed by one and a half years in the UK.

Table 1.2 shows the leading 10 products worldwide. Their vulnerability is clear: nine
will lose patent protection in the US by the end of 2010, while six will lose protection in
the EU. GlaxoSmithKline’s combination of Salmeterol and Fluticasone sold as Seretide
actually lost its protection in the UK in March 2004 when the courts ruled that the
combination was “obvious” and thus not deserving of patent protection. The UK
decision does not affect the US patent status, but could conceivably be viewed as a
precedent if the generic companies that initiated the UK action try to repeat it in the US.

27
 Table 1.2: Best selling pharmaceuticals (2003) and their patent expiry dates

Brand Company Generic 2003 sales EU Patent US Patent

US$bn / SPC expiry expiry

Lipitor Pfizer Atorvastatin 10.3 2011 2010

Zocor MSD Simvastatin 6.1 2003 2006
Zyprexa Lilly Olanzapine 4.8 2011 2011
Norvasc / Istin Pfizer Amlodipine 4.5 2007 2007
Erypo Various Epoietin 4.0 2008 2008
Prevacid / Zoton TAP/Wyeth Lansoprazole 4.0 2005 2005
Nexium Astra Zeneca Esomeprazole 3.8 2009 2005
Plavix Sanofi Clopidogrel 3.7 2013 2005?
Seretide /Adavair GSK Salmeterol /Fluticasone 3.7 Annulled in UK 2010
Zoloft / Lustral Pfizer Sertraline 3.4 2005 2006

Total turnover for top ten 48.3

Source: IMS (turnover), Author’s research and analysis (patent expiry) Business Insights Ltd

Based on these dates, the potential loss of sales to these brands by 2010 is close to
US$40m, based on US and EU expiry dates for most of the products and the earlier
expiry for Lipitor in the EU (Zyprexa and Plavix expire later) but this figure will
probably rise as most of these brands will increase their turnover by 2010. The size,
competitive landscape, different legislative framework and patent expiry dates there
create entirely different markets in the US and Europe.

Nevertheless, in the mature generic markets of the US, Germany, the Netherlands and
the UK, it is mainly these blockbuster expiries that will give drive generics market
growth over the next few years. The effect of patent expiries is short-lived, however:
after a brief period of high prices, price erosion dilutes the growth opportunities. When
a market has very high generic penetration such as 51% in the US or over 80% for some
products in Germany, or a generic prescribing rate of 76% as in the UK, there is little
organic growth opportunity apart from the growth opportunities offered by imminent
patent.

For branded pharmaceutical companies, the generic companies’ limited approach to

planning their future product launches might seem unusual. For example, the list of

28
major products that generic drug companies are targeting shows a variety of therapeutic
areas, including, but not limited to, cardiovascular, gastrointestinal and CNS. That
generics companies cannot have expertise in each of these areas highlights the difference
in approach between the generics and the branded pharmaceutical sectors. For most
generics companies the issue of therapeutic areas is completely irrelevant. The sales
potential of the generic copy of the brand is the critical factor. The generics company
has almost no interest in therapeutic areas because:

It has virtually no contact with the doctor who is prescribing the product;

It has no way of influencing him/her to prescribe their particular generic and thus no
need to specialize in any particular area;

Where a prescription is written by its INN or chemical name, the real customer for
the generics companies is the pharmacist or wholesaler.

Underdeveloped markets

While unexpired patents represent growth opportunities in mature domestic markets for
generic companies overseas expansion also offers a range of opportunities. The generics
market leader, Teva, has grown through aggressive overseas expansion, rather than
reliance on its domestic market, Israel, of just over 6m. Nonetheless, few US companies
have targeted the European markets, due to the barrier to entry presented by smaller,
more fragmented markets.

For generics companies operating out of mature markets such as Germany, the UK or
the Netherlands, the Mediterranean countries (including France) are attractive,
underdeveloped markets. In addition, after 1st May 2004, the pharmaceutical markets of
the 10 East and Central European countries acceding to the EU should present growth
and expansion possibilities, although they paradoxically also present a greater risk to the
German, British and Dutch companies due to the potential for competition from Eastern
and Central European generics companies with lower manufacturing costs.

29
While the Central and Eastern European countries have undergone radical development
since the fall of Communism it is likely that several years will pass before these markets
open themselves completely to Western competitors although some Western generics
companies such as Ratiopharm and Norton/IVAX have already made some impact in
Poland and the Czech Republic. Pharmaceutical legislation is less developed, however:
Poland has encountered delays in incorporating EU legislation into its 2002 Polish
Pharmaceutical Law. For pharmaceutical companies, this is a concern as Poland is the
largest market within the CEE region and already one of the most westernized markets.
The implications are likely to be a series of delays in drug authorization both in Poland
and in other smaller markets among the new EU member countries.

Underdeveloped European markets without high generic penetration are likely to offer
the highest growth potential, in contrast to saturated mature markets. These are the
Southern European generics markets of Italy, Spain and France, which exhibited strong
growth in 2002, but still contributed less than 3.6% to global generics sales. Generic
penetration in some core markets is outlined in Figure 1.2.

Figure 1.2: Generic penetration in Europe

20
Generics sales Branded pharmaceutical sales
2002 Pharmaceutical sales ($ billion)

18
16
14
12

10
8
6
4
2
0
Germany France UK Italy Spain
EU Market

Source: Business Insights, BGMA, Stada, EGA, UK Dept. of Health Business Insights Ltd

30
According to a statement from the French generic industry association GEMME in
September 2003, the generics market had grown to account for 5% by value and 10%
by volume – this clearly still leaves plenty of room for expansion. Market development
in Spain has also seen strong progress, according to its trade association, AESEG. By
December 2003, generics accounted for 6.5% by volume of all prescriptions (up from
6.0% at the end of 2002) and 4.6% in value terms. Nevertheless, this is significantly
lower than Northern European markets. In addition, the Spanish government has stated
its commitment to greater generic use, indicating the longer terms potential of the
Spanish market.

If these markets are added to markets which have been“newly converted” from the
absence of generics (such as Greece and Portugal and Scandinavian markets such as
Norway and Sweden where generic penetration is less than 10%) then there are several
possible areas of expansion in Europe. The main question is whether any of the US
generics companies see these as opportunities worth exploring, given the relatively small
populations and small overall pharmaceutical markets compared to the vast size of their
domestic market. Or will they just leave it to their European competitors to take
advantage of these opportunities and perhaps look closer to home at Canada? It is
probable that a few of the US companies will understand that expansion abroad is
essential in the face of the threat to them from increased competition in their home
market and will try to emulate IVAX. Nevertheless, there is no reason to suppose that
the majority of companies will make significant changes in the way that they currently
operate and so will rely on their greater expertise in their domestic US market and
moves to higher margin products to try to fight off the competition.

31
Expand abroad or stay at home?

For generics companies such as Teva, which has a limited domestic market, the decision
to expand overseas has been relatively straightforward. For generic companies operating
in larger, more mature markets such as Germany or the US, the strategic benefits have
been less obvious. The leading German generics company Ratiopharm led its domestic
generics market, the largest in Europe for generics and branded pharmaceuticals, in the
mid nineties. Ratiopharm’s experience has an analogue with that of US generics leaders:
why move into a smaller, lower priced market? The answer in Ratiopharm’s case is that
the company understood that its dominance in its home market was vulnerable and it
foresaw the possibility of competition from low cost manufacturers based in other
countries. Therefore, Ratiopharm has made a strategic decision to reduce its dependency
on the mature German market by moving into countries such as France, the UK, Italy in
order to mitigate the risk.

US companies have typically remained within their domestic market, with the sole
exception so far of IVAX. However, the US market is being targeted by numerous
foreign generics manufacturers. Teva is the clearest example. UK generics company
Galen, sold its UK business in early 2004 to concentrate solely on the US market,
although this US presence is not its original generic business. There are not many
overseas companies that are yet major forces in the US generic market apart from Teva
as most of them have only arrived fairly recently. Foreign companies that are already
significant in the US include Sandoz, Pliva, Ranbaxy and Dr. Reddy’s.

Despite their simpler business model, overseas expansion by generics companies still
carries clear risk. Risks that can specifically affect generic companies include not
understanding local prescribing habits, pricing regimes and distribution methods. There
are several examples of companies that have failed to expand into international markets
successfully, in some cases by applying their domestic business model and practices
without addressing their suitability in a different market.

32
One example of the market-specific barriers occurs in Germany: until recently, all
generics were prescribed by their INN chemical name followed by the marketing
company’s name. By contrast, other key markets operate under different protocols,
under which prescription is by INN chemical name alone. For companies trying to enter
Germany there is a major cost implication in that they need to promote to physicians in
order to maximize prescribing of their products. However price regulation schemes
introduced during 2003 are moving prescribing habits more in the direction of simple
INN prescriptions, which should ease, market entry.

Of course, there will be occasions when a new approach is what a market needs and is
the catalyst for a major shake-up of the whole area. In general, though, it is difficult (and
probably inadvisable) for one company, however successful it might be at home, to try
to shape a foreign market rather than adapt itself and its methods to the customs
prevailing in the new target market. Outside pharmaceuticals, there have been cases in
where an innovative approach has eventually led to the demise of the local industry. A
prominent example, although not in generics, is that of the Japanese automobile
manufacturers who entered the European markets in the 1960’s with innovative ideas
like reliability and extra features included in the price of their cars. The indigenous
industries in Europe and the US refused to take the problem seriously and change their
own marketing approach to compete with the result that the UK at least now has
virtually no indigenous motor manufacturing industry.

The obstacles, competitive and market pressures of the generics market also act as a
defense mechanism: multinational branded pharmaceutical companies that have tried
expanding into generics and attempted to run their generic business like a branded
business such as the German Hoechst that bought Cox in the UK have failed because
they did not appreciate that selling generics requires quicker, more flexible style of
management. By contrast Sandoz has allowed its generic subsidiaries for the most part
to continue to run relatively independently with little central control.

33
Multinational R&D companies’ involvement in generics

Branded, multinational pharmaceutical companies with R&D specialism necessarily

operate on a long-term strategy. Generics companies necessarily operate on a short-term
strategy. These key cultural and organizational differences explain the difficulties
inherent in either type of company moving into the other’s market.

One example of a branded company that entered the generics market but later withdrew
is Hoechst (now part of Aventis). The company bought Copley in the US in 1994 and
disposed of it in 1999, and sold Cox in UK to Alpharma in 1998. Similarly, Rhône-
Poulenc Rorer sold its holding sold its holding in Rugby-Darby to Watson in 1995 and
sold UK company APS-Berk in 1996 to Teva, although it retained an interest in the
French generic market through RPG (which includes French generic pioneer,
Biogalénique), before selling it to Ranbaxy in 2003. Eli Lilly has also had a commercial
interest in the UK generics market in the late 1990’s under the name of Greenfield but
later decided that generics did not form part of its core business, while Bayer had its
own German subsidiary as well a US joint venture with Schein, which in turn owned
Genus in the UK (now owned by Stada). Bayer later made a strategic decision to leave
the generics market. It subsequently sold its German generics subsidiary to Ranbaxy and
its French generics business to Teva.

Nevertheless, some key players in branded pharma have made been successful in
generics. The defining criterion has been keeping distance between the branded
pharmaceutical parent company and the generic subsidiary because the two types of
company operate in such different ways. A particular example is Merck Darmstadt,
which acquired the former Generics (UK) network of companies. Merck kept the
individual operating companies as their generic subsidiary in each country and used the
existing GUK model to set up new generic subsidiaries in other countries. This seems to
work well because generics companies, who need to be flexible and responsive, are not
subjected to big company bureaucracy Novartis has also been successful, having bought

34
generics companies such as LEK of Yugoslavia, Biochemie in Austria, Lagap in the UK
in the late 1990’s and others that it unified under the revived Sandoz name as its generic
operation. Novartis has chosen to keep its Sandoz generics subsidiaries at arm’s length
and allow them relative freedom. In the UK, Sanofi-Synthélabo still retains its Sterwin
generic subsidiary since it has a reasonable market share and Pharmacia-Upjohn (now
part of Pfizer) continues to operate in the UK generic market.

The generic companies that have remained part of larger R&D based pharmaceutical
companies have gained from economies of scale in new product development and
purchase of API’s. In addition, being part of a large group has given them access to
larger development facilities and increased buying power when dealing with contract
manufacturers. However, successful generics subsidiaries have also retained a degree of
autonomy leaving them able to respond quickly to changing market circumstances.

Where successful, multinational branded pharmaceutical companies represent a

significant threat to the smaller generic companies. For example, Merck’s French
subsidiary Merck Génériques has been the leading generics company in France for
several years and at the end of 2003 had sales of €232m and a generic market share of
28.3%. In markets where price competition is very high and price erosion is a serious
problem, the ability to contain new product development and production costs by
sharing manufacturing facilities with associated companies makes an important
difference.

35
36
 CHAPTER 2

Successful US strategies

37
Chapter 2 Successful US strategies

Summary

The US generics market exhibits all the characteristics necessary for development
of a successful generics industry. These are: high priced brands; strong IP
legislation; high levels of generic prescribing; high levels of competition for supply;
pharmacists purchasing on price; pricing levels determined by supply and demand.

The US market has also benefited from a uniform set of pharmaceutical laws
applying in all states by contrast with the variations prevalent in Europe. Recent
legislation (e.g. Gregg-Schumer) has further improved the environment created by
the original Hatch-Waxman Act.

Five of the top ten generics companies in the US market are exclusively focused
on the US market. However, the market leader is the Israeli company Teva.

Leading US companies are moving upstream. Many companies started out by just
distributing generics, then moved on to conduct their own manufacture to gain
greater control over profits. Increasingly, key players such as Barr, Mylan and
Watson are investing more in R&D.

The move upstream has partly been driven by high levels of competition, which
have historically meant intense price competition and rapidly eroding profit
margins. One of the most popular channels is diversification into modified release
formulations and alternative dosage forms to derive higher profit margins.

Aggressive patent challenges and Paragraph IV filings have brought major short-
term benefits to more adventurous companies, as a result of the 180-day
exclusivity legislation. However, high legal costs make this a risky strategy for
companies.

As yet no biogenerics have been launched in the US, but several companies such
as Teva, Sandoz and Stada are looking at the possibility and this will certainly
present growth opportunities for the companies that can afford to enter this area.

38
Overview of US generic market

American generics companies have benefited from an extremely favorable set of market
conditions landscape. This section will review some of the criteria necessary for the
development of a strong generics market to the impact they have had on the US market
- worth US$16bn in 2003 – even though some individual players have had limited
success.

Figure 2.3: Significant factors necessary for the development of a healthy

generic market

Present in
Characteristic
the US?

High-priced branded products √

Strong tradition of intellectual property legislation √

High levels of generic prescribing √

Large number of competing suppliers √

Purchasing decision made by pharmacist mainly on price √

Pricing levels determined mostly by supply and demand criteria √

Source: Author’s research and analysis Business Insights Ltd

The US market has the world’s highest brand prices and this is creating real concern at
the cost of drugs among healthcare providers. According to the Generic Phamraceutical
Association (GphA),the average brand prescription in 2003 cost approximately
US$76.29, whereas the average price of a generic prescription was approximately
$22.79.

In early 2004, US senators proposed a draft bill to permit individuals to personally

import a 90-day supply of a prescription drug for their own use as way round high
prices. High prices are a necessary precondition for a successful generics market since

39
low prices are less attractive to generic copiers. Low prices are a major factor in the
slow development of generics in some of the Southern European countries where low
brand prices have acted as a powerful disincentive.

Another prerequisite is intellectual property legislation. Although it may appear to be

detrimental to generic drugs, IP legislation is critical to provide a period of protection
during which new, small brands can become mature big brands. US legislation required
reformulation for pharmaceuticals, in the form of “The Drug Price Competition and
Patent Term Restoration Act” of 1984 (Pub. L. No. 98-417), also known as the Hatch-
Waxman Amendments, which was superseded by the Gregg-Schumer Bill in 2003.

The Hatch-Waxman Act compensated innovative R&D companies for the loss of patent
term suffered during the regulatory process, in return for which generic companies were
enabled to begin development of their copy products while the patent was still valid. It
created the Abbreviated New Drug Application (ANDA) process, which produces an
acceleration in the FDA approval of generic pharmaceuticals. However, the branded
drug manufacturers may sue the generic applicant for patent infringement. In such a
case, the Act provides for a delay of 30 months in the approval of the ANDA.

The third prerequisite is high levels of generic prescribing. In the US, the generic
prescription rate is around 45% according to the GPhA. The US also satisfies the fourth
prerequisite, as there are a large number of competing suppliers, both domestic and
foreign.

Because generics manufacturers offer the same product, price is the main way in which
manufacturers compete. Supply and demand control the price level at any given time.
However, the growth in the number of generics manufacturers has typically meant a
rapid erosion after the patent and any exclusivity expire.

The pricing issue was highlighted in a position paper from the German generic trade
association, Deutscher Generikaverband (DGV), in July 2003, which pointed to generic

40
discounts in the USA as typically reaching 70%. The aim of the paper was to defend the
local German industry from the charge that generics in Germany were too expensive and
not discounted enough. In its defence, the DGV pointed out that US discounts are
greater than those in Germany because the US copies are working from a higher starting
price. As justification, it highlighted the example of Ranitidine where it compared the
lowest German generic price at that time of €11.27 against the lowest American generic
priced at the equivalent of €19.28. The DGV paper added that the prices differences of
the original Zantac brand had been far more extreme than this – the German Zantac
showed a list price of €33.07 whereas the American version had been €264.33.

Leading US generic companies

Table 2.3: Major generic companies in the US market 2002

Company 2002 sales ($m) % of sales derived US revenues 2002 ($m)

from US market

Teva 2,519 64% 1,612

Mylan 1,269 100% 1,269
Watson 1,223 100% 1,223
Barr 903 100% 903
Alpharma 1,238 63% 780
Andrx 771 100% 771
Sandoz 1,8051 41%2 740
Biovail 788 91% 717
IVAX 1,197 42% 503
PRI/Par 382 100% 382
SICOR 456 69% 315
Ranbaxy 6693 44% 294
PLIVA 792 36% 285
Taro 212 87% 184
Dr. Reddy's 342 32% 109
Gedeon Richter 388 24% 93
Stada 597 8% 48

1: Total Sandoz sales (generics and industrial generics)

2: As at H1 2003
3: Finished dosage sales only

Source: Business Insights, company reports Business Insights Ltd

41
Teva increased its turnover in 2003 and 2004 as it reported first quarter revenues of
US$1bn in 2004 and was anticipating full year sales of more than US$4.5bn. In addition,
Teva bought SICOR in late 2003 to further increase its turnover and give it an entry into
the injectables and possibly the biogenerics markets. Other significant generic companies
such as Ratiopharm and Merck Generics have been omitted from this list, a reflection of
their limited turnover in the US.

The largest of the US domestic companies is Mylan, which, as Table 2.3 shows, is
completely dependent on the US market for its revenues. Watson is the second largest
domestic manufacturer and is also wholly US-focused after the sale of its UK subsidiary
Genus to the German company Stada.

The road to success

The growth of the US market prompts a number of questions:

What were the strategies adopted by leading companies?

To what extent did the companies balance long-term and short-term strategies?

Distribution of commodity generics

The simplest, and most common, way for generics companies to enter the market is
through commodity generics after the patent expires on the original brands. Although at
the outset it is unlikely that any of the manufacturers (not all generics companies are
manufacturers) viewed their product as commodities, this is what they eventually
became.

The commodity generics route has both advantages and disadvantages. For example, by
pharmaceutical industry standards, the cost of entry is relatively low. At its extreme a
generic company can act as an “own brand” distributor for a generic copy manufactured
by a third party. In this instance, the distributor’s costs are limited to the purchase of the

42
product and associated promotion or distribution expenses – there are no development
costs or manufacturing overheads. Indeed Barr, for example, still distributes Tamoxifen
rather than manufacture it.

By contrast, there are also several disadvantages – the marketing company is dependent
on the manufacturer in terms of supply pricing, for example. Low barriers to entry can
drive up the number of competitors and lead to rapid price deterioration. When this
happens, companies have to look at ways of reducing their product costs either by
linking up with a different manufacturer, which for US companies might be in South
America, or Canada or even India, or else by acquiring their own manufacturing
facilities.

Manufacture and distribution of commodity generics

This is often the second stage in a generic company’s evolution and one that all the
major generics players have eventually adopted. Teva, Watson and Barr all manufacture
a major part of their own product range. Some companies such as Mylan have set up
more than one factory (Mylan opened a second factory in 1987 and a third in 1994 in
Puerto Rico).

The advantages are clear – reduced reliance on a third party manufacturer, greater
control over costs and shorter supply lines and the possibility of selling to other
marketing companies to achieve further economies of scale. However, investment in
manufacturing facilities also brings with it higher overheads, employment and
maintenance expenses required to maintain compliance with the constantly changing
requirements of the GMP (Good Manufacturing Practice). Nevertheless, investment in
manufacturing is central to the long-term strategy of generics companies that have
diversified and moved upstream, such as Teva, Mylan, Watson and Barr - all of which
operate several dedicated manufacturing facilities. Nevertheless, whether companies do
or do not manufacture their products, they cannot alter one salient characteristic of
commodity generics: that profit on individual products tends to erode fairly quickly after
the patent expires as competitors enter the market to offer an identical product.

43
Of the US market leading companies, Teva (and some smaller competitors such as
Ranbaxy and Pliva) has one particular advantage when price differences are measured in
cents. Teva manufactures or controls many of the API’s that it uses in its formulations.
For smaller companies, dependence on irregular patent expiries providing short-term
benefits has forced them to explore other strategies. Nevertheless, large product baskets
appeal to wholesalers, of which there are now only three significant players in the US,
and for whom “one-stop” shopping for generics is a key attraction.

Acquisition

Mylan was founded in 1961, has risen during its 40-year history to become one of the
leading generics companies in the US, and is the largest of the domestic generics
companies. It markets a range of standard and modified release formulations and also
sells a number of branded products under the Bertek label, a company that it bought in
1993. The company uses its own manufacturing facilities to produce almost all its
product range. It also owns a specialist technology for the manufacture of transdermal
patches. At the end of 2003, Mylan reported that for the nine months ended December
31, 2003, net revenues increased 14% or $125.7 million to $1.04 billion from $915.5
million for the nine months ended December 31, 2002. Scaling this up for its fiscal year
2003-2004 this would suggest a 12-month figure of approximately $1.39 bn.
Acquisitions have formed a key part of the company’s growth strategy:

In 1988, Mylan acquired 50% of Somerset Pharmaceuticals;

In 1991, it acquired Dow B. Hickam Pharmaceuticals;

In 1993, it added Bertek Inc;

In 1996, Mylan acquired UDL Laboratories Inc;

In 1998, the company acquired Penederm, Inc.

Mylan’s competitor Watson has also undertaken significant acquisition activity over the
past decade as it has sought to increase size:

44
 In 1995, Watson acquired Circa Pharmaceuticals;

In 1997, it acquired Oclassen and Royce;

In 1998, Watson added Theratech and Schein and Makoff.

Teva, the market leader, acquisition activity is listed below:

In 1991, Lemmon Pharmacal Company became a wholly-owned subsidiary of Teva

Pharmaceutical Industries Ltd, which constituted Teva’s first acquisition in the US
(for the purposes of this chapter the non-US acquisitions will be ignored);

In 1996, the company acquired Biocraft

1999, Teva added Copley;

Teva acquired SICOR in 2003/4.

Table 2.4: Generics players and their subsidiaries (selected list)

Owner Original name Country

Pliva Dominion UK
ArzneimittelWerk Dresden Germany
2K Pharmaceuticals Denmark
Sandoz Biochemie Austria
Géminis Spain
GNR France
Lagap UK
Lek Slovenia
Multipharma Holland
Stada Bayvit Spain
Centrafarma Holland
Clonmel Healthcare Ireland
EG Labo France
Genus UK
Pharmajani Italy
Teva APS-Berk UK
Bayer Classics France
Bentley Spain
Biogal Hungary
Pharmachemie Holland

Source: Author’s research and analysis Business Insights Ltd

45
All of the leading generics players in the US have provided a parallel to the main
branded pharmaceutical sector in which companies have sought to accelerate growth not
through organic growth of their existing product range, but through acquisition of
“critical mass”. In part the additional turnover and expanded market share has in itself
been one of the benefits of the acquisition but, more importantly, the purchasers have
benefited from the acquisition of additional skills.

Patent challenges – Paragraph IV filings and first to file

Because generics companies do not always wait until the official expiry date of a
product’s patent, some have adopted an aggressive strategy of challenging the
originators in court to try and get the patent overturned. If successful, the challenge can
provide a competitive advantage to the company making the challenge, particularly if it
then becomes the “first to file” under the system created by the Hatch-Waxman Act.

Patent challenges and “first to file” are linked because when the company files its
ANDA, it must submit a statement compliant with Paragraph IV claiming either that it
does not infringe any of the originator’s patents or else that the patents are invalid. This
is a high risk strategy, due to the high costs of litigation. Costs are particularly relevant
as the Hatch-Waxman amendments provide the originator with the opportunity to
counterclaim an infringement of one or more of its patents leading to a 30-month stay in
the launch of the generic.

It is important to reemphasize that the patent and regulatory processes are intertwined in
the US system, unlike in Europe. As a result, the Paragraph IV filing remains a valuable
tool for short-term growth for the generics companies. However, the timing of its
ANDA submission is a vital factor because if the applicant was, in fact, the first to file its
ANDA claiming either that the originator’s patent is invalid or that its version does not
infringe any patents it can attain a 180-day period of exclusivity. The key risk for
generics companies is that, in many cases, it does not discover until near to the date of
patent expiry if it has the first to file rights or not.

Several companies have made the search in pursuit of paragraph IV challenges a key

46
part of their strategy. Generic challengers have acquired a good record of success with
patent challenges but have also had their failures. Leading US generics companies have
benefited substantially from the 180-day generic market exclusivity. For example,
IVAX, Mylan, Watson, Barr, Teva and Dr Reddy’s achieved successful paragraph IV
litigation between 2001 and 2004.

IVAX: Launched generic Paclitaxel by a successful patent challenge. In early 2003 it

filed an ANDA for Olanzepine, equivalent to Lilly’s Zyprexa, securing first–to-
market advantage more than eight years prior to anticipated patent expiry.
According to the Orange Book, the patent US 5 229 382 does not expire until 23rd
April 2011;

Mylan: Has achieved first-to-file status—and thus 180 days market exclusivity - for
the generic versions of Duragesic, which had US sales of $745m in 2002. It
launched generic Omeprazole in 2003 despite not having achieved a successful
challenge to the AstraZeneca patent and thus left itself at risk of an expensive
lawsuit from AZ that could result in Mylan paying extensive damages;

Watson: Challenged BMS’s product BuSpar and this led the way to its introduction
of generic Buspirone in April 2001;

Barr: Had a major success with Lilly’s Prozac (=Fluoxetine) which it launched in
2001 and followed with generic Adderall in February 2002 which it was the first to
file;

Teva: Held first-to-file status for at least seven of the products it launched in 2002
and 2003. One of its most significant victories was against the GSK antibiotic
Augmentin (pre-expiry sales of US$1,369m (of which Teva launched a generic
version in February 2002 but it has also lost cases – most recently against Pfizer’s
Accupril (=Quinapril) in June 2004;

Dr Reddy’s: Failed to overturn Pfizer’s six months’ exclusivity on Diflucan

(Fulonazole) but was the first to file Paragraph IV certifications in February 2004

47
 against all the patents listed in the Orange Book for Bayer’s Avelox (moxifloxacin)
although the case is still under consideration.

Andrx: Was successful in its challenge against Pfizer’s Accupril (=Quinapril) but less
successful with its challenge against AstraZeneca’s Prilosec (=Omeprazole) resulting
in Andrx losing US$41m of unusable stocks of generic Omeprazole that infringed
certain formulation patents;

However, patent challenges carry major risk as well. In 2004, Dr. Reddy's reported a
74% fall in fourth quarter net profit in 2003, which partly resulted from a one-time
charge related to the failed legal challenge to Pfizer's anti-hypertension drug Norvasc.
Its Q4 results included a Rs115m ($2.5m) charge relating to the launch preparations of
AmVaz, the company's version of Norvasc. In addition, the company had looked to
Norvasc to provide it with its first big launch since the 180-day exclusive marketing
rights for a generic version of Eli Lilly's anti-depressant Prozac ended in March 2001.

Specialty generics - reducing the competition levels

The saturation of the market for commodity drugs and the resulting price erosion has
meant that the ultimate winners will be manufacturers with lower production costs such
as Indian, East European or possibly South American competitors, or else companies
that make their own API’s or indeed those who enjoy both advantages. As a result,
generics companies have begun to look at pharmaceutical sectors where the barriers to
entry are higher, competition is lower and therefore profit margins are higher. The start-
up and development costs for the specialty drugs are higher and have therefore resisted
the main thrust of generic competition. This section outlines some of the key areas now
subject to specialty generics.

Products with technologically challenging formulations

Examples include non-oral formulations such as topical, liquid and suppository

formulations (Alpharma) or proprietary inhaler technology (IVAX), chewing gum
therapies (Watson), generic injectables (SICOR, now part of Teva), Faulding (now part

48
of Mayne) and ESI Lederle. However, despite the advantages of a lack of competition,
most of the non-oral markets so far described are small. In contrast, the market for
generic injectables is large and growing, which is why Sandoz bought Sabex Holdings in
Canada in June 2004 and also why Teva acquired SICOR.

Controlled release generics

The most successful of these companies is, perhaps, Andrx, which has developed its
own proprietary technology and used it to create versions of off patent drugs that are
both bioequivalent to existing products (its ANDA program) and that are improvements
to existing products (its NDA program). Teva, which has an agreement with the
Canadian drug delivery expert Biovail, has marketed a number of extended release
products in the US including generic forms of Cardizem CD (diltiazem), Adalat CC
(nifedipine), Procardia XL (nifedipine) and Voltaren XL (diclofenac). Mylan, Alpharma
and Ranbaxy have also launched products that use this technology.

Products where significant regulatory support is required

Examples include Clozapine or Isotretinoin, which require special advanced patient

monitoring systems. In the case of Clozapine, the FDA insisted that the manufacturing
company had to have a sophisticated in-house medical registry to monitor the white
blood cell count of clozapine patients. In order to obtain FDA approval, IVAX’s US
subsidiary, Zenith Goldline, implemented the ALERT (Archives Lessening the Elemental
Risk of Treatment) program leading to virtual exclusivity as few other generics
companies had the resources needed to manage a monitoring program.

In view of the difficulties that Goldline encountered with Clozapine, it is probable that
Isotretinoin (=Roche’s Roaccutane) will present a similar problem for generic copiers in
that Roche has been obliged to introduce a monitoring program for patients due to the
high level of side effects encountered with the product. The assumption must therefore
be that generic companies will also be required to do the same thereby raising the
barriers to entry and launch costs. Even so, it is reported that both Mylan and Ranbaxy
intend to launch the product together with monitoring programs.

49
Products with limited availability of the API
This situation severely restricts the number of copy products that can enter the market.

Proprietary drugs — branded and generic products together

In October 1984, Mylan obtained approval of its first proprietary product, Maxzide®
and moved away from being a pure commodity generics company. Since then companies
such as Barr, Ivax, Teva and Watson have all diversified into the branded market as part
of their strategies of reducing dependence on commodity generics. Generics companies
have entered the proprietary drugs segment of the market in various ways, including:

Internal product development;

In-licensing from branded companies;

Product or company acquisition.

A notable recent example has been Teva’s acquisition of SICOR in 2003/4. Figure 2.4
illustrates how leading US generic companies are now also dependent on sales of
branded products.

Figure 2.4: Branded sales and sales growth of the leading generics companies,
2000–01
Growth in branded drug sales, 2000-01 (%)

Bubble size represents

100 branded sales in 2001
Barr
80 KV
IVAX
60

40 Watson
Teva
20

0
0 10 20 30 40 50 60
(20)
Mylan
(40) Dependence of ethical revenues on branded drugs, 2001 (%)

Source: Business Insights Business Insights Ltd

50
Diversification into branded products has brought both advantages and disadvantages.
Advantages include higher margins on branded products, the reduced competition on
price, and a more stable market. Disadvantages include higher R&D costs, higher risk of
failure, greater sales and marketing costs since detailing to doctors is now necessary
and, ironically, the threat of generic competitors.

Biogenerics

As yet no biogenerics have been launched in the US, but several companies such as
Teva, Sandoz and Stada are looking at the possibility and this will certainly present
growth opportunities for the companies that can afford to enter this area. This sector
will be examined in more detail in US barriers to generics growth.

51
52
 CHAPTER 3

Successful European strategies

53
Chapter 3 Successful European
strategies

Summary

In contrast to the unified US market, the European generics markets differ

significantly from between countries, in terms of legislation, key players, market
development and pricing. This demands that companies tailor their strategies by
market and has acted as a barrier to entry. For example, patent challenges must be
repeated in each territory due to the absence of a pan-European patent.

Pricing in most countries has been determined by governments, leading to wide

price differences. Where reference pricing has been introduced, governments have
driven down the cost of generic drugs.

Generic penetration is higher in Northern Europe than in Southern Europe, where

generics markets are less developed. However, low prices means that Southern
European markets are not automatically more attractive.

Key players in Europe are Ratiopharm, Hexal, Alpharma, Stada and Teva.

European companies are also concerned about Indian competition, following

market entry in several countries by key players such as Dr Reddy’s and Ranbaxy.

Registration through the mutual recognition system is still difficult but offers a
way to register in several countries simultaneously. Recent legislation
(2004/27/EC) has improved the environment for generics in the EU. However,
some countries may wait until October 2005 to implement the changes into local
law.

The new laws provide a mechanism for registering biogenerics. As a result, they
are forecast to appear in Europe before the US.

54
Overview of European generic markets

US generics companies have benefited from favorable market conditions that are
conducive to a healty generics industry. Figure 3.5 lists the same criteria for two
different European markets. The first is Germany, which ranks as the leading European
generic market. The second is Spain, where generic sales accounted in 2003 for only
6.5% by volume and 4.6% by value according to AESEG. Both markets are highly
dynamic, although this is especially so in Spain, as the government strives to increase
generic usage.

Figure 3.5: Factors necessary for the development of a healthy generic market

Characteristic Present in
Germany Spain?
High-priced branded products √

Strong tradition of intellectual property legislation √

High levels of generic prescribing √

Large number of competing suppliers √ √

Purchasing decision made by pharmacist mainly on price √

Pricing levels determined mostly by supply and demand criteria √

Source: Author’s research and analysis Business Insights Ltd

Both country markets share only one common factor: multiplicity of suppliers. In all
other respects, market conditions are different, underlying the importance of addressing
European country markets separately, rather than as a single market such as the US.

55
Pricing

Several surveys of European price levels over a number of years for a basket of goods
have shown the Spain and Germany to have very different pricing systems, and for there
to be wide variations in pricing across Europe.

Table 3.5: Comparison of different national pharmaceutical price levels,

2000

Country Comparative price

US 209
UK 100
Germany 91
Ireland 83
Netherlands 81
Finland 85
Italy 79
Austria 77
Belgium 78
France 80
Spain 64

Source: UK Department of Health Business Insights Ltd

While the purpose of the study was to show that UK prices are too high in the opinion
of the UK authorities it also helps to highlight the stark contrast between the highest
priced European market, the UK, and the US. The contrast is even more apparent in a
comparison between the US and Spain.

Pricing of generics is especially important as a means to encourage supply of generic

drugs. For example, a brand losing patent protection in Germany will present more
attractive target to copiers than its lower priced equivalent in Spain. Paradoxically,
governments could promote generic growth and lower drug bills in the long term by
placing fewer restrictions on brand pricing at the time of launch. The more attractively
priced brands would then tempt more copies into the market after patent expiry, causing
rapid price erosion and perhaps more than compensating in the long term for the initially
higher drug bills for the product.

56
Intellectual property

One of the main differences between the Spain and Germany is that Spain did not
introduce product patents until 1991. As result, supply of cheap copies that are best
described as branded generics grew before that. By contrast, Germany has had strong
patent laws for many years, which the branded, R&D-led pharmaceutical companies
used to maintain their exclusivity of supply. The result has been that Germany has built
up a strong domestic pharmaceutical sector with company names that are known
worldwide whereas few Spanish companies are known outside their own borders.

Pharmaceutical companies in Germany still faced competition from generic drugs

manufacturers such as Ratiopharm and Stada, which achieved recent legal successes in
overturning patents to create a market for generic copies. Although German generics
companies CT-Arzneimittel and Stadapharm did not succeed in annulling the patent for
Omeprazole (Astra Zeneca’s Losec or Prilosec), they managed to fight off the
originator’s attempts through patent litigation to keep their generics off the market.
Another important difference between Spain and Germany was data exclusivity (the
period during which the originator’s data remains confidential and during which no
generic company trying to register a copy may ask the regulators to refer to it), which is
10 years in Germany but only 6 years in Spain. The impact of this on the generic market
is that brands in Germany have had longer to develop turnover and thus have provided a
much bigger target for generic competition after patent expiry. Although Spanish
companies have by contrast been able to launch their copies much sooner, they have not
been able to ride on the back of the originator’s brand to the same extent.

Generic prescribing levels

Figures from the Spanish association AESEG showed that in 2003 generics
prescriptions written for patients covered by the Germany GKV health insurance scheme
accounted for 34% of the market in value. By contrast, generic prescriptions in Spain
accounted for only 6% market share by value in 2003. However, in 1999 generic
penetration was less than 2% in Spain, according to El País.

57
Purchasing decision based on price

The picture here is not so clear-cut in that the German market combined elements of
prescription-led prescribing since generics usually consist of the INN name with the
manufacturer’s name as in Nifedipine-Ratiopharm together with a high degree of price
competition. Generic companies actually used representatives to visit doctors and detail
their particular brand of generics. This caused problems for pharmacists who were
required to hold duplicate stocks of particular generics under various brand names as
they were not permitted (until the legislation changed in 2003) to substitute, for
example, Nifedipine-Stada in place of Nifedipine-Ratiopharm . Nevertheless, until the
recent government efforts to create a generic market, price competition was wholly
absent from the Spanish market where products were (and still are to a great degree
since generic prescribing is still only a few percent) prescribed by brand name alone.

Pricing based on supply and demand

Generics in Germany have not always competed solely on price. However, increased
levels of competition have certainly eventually resulted in lower prices for multi-source
products. In Spain, by contrast prices have traditionally been immune to any supply and
demand effects because they were all sold by representative detailing to the physician
and not on price negotiations with the pharmacist. This state of affairs is now changing
in both countries as government measures including reference schemes encourage
greater price competition. In addition, the Spanish government together with AESEG
(the Generic trade association) are conducting PR campaigns to encourage greater
acceptance of generics and create patient demand for cheaper substitutes.

58
Leading European companies

Figure 3.6: European sales of leading generics players, 2001

€1,200
European sales (€), 2001

€1,000

€800

€600

€400

€200

€0

Merck KGaA
Ratiopharm

Teva
Alpharma

Stada

Sandoz
Hexal

IVAX
Source: Ratiopharm estimates Business Insights Ltd

As the generics industry becomes more international with the growth of multinational
players, defining a “European” company is imprecise. However for the purposes of this
section “European business” will be defined as a generic company that has its Head
Office in Europe or as the volume of business conducted within the EU for companies
with a non-European Head Office. This definition allows for the inclusion of the
European sales of, for example, Teva and Ranbaxy but excludes Mylan and Watson,
solely operate in the US market.

There is necessarily a degree of imprecision in some of the figures in that not all of the
companies clearly break out the European element of their sales, but the chart, based on
figures from Ratiopharm for 2001, nevertheless provides some indication of relevant
sizes in respect of generics.

59
In 2003, Hexal reported full year sales of €1.179bn, of which Germany and the rest of
Europe accounted for 91% or €1,073. Sandoz enjoyed turnover of US$2.9bn for 2003
with around 38% or US$1.1bn coming from Europe. For Teva in 2003 the amount
provided by European activities has risen significantly, following the acquisition of the
Dutch company Pharmachemie, to US$860m, which represented 26.3% of their
turnover.

Figure 3.6 lists no UK generic companies, even though the UK market has a large
generic drugs market. All leading generics companies in the UK are foreign owned:
Generics (UK) is now part of Merck; Norton operates under IVAX; ASP-Berk is owned
by Teva; Cox is now integrated into Alpharma; Lagap is owned by Novartis and trades
as Sandoz.

60
The road to success

Despite the wide variations between the US and the European markets, the same core
strategies have worked in Europe as have succeeded in the US, although they have been
brought about differently. These are:

Distribution of commodity generics;

Manufacture and distribution of commodity generics;

Patent challenges;

Be first to launch;

Acquisition;

Specialty generics;

Proprietary drugs;

Biogenerics.

Distribution of commodity generics

Distribution of commodity generics is most common in markets such as the Netherlands

and the UK where the pressure on margins leads manufacturers to seek economies of
scale. In some cases where, for example, the manufacturer only sells to wholesalers but
the competitor deals with pharmacies, the competitor will have access to outlets that the
manufacturer himself cannot reach and so both parties benefit. The same advantages and
disadvantages apply in Europe as in the US: lower costs and overheads for the
distributor but less control over product prices and timelines. Distributed products tend
to be those that are most popular, which are effectively the high volume commodities
and where competition is strongest. There have also been cases where the manufacturer
is the originator company, seeking to discreetly enter the generic market with a product

61
whose patent protections is about to expire. In this case, the partner is likely to be either
a generic company that has made a direct approach to the originator, or else one that
has developed its own generic but prefers to take supply of finished product from the
originator as part of an accommodation to avoid messy patent litigation.

Manufacture and distribution of commodity generics

This is the most common generics company strategy, although some generics companies
have reduced or even discontinued their manufacturing activities. IVAX’s UK subsidiary
for example closed down all its UK manufacturing during the late 1990’s and Teva has
concentrated manufacture of bulk tablets for its European subsidiaries at its Hungarin
Biogal factory. Ratiopharm claims that it was the first generics manufacturer when it
started in 1974. Its turnover that year was DM250,00 (€127,800) and had risen to
DM2.5m (€1.28 m) by 1975. According to the company, in 2003 turnover in Germany
was €680m in 2003 and internationally was €421.

The strategy, combined with its philosophy “to develop and produce high-quality drugs
at low cost, and to offer these under generic names at attractive prices” – has certainly
served it well as it has consistently led the generics field in Germany and indeed is the
largest company in the country in terms of the number of units that it sells. It has
supplemented this by exploiting its size to portray itself as a trusted partner to physicians
and by trying to be the first or amongst the first to launch any major new molecule.

Similarly, Sandoz is virtually self-sufficient in generic manufacture as its principal

generic subsidiary, formerly known as Biochemie in Austria, has facilities for both
manufacture of API’s and a wide range of formulations. In May 2004, Sandoz
announced an investment of €70m in a new generics facility in Poland to add to the three
plants that it already owns in Poland through its Lek subsidiary in Slovenia. Novartis
acquired these existing facilities along with the companies that it bought, but the recent
investment is recognition of the cost benefits of manufacturing in Poland with its ready
access to the EU after 1st May 2004.

62
Amongst the larger companies for example Teva has manufacturing facilities in Israel,
Hungary, Spain. Merck produces generics in the UK, France and Germany. All these
companies have seen advantages in having more direct control over their manufacturing
costs. Nevertheless, as with all strategies there are disadvantages, particularly in the high
cost of entry and the ever-rising costs of GMP compliance. It is these rising costs set
against the narrowing margins that have caused companies of all sizes to look outside
for lower cost manufacturing, particularly from Indian companies that in many cases are
vertically integrated in that they also manufacture the API themselves. For companies
that have always contracted out their production this is nothing new, but even European
generic manufacturers that have always used their own facilities are now considering the
merits of shifting manufacture of low margin products to India or Eastern Europe.

Patent challenges

By contrast to the US, in Europe patents are wholly separate from the regulatory
procedure. Regulatory authorities are charged to only consider the issues of safety,
efficacy and quality. In consequence, a company can submit a registration application
and receive approval without a valid patent covering the product itself, its synthesis or
the formulation. Under European law, the generic companies will only infringe a patent
if it makes commercial use of the product by launching it or, incidentally, by developing
it in any EU country where the patent is still valid, until such time as the European
equivalent of the “Bolar” law is incorporated into legislation.

Another significant difference is the absence of a European Community Patent. Where

annulment of a US patent annuls it in all US states whereas, European challenges must
be conducted on a country-by-country basis. The cost of challenging patents acts as
powerful disincentive for a copier seeking to overturn the patent across the entire EU.
Generics companies have overcome this barrier by combining and taking joint action.
One example is the GSK patent for Seretide/Advair (a combination of Salmeterol and
Fluticasone). The generic parties that went to court in 2003 against GSK included
Arrow, Cipla, Ivax Merck-GUK and Neolab. However, as the target was the UK patent
GB 2 235 627, the equivalents are still valid elsewhere in Europe.

63
In November 2003, a combination of Arrow, Ivax, Merck-GUK and Teva succeeded in
overturning the MSD-Gentili patents GB2 118 042 covering the use of biphosphonates
(specifically Sodium Alendronate) in Osteoporosis and EP 0 998 292 covering the 70mg
formulation. Although a European Patent was declared invalid, the court’s jurisdiction
only extended to the UK and so it remains valid elsewhere. At the same time, the US
courts confirmed the validity of the US patents and that Teva’s generic Alendronate
equivalents would be infringing until 2007. This episode highlights the lack of legislative
clarity both within the EU and between the US and the EU.

Be first to launch

In Europe, first to launch does not necessarily require a patent challenge, although there
are occasions when this is a factor. European generics companies, unlike in the US, do
not have a 180-day exclusivity protected by law. Frequently, companies will develop
their copies outside the EU, in, for example, India or Turkey, obtain an EU registration
and arrange for the partner company to manufacture launch stocks. In a typical scenario,
the manufacturer will arrange for these stocks to arrive in the customer’s country just
after midnight on the day of patent expiry so that the stocks can be legally imported a
few hours after patent expiry. Thus the whole procedure can be conducted in such a way
that neither requires the generic copier to challenge the originator’s patent nor infringes
that patent at any point. This approach is open to both large and small companies as the
company can use contract manufacturers based outside the EU to carry out the
manufacture without needing to invest in their own production facilities.

Generics companies have historically used this strategy because there were fewer
proactive companies in the major generic markets of Germany, the UK and the
Netherlands. As a result, companies that launched first could achieve had exclusivity for
several months. The advantage of this system was that proactive companies with greater
resources to finance court cases if they were sued could obtain high margins during the
exclusive supply period and gain “brand” loyalty from wholesalers and pharmacists. For
example, Ratiopharm’s launch of generic Omeprazole accounted for DM40m (€20m),
equivalent to approximately 4% of its global turnover in 1999. This first to market

64
advantage made market entry more difficult for competing suppliers. Subsequent
suppliers tended to be smaller competitors that were more likely to concede to legal
threats from multinational branded pharmaceutical companies. Smaller players therefore
resolved to copy drugs when the serious risk of litigation by the originator had receded.
However, gradually over the last decade smaller generics companies have implemented
the same strategies as larger players, leading to ferocious price competition from the day
of patent expiry. For example, in 1997, generic Captopril (=BMS’s Capoten) was
discounted by around 90% of the brand price within one week in both Germany and the
UK.

Acquisition
Table 3.6: Generics players and their subsidiaries (selected list)

Owner Original name Country

Pliva Dominion UK
ArzneimittelWerk Dresden Germany
2K Pharmaceuticals Denmark
Sandoz Biochemie Austria
Géminis Spain
GNR France
Lagap UK
Lek Slovenia
Multipharma Holland
Stada Bayvit Spain
Centrafarma Holland
Clonmel Healthcare Ireland
EG Labo France
Genus UK
Pharmajani Italy
Teva APS-Berk UK
Bayer Classics France
Bentley Spain
Biogal Hungary
Pharmachemie Holland

Source: Author’s research and analysis Business Insights Ltd

The leading companies in Europe have adopted varying growth strategies. Sandoz,
Stada and Teva, for example, have all engaged in acquisition. Ratiopharm has expanded
into new territories in new European territories. Hexal has combined acquisition with

65
establishing joint ventures. For the most part, acquisitions have not been in the
purchaser’s domestic market, but have served as a method of allowing it to expand
abroad into new markets. Table 3.6 shows a list of some subsidiary relationships:

Advantages of this approach apart from just the acquisition of turnover and market
share (which are in themselves important for generic companies) include the acquisition
of local market knowledge, lower cost manufacturing facilities and expertise in
particular specialist areas.

Specialty generics - reducing the competition levels

Modified release formulations, transdermal patches, inhalation products and injectables

all offer generic companies ways of reducing their dependence on commodity generics.
European generics companies have entered these areas as part of a move upstream to
leverage competitive advantage against smaller players and to enter sectors with lower
levels of competition and higher margins. The US company IVAX, for example, made
its first venture into the European market through the purchase of Norton, leveraging
Norton’s expertise in generic inhaler technology that allowed it to occupy a profitable
niche in the UK generic market. Some companies have built up a range of slow release
oral formulations either by buying in preparations manufactured by companies with
expertise in modified release technology such as Ethypharm in France and Elan in
Ireland or buying the technology from them or buying the company itself as happened
when Teva bought the French company Prographarm.

A further route upstream and towards a more traditional R&D-led business model is the
departure from commodity generics into specialist therapy areas. The best examples are
Teva’s establishment of Teva Oncology Europe, which has given it strong positions in
France, Italy and Germany and Hexal’s venture into the same field through OncoHexal.
Apart from allowing them to market generics that have lower levels of competition,
entry into these specialist areas will allow some generic companies to compete directly
with branded companies in those areas that are not as heavily genericized. Stada has also
followed the same route through Cell Pharm.

66
Proprietary drugs - branded products alongside generics

For companies, proprietary drugs can also include a range of OTC preparations. OTC
drugs can have a long gestation period and require a large marketing investment,
although they tend to be very stable once established, highly profitable and less price
sensitive than generics because they are marketed to the public as brands. Switching
prescription generics to make them available OTC (=Over The Counter) requires a
regulatory authority to sanction such a move. In the UK, the Medicines and Healthcare
products Regulatory Agency (MHRA) has been more flexible than European regulatory
bodies. Recent patent expiries such as Ranitidine (=GSK’s Zantac), Cetirizine (=UCB’s
Zirtek) and, from early 2004, Simvastatin (=MSD’s Zocor) are all available without
prescription. At the European level, the EU has not yet sought to intervene in the area
of Prescription to OTC switching but this could become one of the topics introduced
into the next review of pharmaceutical legislation whenever that takes place.

In generics markets such as Germany, where all new patent expired products are still
subject to prescription, Ratiopharm’s generic OTC line is restricted to analgesics, herbal
products and vitamins although it does include an Aciclovir cream. Furthermore, apart
from the UK, European markets tend to place far more restrictions on the channels
through which pharmaceuticals, even OTC products, may be distributed.

In general, the move into brands has involved prescription branded products rather than
over the counter brands. In some cases, this strategy has involved buying a range of
older, less glamorous brands from a branded pharmaceutical company wishing to divest.
In other cases it has been a move into the area of branded generics after launch of a
modified release formulation that does not lend itself to straight generic prescribing but
needs to be detailed to GP’s to encourage them to prescribe it.

Biogenerics

As in the US, no such products have yet been launched in Europe as no regulatory
mechanism yet exists to cope with them. There are no examples of generics companies
that have introduced biogenerics, but there surely will be in the next few years. Several

67
companies such as Ratiopharm, Stada, Sandoz and Teva are all investing in biologics for
the future creating a market entry route for biogenerics. Teva, for example, looked at
purchasing biotech company Savient Pharmaceuticals in late 2003/2004, although it later
pulled out of the deal.

The advantage to generic companies, as with the other strategies, is that it represents a
move away from excessive dependence on low-margin commodities into an area where
the cost of entry is high and there is a technology barrier limiting the number of possible
entrants. Production costs are therefore not likely to be an issue for a long time as it will
be so difficult for most small or medium sized companies to enter the market.

68
 CHAPTER 4

US legislation and its impact

69
Chapter 4 US legislation and its impact

Summary

The original legislation that affected US generics was the Hatch-Waxman Act of
1984. The subsequent McCain-Schumer Act of 2002 tried to amend what the
sponsors saw as abuses of the legislation by branded companies. The Gregg-
Schumer Act in 2003 extended the provisions of McCain-Schumer particularly in
respect of patent listings in the Orange Book.

The new Act took into account the findings of an FTC investigation into abuses of
Hatch-Waxman provisions. Hatch-Waxman established one of the key benefits to
generics companies in the US - they no longer needed to wait for expiry of the
product patent to begin development of the copy, often referred to as the “Bolar”
clause.

Another key benefit was that the company that was first to file a new generic
application would enjoy 180 days’ exclusivity after they marketed their product.

Under the Gregg-Schumer Act, pharmaceutical companies who sue generics

companies can now only obtain one single stay on processing of the application by
the FDA. In addition, the new act set up a new mechanism to prevent the inclusion
of frivolous patents or those filed at the last moment as a blocking mechanism.
Gregg-Schumer also changed the previous system of 180-day exclusivity that
allowed individual generic companies to block competition if, for example, it had
either made a deal with the originator not to launch or else had agreed to take
product from the originator. Gregg-Schumer includes “forfeiture” provisions
which can result in the generics company losing its exclusivity if found to have
made such an arrangement.

The legislation enabled the FDA to determine what parameters are required for
proving bioequivalence.

70
Overview of US generic legislation

The legislative environment in which generic companies operate has a significant impact
on the way that they operate and thus on the strategic options that are available to them.
It is therefore important to review the state of the legislation and the impact that recent
changes are likely to have on the way in which generic companies can plan their future
strategies. The US government has two conflicting requirements: to create a strong
R&D industry as well as a healthy generics industry.

To try and reconcile these two conflicting requirements, Congress looked in the 1980s
at how well the existing pharmaceutical legislation served the country’s healthcare needs
and concluded that change was needed. Until then, the basic legislation governing
pharmaceuticals was the Federal Food Drug and Cosmetic Act of 1938 (pub. L 98-417).
This was supplemented by a number of federal statutes that determined the way in which
patents, including pharmaceutical patents, were granted.

Following an extensive review, in 1984 the Drug Price Competition and Patent Term
Restoration Act was brought in, which included the Hatch-Waxman amendments. This
Act tried to ensure that innovators would receive adequate return on their investments
by improving patent protection, but also sought to improve access to the market for
lower priced generic copies.

71
Hatch-Waxman amendments

Benefits to the R&D side

The amendments sought to remedy a problem for pharmaceutical companies caused by

the regulatory process, which, in the case of a New Chemical entity, can last for several
years during which the inventor can derive no benefit from the product. This contrasts
with the case for other types of patent protected products that may be put onto the
market even while the request for the grant of a patent is still being considered.

The 1984 reform included Title II, which provided for an arrangement whereby holders
of patents for a pharmaceutical substance could recoup some of the patent time lost
during the regulatory process. The basic term of a patent at that time was 17 years from
the date of issue or publication and Title II permitted an extension of 5 years maximum
but nevertheless limited the total life of the patent to 14 years from the product’s date of
approval by the FDA. The basic term was later altered to allow 20 years from the date
of filing.

The legislation included a regulatory authority, the FDA, in patent issues which
elsewhere are considered to be a wholly separate issue. For example, it is the FDA’s
responsibility to provide information to the PTO (Patent and Trademark Office) about
whether a product is eligible for patent restoration and also to show how long a
product’s regulatory process has lasted to allow the PTO to make the necessary
adjustment.

Where a generic applicant submits a request for registration of a generic copy and
simultaneously claims that his copy does not infringe any of the originator’s patents
(referred to as a Paragraph IV Applications) the patent holder can file a suit alleging
infringement. In such a case, the FDA is obliged to suspend approval of the generic for
up to 30 months from the date of the generic application. This allows the originator to

72
delay the introduction of generic competition for another 30 months if the patent courts
reach no decision prior to this.

Another gain for the innovators was the possibility of adding on further periods of
exclusivity (these are separate from the patent extensions) for such things as a new
indication (+3 years) or pediatric use (+6 months). In any case, if the product is an NCE
(New Chemical Entity), the developer can seek 5 years’ exclusivity on the market before
the FDA is even allowed to consider an application to market a copy.

Benefits to the generic side

The most immediate benefit to the generics companies was that they no longer needed
to wait for expiry of the product patent to begin development of the copy – this is often
referred to as the “Bolar” clause. The name is derived from a landmark case between
Roche and the generic companies Bolar (Roche Products Inc. v. Bolar Pharmaceutical
Co., 733 F.2d 858 (Fed. Cir. 04/23/1984)). In this case “The court held that Bolar's use
of the patented compound for federally mandated testing was not infringement of the
patent in suit because Bolar's use was de minimis and experimental” as a result of
which, Bolar won the right to start their development prior to the expiry of Roche’s
patent on Flurazepam Hydrochloride. The court’s decision was effectively incorporated
into the new Act.

In addition, generics manufacturers gained from an enormous reduction in their

development costs by being allowed to reference the originator’s data on safety and
efficacy of a particular substance without having to repeat those same tests themselves.
Before the Hatch-Waxman amendments, generic manufacturers had to carry out these
costly experiments to, in effect, duplicate the existing data already in the hands of the
FDA.

Another innovation was the advantages given to the company that was first to file a new
generic application or ANDA (Abridged New Drug Application) as it became known.
The first to file, if they were not injuncted or else were able to win any patent case,

73
would enjoy 180 days’ exclusivity after they marketed their product. If, however, the
company chose not to market their copy, they can in actual fact exclude all their
competitors from the market and block all competition, although in such a case it is
difficult to see how anyone except the originator would benefit. The counter to this, as
noted in the previous section, is the opportunity given to the originator to sue for patent
infringement and thus block any generic competition for up to 30 months.

Before filing its applications, the generic copier has to consult what became known as
the Orange Book (due to the color of its cover), which the FDA initially published to list
all generic equivalents of particular brands. The copier must not only notify the FDA
which if any of the many patents around a product it is or is not infringing, it is also
obliged to notify the originator thereby leaving itself open to counterclaim and litigation.

According to the wording of the legislation: CFR 314.94(a)(12)(i)(A)(4)

(http://www.fda.gov/cder/ogd/paragraph4.htm)

“... the applicant shall provide the patent number and certify, in its opinion and
to the best of its knowledge, ...that the patent is invalid, unenforceable, or will
not be infringed by the manufacture, use, or sale of the drug product for which
the abbreviated application is submitted. The applicant shall entitle such a
certification ``Paragraph IV Certification''.

Due to the FDA’s involvement in certain patent aspects, the Orange Book evolved after
1984 to include all the relevant patent information relating to the substance itself and its
therapeutic uses. This involvement of the FDA in patent issues is something that has
come in for increased criticism and led to debate as to its desirability.

74
Disadvantages of the legislation

The Hatch-Waxman legislation took the FDA into patent issues, which in Europe are
considered to be a wholly separate issue. As a result, the regulatory process became
intertwined with patent law and therefore considerably more complicated. Since the
passing of the Hatch-Waxman amendments, patent litigation has become more frequent
and costly and there US regulation has made it impossible for the FDA to detach itself
from patent questions. Court rulings that contradict each other and engender confusion
have variously concluded that generic companies could apply to have patents delisted
from the Orange Book and then concluded that they had no right to do so.

By way of example, in the 1998 case of Ben Venue Labs v. Novartis, the court said that
generic competitors could raise the issue of Orange Book listings outside the context of
the Hatch-Waxman Act and patent litigation. Contradicting this was a 2001 decision (in
the case of Mylan Labs v Thompson) when a federal court held that there was no
“private cause of action” for delisting an Orange Book patent, which effectively means
that a generic company has no specific right under the Hatch-Waxman Act to ask the
FDA to delist a patent.

Furthermore, if an originator were to register a new patent on a product a short time

before the expiry of the principal patent, this would place a major obstacle in the way of
the copier, which is not allowed to ignore the new patent but must state to the FDA
(and the manufacturer) whether or not it, the copier, infringes the new patent. The
generics manufacturer would have to do so even if the originator filed a new patent at
the last minute, leaving the copier to make a last-minute decision on a patent about
without having undertaken appropriate research. As a result, delays of anything between
2-4 years can arise if the originator then decides to sue the generics company for
infringement of a patent that did not exist and of which the generics company could not
have been aware when it started development.

75
In its Statement to the United States Senate in June 2003, the Federal Trade
Commission cited amongst other, the following instance of abuse of the system:

“In October 2002, the Commission issued a consent order against Biovail
Corporation,(48) settling charges that Biovail illegally acquired an exclusive
patent license and wrongfully listed that patent in the Orange Book for the
purpose of blocking generic competition to its brand-name drug Tiazac. This
was the Commission's first enforcement action to remedy the effects of an
allegedly improper, anticompetitive Orange Book listing.

Prior to the events giving rise to the Commission's complaint, Biovail already
had triggered a 30-month stay of FDA final approval of Andrx's generic Tiazac
product, by commencing an infringement lawsuit against Andrx. Andrx
prevailed in the courts, however, so that the stay would have been lifted by
February 2001. According to the Commission's complaint,(49) Biovail, in
anticipation of pending competition from Andrx, undertook a series of
anticompetitive actions to trigger a new stay and maintain its Tiazac monopoly.
Just before the stay was to terminate, Biovail acquired exclusive rights to a
newly issued patent from a third party and listed that patent in the Orange Book
as claiming Tiazac - thereby requiring Andrx to re-certify to the FDA and
opening the door to Biovail's suit against Andrx for infringement of the new
patent and commencement of a second 30-month stay.

The Commission's complaint alleged that Biovail's patent acquisition, wrongful

Orange Book listing, and misleading conduct before the FDA were acts in
unlawful maintenance of its Tiazac monopoly, in violation of Section 5 of the
Federal Trade Commission Act ("FTC Act"), and that the acquisition also
violated Section 7 of the Clayton Act.”

76
It was this problem of potential patent abuse led the FTC (Federal Trade Commission)
to investigate whether other cases of abuse had, in fact, taken place. It investigated
whether pharmaceutical companies had listed frivolous or even ineligible patents at the
last moment as a simple blocking maneuver. Concern about patent abuse was such that
Senator Orrin Hatch (the Hatch of Hatch-Waxman) wrote to the FDA in September
2001 asking it to exercise “more discretion” in adding patents to the Orange Book.

Company tactics had therefore revealed flaws in the 1984 legislation, requiring
significant revisions. Senators John McCain and Charles Schumer therefore proposed
new legislation in 2002 to alter parts of Hatch-Waxman.

McCain-Schumer legislation

As with “Hatch-Waxman” the names of the sponsors are used as an alternative to the
full name for the legislation, in this case “The Greater Access to Affordable
Pharmaceuticals Act (GAAP, S.812)”. The issues that it sought to address were as
follows:

Elimination of 30-months stay following suit for patent infringement;

Prevention of incomplete listing of patents by originator;

Overcoming difficulty of removing listed patent from Orange Book;

Elimination in some cases of 45 day period for filing law suit after patent listing at
FDA;

Amendment of rules on 180 day exclusivity to prevent first applicant blocking

others;

Changes to rules on “Citizen Petition” which allows anyone including originator to

query a drug’s approval.

77
The Senate passed the legislation in 2002 but it, too, was criticized. The legislation was
quickly superseded by the Gregg-Schumer Act and is therefore not covered in detail in
this report.

Gregg-Schumer Act

This Act, which was passed in June 2003, sought to improve on the amendments
introduced by the McCain-Schumer Act. In particular, it took account of the FTC
investigation into possible listings of frivolous or ineligible patents by the originator.

The FTC study in July 2002 identified cases involving eight major branded
pharmaceutical companies between 1994 and 2000, where repeated 30-month stays on
late-issued patents had delayed access to generic drugs. Following its study, the FTC
made two recommendations:

Allow only one automatic stay per generic drug application;

Tighten Orange book patent submission and listing process to help ensure only
appropriate patents are listed.

Senator Gregg explained why he had backed new legislation. According to a press
release from the Senator’s office,

“Current US drug patent laws (known as Hatch-Waxman) were designed to

strike a balance between rewarding blockbuster drug companies for their
research and development while ensuring that less expensive generic drugs are
available to consumers. But in the years since these laws were enacted, the
namebrand industry has stifled low-cost competition with a host of tactics -
including filing frivolous patents with the FDA on the color of a pill bottle and
paying generic manufacturers not to sell their drugs. In so doing, these tactics

78
 allow the namebrand companies to keep charging exorbitant prices and delay
the arrival of lower-cost alternatives.”

Gregg-Schumer took this into account by introducing a single 30-month stay. The
Senator’s press release said on this topic:

“The stay would be triggered if a name-brand company sues a generic

application for infringing on any patent on a blockbuster drug that is filed
before a generic application is submitted to the FDA.

Once a generic application is filed, the name-brand company has 45 days to

challenge the generic application in court. If the name brand does not
challenge the generic company's application within 45 days, the generic can
seek a declaratory judgment indicating that it does not violate the name-brand
drug's patents.”

Table 4.7: Comparison of major legislative provisions in the US

Provision Hatch - Schumer - Gregg -

Waxman McCain Schumer

1) Multiple 30 month generic launch a x x- one stay only

after injunction

2) Requirement for full patent listing and x a a- FDA to filter

elimination of inappropriate patents frivolous patents

3) Possibility of generic companies annulling x a a - can counter-sue

in
patent in Orange Book response to litigation

4) 45 day litigation limit after listing a a a- unchanged

new patent at FDA

5) 180 days’ exclusivity for first-to-file only a a x - if any failure

to launch

6) Allow citizen petitions to block FDA a x x

review with limited evidence

Source: Author’s research and analysis Business Insights Ltd

79
In addition, the new act set up a new mechanism to prevent the inclusion of frivolous
patents or those filed at the last moment as a blocking mechanism. It also addressed the
issue of generic companies negotiating special arrangements with originators and then
conspiring to block other generic competitors by using their 180-day exclusivity to
prevent others getting to market. The changes introduced by each phase of legislation
are outlined in Table 4.7.

The impact of new legislation

Both amendments to Hatch-Waxman sought to improve on efforts to strike a balance

between the needs of the branded companies and those of the generic companies. Key
questions remain:

Did the act succeed in balancing the needs of both parties?

Who were the winners and losers?

The first question is also covered in the final chapter of this report as part of an industry
survey. However, in the first instance, the main winners, according to the FDA, are
consumers. The changes in the regulations are expected by the FDA to save consumers
an estimated $35bn over 10 years by speeding up generic approval procedures.

Single 30 month stay

The results of the FTC investigation showed that some branded companies had abused
the system to repeatedly obstruct generic applications by invoking 30-month delays
during patent litigation. There may have been more cases than the eight incidents that
the FTC managed to verify. In any case, the measure to limit this delay to just one single
stay safeguards the legitimate interest of the originator in defending its invention while
ensuring closing the route of frivolous patents as tactical obstacles. Both parties benefit
although the branded companies might not be convinced by the removal of a useful
tactical weapon of multiple delays even though the measure does ensure that they still

80
have the right to a stay when there is a genuine case of infringement. In addition, the
new legislation also brings a benefit to consumers by reducing delays in bringing generic
copies to market.

Orange Book listings

The act did not seek to specify which patents may or may not be listed in the Orange
Book but rather to create a new mechanism for ensuring that only appropriate patents
were included. In addition, it allowed the generics company to counter-sue if the
originator claims infringement of what turned out to be a frivolous patent. This measure
should reduce the number of frivolous or last minute patent filings and, in turn, reduce
delays in bringing generics to market.

Following the implementation of the act, the FDA has announced revisions in the way in
which it lists patents in the Orange Book. It announced that it would:

Increase staffing to improve service;

Go to daily patent listings ≈April 2004;

Introduce new search capability for patent listings on the Orange Book website.

180-day exclusivity

The contentious issue of 180-day exclusivity periods also changed under Gregg-
Schumer. The previous system allowed individual generics companies to block
competition if, for example, it had either made a deal with the originator not to launch
or else had agreed to take product from the originator. Gregg-Schumer includes
“forfeiture” provisions which can result in the generics company losing its exclusivity if
found to have made such an arrangement. The FTC statement to the Senate mentioned
earlier quoted two examples that:

“involved agreements through which a brand-name drug manufacturer

allegedly paid a generic drug manufacturer not to enter and compete. The

81
 complaints in these cases also alleged that the brand-name company used the
generic company's rights to the 180-day exclusivity under Hatch-Waxman to
impede entry by other generic competitors. Two leading cases illustrate the
Commission's efforts in the area: Abbott/Geneva and Hoechst/Andrx”

Authorized generics

A new way of using, or possibly abusing, the 180-day system emerged during 2003 in
the shape of “authorized generics”. Authorized generics are copies made under license
from the respective innovator companies. In return, the originator receives royalties on
sales. One example is Par Pharma's generic version of Glaxo's Paxil (Paroxetine), which
Par Pharma was able to launch with Glaxo's approval even though Apotex had obtained
a 6-month exclusivity for its own generic. Similarly, IVAX reached an agreement with
GSK for an authorized version of Augmentin (Amoxicillin / Clavulanic Acid) after Teva,
Sandoz and Ranbaxy had challenged the patent.

However, some generics companies are not happy about authorized generics. Mylan has
filed a citizen's petition with the US FDA, asking it to prohibit sale of authorized
generics during the exclusivity period. Apotex, which won a patent case against GSK in
2003 for paxil, announced in March 2004 its support for the petition because, it argued,
“authorized generics violate the right of a first applicant to 180 days of marketing
exclusivity”. The US generic trade association GPhA announced in a March 2004 press
release that it sought to maintain the 180-day exclusivity and was concerned about the
issue of authorized generics.

Bioequivalence

Gregg-Schumer also addressed the difficult issue of bioequivalence. This is fairly simple
when applied to an oral dosage form where the question is whether blood levels of the
generic match those of the original reference product ± variation within specific limits.
Where, however, the delivery system is different, such as with inhalers or topical
preparations, the issue becomes more complex since blood levels do not directly relate

82
to the product’s activity. The question is thus: how then can a generic prove itself
equivalent to the original?

Branded pharmaceutical companies have contended that the FDA is not entitled to
dictate what tests are appropriate. Gregg-Schumer established that the FDA can
establish what tests are required for determining equivalence and gave it the authority to
do so. The Act should therefore eliminate one of the main blocking tactics used against
generics companies by removing the possibility of a legal challenge to the FDA as to its
power to determine what clinical testing is appropriate for unusual delivery systems. The
FDA is also under pressure to help reduce the drugs bill in the US. In a presentation
made to the GphA in February 2004, the OGD (Office of Generic Drugs) section of the
FDA announced that it was speeding up processing of generic ANDA’s and illustrated
this with the example of Benazepril.

OGD approved 13 applications for Benazepril or Benazepril/HCTZ;

2002 Sales for Lotensin® (the RLD) were $315 million (ranks 97th);

In one week, the retail price of a month’s supply of Benazepril fell from $44 to $26
(40% decrease);

Approximate annual savings of 100 million dollars.

As at June 2004, the new legislation has achieved its goal of removing some of the core
problems with the pharmaceutical patent system. However, it is still possible that future
legal challenges could expose weaknesses in the legislation and create opportunities for
tactical manipulation.

83
84
 CHAPTER 5

European legislation and its

impact

85
Chapter 5 European legislation and its
impact

Summary

Directive 2004/27/EC was passed by the European Parliament in early 2004.

Individual countries may take until October 2005 to pass the requirements into
local law. The legislation reformed the earlier Directive 2001/83/EC. The new
laws include a specific definition of a generic. The directive also introduces a
uniform level of data protection at 10 years. Regulators can access the data in
respect of a generic application after 8 years but the generic copy cannot be
launched until the expiry of the 10-year period

A “Bolar” clause is included permitting development of generics within Europe

prior to patent expiry. This is a major benefit to generics companies. An additional
benefit is that if originator companies withdraw a brand before any generic
versions are marketed, the generics can still use it as a reference product – which
closes a tactical loophole exploited by branded pharmaceutical companies.

Directive 2004/27/EC contained a significant benefit to the R&D side: the

lengthening of data exclusivity periods from 6 years in many countries to 10 years
everywhere in the term of data exclusivity. Products are awarded market
exclusivity of 10 years if approved via the centralized procedure, the method by
which innovative products are approved for all EU countries simultaneously.

Under new legislation, the same product can be used as reference product for
generics everywhere in the EU even if not registered in particular countries. This is
a small step towards unification of European generic legislation.

One problem for generics companies is what is known as the “Sunset Clause”. The
clause allows for the cancellation of any marketing authorization for a product that
is not placed on the market for 3 years from the date of authorization. However,
legal challenges by patent owners could, in theory, prevent generics companies
from applying for registrations more than 3-4 years in advance of a patent expiry
even if data exclusivity restrictions allowed them to do so.

New legislation also includes guidelines for registration of biogeneric products.

86
Overview of European generic legislation

There is not one single market, but 15 separate European markets for pharmaceuticals.
In addition, 10 more countries acceded to the EU on 1st May 2004. While US federal
laws apply uniformly in each US state, each country in Europe must incorporate EU
legislation into the framework of its own local legislation. Timelines for integration, how
countries integrate and interpret EU legal rulings all differ by country. The result is a
patchwork of regulations that act as barriers to expansion for companies building a pan-
European business. When Romano Prodi, then President of the European Commission,
addressed an EFPIA conference in June 2000 he commented that:

“Too many differences still exist between Member States in respect of medical
practice, health policies or social security problems for a single market for
medicines to be possible.”

At that time, he was speaking of the 15 members of the EU. The differences are now
magnified as the former CEE countries try to catch up from their very different starting
points. Since 2000, the European Commission and Parliament have tried to remedy the
situation by changing the Pharmaceutical Directive governing pharmaceuticals in the
EU. Despite these efforts, the legislative differences are likely to persist for several
years. This lack of integration is directly related to the short lifespan of the EU.

Table 5.8: EU members and their date of accession

Year Countries joining EU

1957 Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany
1973 UK, Denmark, and the Republic of Ireland
1981 Greece
1986 Spain and Portugal
2004 Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta,
Poland,
Slovakia, Slovenia

Source: Author’s research and analysis Business Insights Ltd

87
There is little to be gained from a detailed examination of each country’s medical,
pharmaceutical and legal systems but reference will be made to the them from time to
time to illustrate particular points. One aspect that highlights the differences across the
enlarged EU and neighboring states is whether generic substitution is permitted or not.

Table 5.9: Generic substitution by country in Europe (as at February 2004)

Generic substitution is permitted Generic substitution is illegal

Denmark Austria
Estonia Belgium
Finland Bulgaria*
France Croatia
Germany Cyprus
Hungary Czech Republic
Italy Greece
Latvia Ireland
Lithuania Slovakia
Malta Turkey*
Netherlands United Kingdom
Poland
Portugal
Romania*
Slovenia
Spain
Sweden

* Not EU member

Source: EGA website Business Insights Ltd

Within the group of those countries where substitution is allowed, there are significant
differences in the way that substitution is effected. For instance, in some of the countries
such as Italy it is compulsory, in some, such as Finland, it is compulsory but the patient
has the right to refuse. In others, such as the Netherlands, the doctor decides whether to
allow it or not, and elsewhere, such as Germany, the doctor may permit it but the
pharmacist may decide against generic prescription.

These differences partly stem from the latitude given to individual states as to when they
incorporate EU law into their own legislation as well as the differing approaches to cost

88
control adopted in each country. As it happens there is, in any case, no EU law on
substitution and individual states determine how they implement it or not.

Directive 2001/83

Directive 2001/83 was the overall body of EU law governing the manufacture and trade
in pharmaceuticals within the EU. It was enacted in 2001, replacing an earlier collection
of rules and regulations as part of moves to create a single market in pharmaceuticals.

As with the American Hatch-Waxman Act, the legislation was intended to balance the
needs of the branded pharmaceutical companies and generics companies. It partly
succeeded but was perceived to have flaws, such as the absence of a definition of a
generic and allowing branded companies to withdraw reference products, and was open
to abuse so the Parliament and EU Council subsequently decided that it needed revision,
particularly in the light of the forthcoming expansion of the EU from its then 15
members to the 25 that would constitute the EU after the 1st May accession of new
member countries. The review aimed to encompass the recommendations of the G10
Medicines Group, which was set up to improve the framework for competitiveness in
the pharmaceutical industry. With respect to generics, the group made the following
recommendation (Recommendation 4):

“To secure the development of a competitive generic market in Europe, that:

The European Institutions agree a way forward on intellectual property rights

issues (especially data exclusivity and Bolar) covered in the Commission’s
proposed legislation;

Member States - facilitated by the Commission - explore ways of increasing

generic penetration in individual markets (including generic prescribing and
dispensing). Particular attention should be given to improved market
mechanisms in full respect of public health considerations.”

89
The European Commission asked Françoise Grossetête to institute a review of the
Directive. She presented a report to Parliament and subsequently, in October 2002, a
proposal to amend 2001/83. This was adopted in December 2003 and the council
formally passed it into law on 31st March 2004. The new directive generally attains a
better balance between the needs of consumers, branded pharmaceutical companies and
generic companies. However, neither generics companies nor branded pharmaceutical
companies was fully satisfied with the final version and both could find aspects of it that
they would have preferred to lean more towards their perspective. For example, Brian
Ager, the EFPIA Director General, welcomed the conclusions of this process, but noted,

“although the final compromise package does not fully meet the needs of the
research-based pharmaceutical industry, it brings in important improvements in
Europe's regulatory structure.”

Even with the new law in place at the European level, changes across individual
European countries could take up to 2 years to be enacted locally. There is no obligation
for countries to transpose the new law into their national legislation until November
2005, since the Directive states,

“Member States shall bring into force the laws, regulations and administrative
provisions necessary to comply with this Directive no later than 30 October
2005.”

Directive 2004/27/EC

Benefits to the R&D side

The most significant benefit to the R&D side was the upward movement from 6 years in
many countries to 10 years everywhere in the term of data exclusivity. Data exclusivity
is the period during which the originator’s data remains confidential and no generic
company trying to register a copy may ask the regulators to refer to it. In line with the

90
other inconsistencies between countries, exclusivity had varied between 6 years and 10
years, although currently products are awarded market exclusivity of 10 years if
approved via the centralized procedure, which is the method by which innovative
products are approved for all European countries simultaneously. Data exclusivity times
are outlined in the table:

Table 5.10: EU data exclusivity times as at early 2003

6 years Austria, Denmark, Finland, Greece, Ireland, Norway, Portugal, Spain

10 years Belgium, France, Germany, Italy, Luxembourg, Netherlands, Sweden, UK

Source: Author’s research & analysis Business Insights Ltd

When the regulations are implemented, innovators will benefit from a minimum of 10
years on the market before any generic companies can market a copy based on to their
data, although the generic developer can refer to the data after only 8 years. In addition,
the originator may gain an additional year of exclusivity at the end of the 10-year period
(called the 10+1 arrangement), up to a maximum period of 11 years, if the regulator
authorizes a further innovative indication for the medicine or switches it to OTC use
during that period. This procedure differs from the US where the extension is granted on
the patent, not the data exclusivity. In respect of generic applications, the new law
reads:

“1. …….. the applicant shall not be required to provide the results of pre-
clinical tests and of clinical trials if he can demonstrate that the medicinal
product is a generic of a reference medicinal product which is or has been
authorised under Article 6 for not less than eight years in a Member State or in
the Community.

A generic medicinal product authorised pursuant to this provision shall not be

placed on the market until ten years have elapsed from the initial authorisation
of the reference product.”

91
It expands this by adding:

“5. In addition to the provisions laid down in paragraph 1, where an

application is made for a new indication for a well-established substance, a
non-cumulative period of one year of data exclusivity shall be granted,
provided that significant pre-clinical or clinical studies were carried out in
relation to the new indication.”

The EFPIA particularly welcomed this saying in its press release that,

“The granting of one extra year of data protection for important new uses (i.e.
if a further innovative indication for the medicine is authorised) is a welcome
incentive to conduct further research work on existing products.”

The new member states, which also had varying or no periods of data exclusivity,
usually 6 years where they did have any data exclusivity, will need to adapt themselves
to the new exclusivity periods. However, even before it actually joined the EU, Poland
announced in April 2004 according to the Warsaw Business Journal that it would
request a transition period for implementing the longer data exclusivity periods under
the new EU pharmaceutical legislation.

Research-oriented pharmaceutical companies also benefited through the opening a

centralized procedure through the European Medicines Agency (EMEA) to more types
of medicines than the restricted range that could use it previously, although the effect
had little impact on generics companies. This system will now be open to all new
medicines intended for four therapeutic areas - AIDS, diabetes, cancer and
neurodegenerative diseases - in addition to biotechnology products. However, this route
will now also be open to generics provided that the original was approved through the
centralized system.

92
The EFPIA, despite its reservations on certain issues, agreed that the new rules would
streamline the current regulatory procedures, thereby accelerating the availability of new
products for patients.

Benefits to the generic side

The EGA was reserved about the new directive, noting, “nothing is perfect, but we have
probably got the best we could out of it”. Nevertheless, the generics industry came out
as net winners when the benefits to the two sides are compared as is shown below, an
expected result, considering the recommendations of the G10 Medicines Group, which
had called for the directive to

“explore ways of increasing generic penetration in individual markets”.

93
The impact of new legislation

Definition of a generic

There had previously been no definitive answer for what constituted a generic product.
The new legislation set to answer the question unequivocally, resulting in a complex,
lengthy explanation. The definition in Article 10, Paragraph 2 reads: -

(b) “generic medicinal product” shall mean a medicinal product which has the
same qualitative and quantitative composition in active substances and the
same pharmaceutical form as the reference medicinal product, and whose
bioequivalence with the reference medicinal product has been demonstrated by
appropriate bioavailability studies. The different salts, esters, ethers, isomers,
mixtures of isomers, complexes or derivatives of an active substance shall be
considered to be the same active substance, unless they differ significantly in
properties with regard to safety and/or efficacy. In such cases, additional
information providing proof of the safety and/or efficacy of the various salts,
esters or derivatives of an authorised active substance must be supplied by the
applicant. The various immediate-release oral pharmaceutical forms shall be
considered to be one and the same pharmaceutical form. Bioavailability studies
need not be required of the applicant if he can demonstrate that the generic
medicinal product meets the relevant criteria as defined in the appropriate
detailed guidelines” [Highlighting added]

This comprehensive definition provides a benefit to the generic industry, removing the
need to prove repeatedly the equivalence of different forms of the original molecule.

94
Bolar clause

One of the most important aspects for generics companies was the long sought “Bolar”
clause, parallel to the Roche-Bolar part of US law, which will allow generic companies
to do their own development work within the EU during the period of patent protection
for the original molecule. Article 10, Paragraph 6 of Directive 2004/27/EC Of The
European Parliament And Of The Council reads:

“6. Conducting the necessary studies and trials with a view to the application
of paragraphs 1, 2, 3 and 4 and the consequential practical requirements shall
not be regarded as contrary to patent rights or to supplementary protection
certificates for medicinal products.” [Highlighting added]

The actual method of implementation will not be the same in each country, as some may
need to make a simple amendment to local patent law while others may need to
introduce changes to several aspects of local Intellectual Property law.

The practical impact of the clause on the timing of product launches may be minimal
because wherever the development is carried out, generics cannot be launched prior to
patent expiry. The main benefit will be that companies will not have to export drug
development jobs outside the EU and will have a tighter control over, and a closer
involvement with, development.

“Is Marketed”

Generics companies also benefited from resolution of what is meant by a drug described
as “is marketed”. Before resolution, the originator could withdraw a product close to its
patent expiry so that the generic industry could no longer produce a generic copy of a
drug on the market. This is a reflection of the requirement imposed on generic products
to demonstrate that they are “essentiality similar” to the original.

95
The specific case that triggered the movement for change was AstraZeneca’s Losec
(=Omeprazole). The original product patent was set to expire in Germany in 1999 and
shortly afterwards in other parts of Europe, according to when the SPC extending its
protection would expire (e.g. April 2002 in the UK, November 2002 in Belgium). Astra
(pre merger with Zeneca) foresaw the possibility of competition – Aktiebolaget Hässle
had patented an improvement on the original in the form of a slightly different isomer
called Esomperazole in 1979 that was launched as Nexium in various countries during
2000.

The original Losec was typically marketed as 20mg and 40mg capsules, whereas
Nexium consisted of tablets. Once AstraZeneca had switched doctors from Losec to
prescribing the new tablet version Nexium, it announced the withdrawal of the original
capsules. This move prevented generic companies from developing copies of the
capsules, which they would be unable to prove “essentially similar” to the product that
was actually on the market.

It is surprising that the branded industry chose to try this tactic as it is inconceivable that
the generic side would walk away from the issue and indeed the generics companies did
not, choosing instead to pursue it through the European Commission. AstraZeneca was
ordered to refrain from the product withdrawals and a further result of this was that the
new legislation embodies a provision specifically targeting this tactic, which reads:

“Article 10. 1. By way of derogation from Article 8(3)(i), and without prejudice
to the law relating to the protection of industrial and commercial property, the
applicant shall not be required to provide the results of pre-clinical tests and
of clinical trials if he can demonstrate that the medicinal product is a generic
of a reference medicinal product which is or has been authorised under
Article 6 for not less than eight years in a Member State or in the
Community.” [Highlighting added]

96
The new legislation removes the ability of the originator to remove the target drug for
generic copiers, as it allows the copier to mention a reference product that has been
marketed at any time anywhere in the EU even if no longer available.

European Reference Product

Generics companies have encountered problems when they have developed generics
copies of a brand in one country and have been asked to prove that the bioequivalence
of the generic with the target brand in one country applies in another country. I.e.
providing evidence that the target brand is not different in two different countries.

Article 10, Clause 1 of the Directive: outlines this issue:

“The first subparagraph shall also apply if the reference medicinal product
was not authorised in the Member State in which the application for the
generic medicinal product is submitted. In this case, the applicant shall
indicate in the application form the name of the Member State in which the
reference medicinal product is or has been authorised. At the request of the
competent authority of the Member State in which the application is submitted,
the competent authority of the other Member State shall transmit within a
period of one month, a confirmation that the reference medicinal product is or
has been authorised together with the full composition of the reference product
and if necessary other relevant documentation”. [Highlighting added].

It is important to note that the “other Member State” must confirm the existence of a
registration for the reference product with one month of receiving the request from the
country of the application. Without this, the possibility would exist of the regulatory
authority that has been asked for the confirmation could delay providing it.

97
Harmonization of SmPC’s

One of the ways envisaged for creating a harmonized market was the idea of a
regulatory system that would permit registration of products (including generics) in
multiple countries through a simplified arrangement. The system, known as MRP
(Mutual Recognition Procedure), was intended to satisfy this requirement and avoid the
need for a serious of applications to different authorities. However, the system did not
work, principally due to the issue of SmPC’s (Summary of Product Characteristics).
Each country wanted to have its own, separate version of the SmPC for the originator’s
product. Solutions included using the lowest common denominator, that is to say
indications that are common to all versions of the SmPC for generic applications but,
ultimately, the answer lay in enshrining a method of harmonization in law. The text of
the Directive is clear in Article 30 that it is intended to promote harmonization on this
issue:

“2. In order to promote harmonisation of authorizations for medicinal products

authorised in the Community, Member States shall, each year, forward to the
coordination group a list of medicinal products for which a harmonised
summary of product characteristics should be drawn up.”

In theory, regulatory authorities wishing to protect their domestic market could select
only less commercially interesting products to forward to the coordination group. There
is also the question of how many such SmPC’s the coordination group will, in practice,
be able to harmonize each year. Nevertheless, this measure will eventually remove one
of the major obstacles to the spread of generics across national borders.

Disadvantages of the legislation – winners and losers

The final version of the new directive was a compromise between the European Council
and the European Parliament. Generics companies were disappointed that Data
Exclusivity periods had been harmonized towards the lengthier period, although this
benefited R&D-led, branded pharmaceutical companies. Branded pharmaceutical
companies are disadvantaged by new periods of protection that will only apply to

98
products for which an application is submitted after the transposition of the directive
into local law – which is not obligatory until 30 October 2005. In terms of SmPC’s, it is
debatable how many SmPC’s the coordination group will actually be able to harmonize
each year given the potential for delays and debates over contentious points.

The final version of the legislation failed to address the issue of generic export versions
of products still under patent protection in the country of origin. This issue was
considered by Parliament but rejected by the commission. This was, at least in the short
term, a gain for the branded side although the Commission did undertake to include the
concept in measures to be discussed during 2004. Generics companies have benefited
from the establishment of guidelines for bio-similar products. although as none of these
has reached the market. With ordinary, chemically synthesized and characterized
generics, proving equivalence (usually through bioequivalence) is now relatively
straightforward. For biological products, the problem becomes more complex and the
Commission has taken the first steps in defining how to resolve this question by setting
out the requirements for bio-similar products in Annex I of the Directive.

A possible problem for generics and a benefit for originators is what has become known
as the “Sunset Clause”. The clause allows for the cancellation of any marketing
authorization for a product that is not placed on the market for 3 years from the date of
that authorization. The EGA envisages circumstances in which a generic companies
might obtain a registration for a generic that it then cannot market due to legal or other
delaying tactics from the originator. This would also prevent generic companies from
applying for registrations more than 3-4 years in advance of a patent expiry even if data
exclusivity restrictions allowed them to do so.

Other IP issues

Although not part of the review of pharmaceutical legislation, the Fourtou Report on
Intellectual Property enforcement was passed at almost the same time in March 2004
and caused consternation in the generic industry. Although most of the report has no
relevance to generics, one part deals with patents. The original aim of the law, and

99
report that preceded it, was to introduce measure to combat counterfeit and piracy,
which also affect pharmaceuticals. Generics companies are concerned that the legislation
opens the way for owners of patents to launch frivolous litigation against generic
companies, requiring the defendant top show innocence rather than the patent holder to
show infringement.

According to critics amongst consumer organizations and generic associations, the law
would also make it easier for drug manufacturers to forestall generic competition by
stretching the duration of their patents since it would turn patent infringements, even
some unwitting ones, into crimes punishable by prison terms. Greg Perry, director-
general of the European Generic Medicines Association, said the proposed law would
give big drug companies "the best tool they could have ever wished for" to fight off
generics.

100
 CHAPTER 6

US barriers to generics growth

101
Chapter 6 US barriers to generics
growth

Summary

The US market is approaching saturation in terms of generic penetration. As a

result, the possibilities for organic growth are limited, forcing companies to move
out of commodity generics and move upstream.

The major boosts to growth for generics companies will come from major patent
expiries. However, after 2006 the value of major patent expiries will fall off
sharply.

As a result, individual companies will feel increased competition from low cost
manufacturers including Indian producers. Low cost European and South
American manufacturers are also potential competitors. Low cost manufacturers
will increase pressures on margins in commodity generics.

The possible copying of reference price schemes from European models could also
push prices downwards. An extension of parallel importing from individual use to
commercial imports is another potential downward influence on prices.

Nevertheless the Congressional Budget Office (CBO) estimated that the removal
of restriction on imports would only reduce total drug spending by $40 billion over
10 years, or by about 1%.

Companies that are looking to move upstream are moving into modified release,
transdermal and injectable formulations. Larger companies that can afford the
R&D costs will also add biogenerics and proprietary brands to their ranges.

Increased price pressure in commodity generics and the entrance of low cost
manufacturers will bring about a shakeout of smaller, uncompetitive domestic
players and will lead to mergers/consolidations as companies seek to leverage
economies of scale.

Expansion into overseas markets will also form a part of some company strategies,
although US companies have traditionally been highly reticent to move outside the
US.

102
Introduction

Chapter 2, Successful US strategies, suggested that the generics industry has grown on
the back of a set of favorable market conditions. Possibly as a result of this, competition
has increased from both domestic and foreign companies. The US represents a relatively
mature generics market, partly a result of a regulatory environment that favors generic
development. Cost containment measures have led to widespread uptake of generics
driven by growth in the managed care arena and this, in turn, has resulted in high levels
of generic penetration and intense competition among the key players. Accordingly, the
US generics market is approaching saturation and so it can offer only limited growth to
generics companies in terms of increased uptake of generics.

Commodity generics alone will not provide companies with steady growth. This chapter
will address:

Threats to the generics industry in the US;

Strategies that will provide the growth that companies need to overcome the erosion
of the value of their product portfolios eroded by increased competition.

Threats to the industry

Market saturation

Although the commodity generics sector is highly saturated, with intense price
competition, its scale still makes it highly attractive to generics companies. More than
100 domestic US companies are present in the generic market and generics account for
more than 50% of packages dispensed by pharmacists. The next five years will see some
shakeout of smaller companies, either through leaving the market or by consolidation,
unless those companies are able to diversify away from commodity generics, or
overcome the issues of price erosion.

103
The US market dynamics of high generic penetration, saturation and intense competition
contrasts to the situation in Europe, where some countries still have very low level of
generic penetration. The US market can therefore offer only limited growth to generics
companies in terms of increased uptake. As a result, the flow of products coming off
patent will be a major source of growth. These gains will only be short-term, however,
due to price erosion. A sustainable growth or survival strategy for smaller and midsize
involves diversification away from the commodity generics market. Bigger companies
can use their size and broader commodity product range to offer customers “one-stop
shopping” by relieving them of the need to go to several different suppliers for various
items.

The clearest route is for companies to move up the value chain into higher margin
formulations such as modified release preparations, topical formulations, aerosols,
injections, prescription or OTC branded products and biogenerics. Inevitably, as more
companies move up the value chain prices will also erode there and the “arms-race” or
competition to stay ahead will move up again.

Increasing wholesaler consolidation

In the US market generic products are prescribed by their INN chemical name and
distributed through wholesalers rather than detailed to physicians. Consolidation in the
US pharmaceutical wholesale industry led to 3 large players (McKesson, Amerisource
and Cardinal Health) accounting for a 90% market share. These companies have sought
to reduce their number of suppliers, giving preference to generics companies with large
product baskets. This concentration also gives wholesalers strong bargaining power and
the ability to force down supply prices further.

Wholesaler consolidation will affect smaller players that are unable to offer customers
such a full range of products. Wholesaler preference for larger product range also forces
larger companies to stay in commodity generics, since reducing their portfolios of
commodities might risk alienating their principal clients.

104
Smaller companies will inevitably find it more difficult to compete in this market. This
will lead them to search for other, more specialized areas where there is limited
competition. These areas can include both internal US customers and possibly an
investigation of markets outside the US. Any of these strategies will necessarily be more
difficult for smaller companies with their limited financial and manpower resources. Of
course their similarly sized competitors will also be pursuing similar strategies and for
some of them the attempt to diversify will be unsuccessful so that some consolidation
will occur. Given the reluctance of even large American generics companies to venture
outside the US, very few of the smaller companies are likely to have either the impetus
or the means to do so, so that specialization should emerge as the preferred alternative.
In this case, their smaller size may work to their advantage in that they will be able to
concentrate on smaller products that are too small to interest larger competitors.

Overseas competitors – India

Indian companies are beginning to impact on the US generics market. They benefit from
several advantages that are unavailable to many US domestic companies. These include:

Low labor costs;

Low overheads;

Vertical integration / self sufficiency in API’s;

Government export incentives;

Absence of products patents.

The advantage of absence of product patents will disappear as India begins to accept
TRIPPS rulings and enshrines greater Intellectual Property protection in its legislation,
including in particular the right to protect pharmaceutical substances. For those Indian
companies such as Ranbaxy, Wockhardt and Dr. Reddy’s that are engaging in original
R&D this will actually be a welcome change. The proposed changes to the patent
regime in India will have a cut off date of January 1995, with molecules patented after

105
that date gaining full protection in India. Many of the key drugs on the market today
were patented before this and Indian companies should therefore still be able to target
most recently launched molecules for several years.

Previously, Indian companies could launch new molecules onto their domestic market
ahead of the originator. The publication of a patent by the originator and signs that
clinical trials had produced promising results would lead one or more of the Indian
companies to develop a synthesis for the API and then develop a formulation which it
would register while the originator was still going through the regulatory process in
Europe or the US. A further advantage is radically lower labor costs than in Europe or
the US.

The vertical integration could conceivably change in the longer term as Chinese API
manufacturers compete more vigorously. An indication in the growth of the Chinese
API industry can be seen by the number of visitors to the CphI (Chemical and
Pharmaceutical Ingredients) exhibition, which have risen rapidly to around 350
companies from only a handful in 1996 and 1997.

The possibility of a threat by Chinese manufacturers to Indian generics companies (and

by implication to US and European companies) can be seen in India. Some Indian
manufacturers of semi-synthetic penicillins have discontinued synthesis of the basic
benzyl penicillin building block that they used and buy it in from China instead.
Nevertheless, to a great extent this Indian self-sufficiency will continue even if at a
certain stage the formulation manufacturer decides to manufacture only for his own
internal consumption rather than supply to other formulation manufactures in India. The
advantage that this control over their API’s gives the Indian manufacturers is significant
in terms of competing in the commodity generic market. It is likely to lead to Indian
companies becoming predominant in this commodity market segment as they take
market share from the local US domestic competitors. Strategies for domestic US
companies include:

106
 Moving up the value chain;

Contract out the manufacture of their formulations to Indian partners.

These strategies are by their nature limited in the time for which they will avert
competition, as Indian companies will ultimately follow the US companies up the value
ladder. Similarly, the Indian companies that are carrying out contract manufacture for
US companies will eventually want to increase their profits by eventually starting to
market the products that they manufacture for others. The only thing holding them back
is the lack of personnel with the requisite marketing experience in the US. As the US
companies themselves move up the alder, the nature of the competitors that they face
will change as they move into promoting brands and find themselves face-to-face with
the big pharma companies.

Ranbaxy currently markets drugs in the US and is forecast to achieve annual US sales of
over $900m by 2008. Dr. Reddy’s has also made several Paragraph IV filings and will
also represent a serious threat and it is safe to assume that others will certainly follow.

Overseas competitors – Europe

America is seen as attractive to European generics companies because of higher margins

(despite price erosion) and fewer barriers. The margins are higher despite erosion
because the US brand prices are so much higher than those in Europe and the US is one
large market as opposed to Europe’s 25 separate markets. By contrast, Europe is
unattractive for US generics companies. In their eyes, when measured against the
enormous size and value of the American generics market, even the undeveloped
potential of the newer European markets seems too small to target.

Actual and potential entrants include larger players such as Sandoz (Switzerland)
Ratiopharm and Stada (Germany), Alpharma (Norway) and others from Eastern Europe
such as Pliva (Croatia) which bought the US company SIDMAK, Gedeon Richter and
Egis (Hungary), as well as KRKA and Lek (Slovenia). In this context, Turkish players

107
are also important as IVAX has already forged an alliance with Eczasibasi to supply it
for Eastern European markets. However IVAX might extend this relationship in the
future to allow it to market some of Eczasibasi’s low cost products in the US. In order
to further extend its options in Eastern Europe, IVAX announced at the start of June
2004 that it would be increasing its holding in the Polish company Polfa Kutno by
buying 25% of its shares from the Italian companies Recordati making it Polfa’s largest
shareholder.

European entrants face strong competition from domestic players. However,

consolidation or players leaving the market through erosion of margins could leave gaps
in the market for foreign generics markets to exploit. Although US prices erode quickly,
US prices are starting off from a much higher level. For example, UK companies can
sometimes end up with 70-80% discounts off the price of a brand that was already half
the US brand price.

While Eastern European generics entrants (which have a low cost base and are, in some
cases also vertically integrated for certain products where they manufacture their own
API’s) are a key threat, in the short term, established Western European players pose
the greatest risk. Germany’s market leader Ratiopharm has a presence through Martec
and the German company Schwarz was the first to launch a generic Omeprazole
(Prilosec/Losec) product into the US market in December 2002. Furthermore, another
of the three competitors that launched copies at the end of 2003 (Lek /Sandoz) is
European with the only US competitor being Mylan.

Thus even the (by European standards) relatively high cost German manufacturers feel
that the even higher priced US generic market has room for them. It may well be that
other European companies from lower priced countries will also see the potential in
America. For the US companies the question must be asked as to whether it will be
worthwhile for them to stand toe to toe and fight it out with the European invaders over
low margin commodities or whether they should find a way to form alliances with them?

108
Gaps in patent expiries

Focusing on blockbusters alone, over $84bn of drugs with sales in excess of $1 billion in
2002 will be at risk from generic competition in the US by 2008. If we extend this
review to include the entire portfolios of the top 40 pharmaceutical companies, then
products with total sales of $137bn in 2002 will have lost primary US patent protection
by 2008. This represents over 50% of the $235bn in total product sales generated by
these 40 companies in 2002.

Looking ahead, 2006 could present a key opportunity for generics companies to profit
from patent expiries, as blockbuster drugs with 2002 sales of over $16bn face expiry of
their US patent protection. One specific that is expected to be threatened by US generic
competition in that year example is Merck & Co.’s $5.6bn drug Zocor (Simvastatin).

Looking further into the future, however, there is a gap in patent expiries in 2008, which
will affect generics companies. The annual value of blockbuster patent expiries over the
first decade of the 21st century looks attractive until 2008, when the potential value of
expiries drops to a relatively low US$3bn compared to the US$16bn foreseen for 2006.

109
 Figure 6.7: The value of major US patent expiries to 2008

2008

2007

2006

2005

2004

2003

0 2 4 6 8 10 12 14 16 18
Sales (US$bn) (based on 2002 sales)

Source: Business Insights Business Insights Ltd

Those companies relying on the periodic boost from major patent expiries could find
their revenue streams shrinking towards the end of the decade. In view of the existing
trend towards price erosion in the market at current levels of competition, the
downwards pressure on prices can only get worse as more foreign competitors enter the
market (see previous two sections). As a result, by 2008 the short-term boosts to the
market resulting from the US$16bn expiries in 2006 will have largely evaporated and
2008 itself will bring little to relieve the reduction in margins. Companies will need to
ensure that they use the intervening years to balance their product portfolios to keep
them afloat when this happens.

Reference prices

Numerous European governments have introduced references prices, and the option
remains open for the US. One of the primary aims of the Hatch-Waxman legislation in
1984 was to facilitate market entry for generics. After almost 20 years it became

110
apparent that there were loopholes in the legislation McCain-Schumer and then Gregg-
Schumer introduced changes to close loopholes and balances the demands of cheaper
drugs with the commercial needs of the pharmaceutical sector. The US Senate has
shown itself ready to consider measures that hit branded margins and could see
reference prices as another suitable measure, particularly if the insurance companies and
healthcare providers start to exert pressure on the Senate to consider such a move.

While reference prices would signal a move towards cheaper drugs and theoretically
benefit the generics industry, the examples of France, Holland and Germany, in
particular, show reference prices have led to a dramatic drop in generic drug prices.
Ideally for generics companies, a reference pricing scheme should exert pressure on
branded companies to lower the prices of their brands after they become multi-source,
i.e. available from several sources apart from the originator and generic competitors are
available. In practice, many of these schemes, and the German one in particular, also hit
the generic products and forced them to keep lowering their prices as well in order to
remain within the scheme. A reference pricing system could harm the generics, whereas
it is possible for one to be structured in such as way as to be beneficial. In the short
term, a system to push down medicine prices will be beneficial to the government and
healthcare providers. However, if the long-term result is the extinction of the domestic
industry this could result in a reduction of drug availability and result in price rises.

Parallel imports

Parallel imports were illegal in the US until the Medicare reform bill passed into law in
December 2003. This permits licensed importers to bring FDA-approved products into
the US from Canada, but also requires the government to verify drug safety, something
for which it has no plans in place at this stage. Americans spend approximately $650m
annually in cross-border purchases of pharmaceuticals, the equivalent of 1-2% of total
pharmaceutical sales.

The Congressional Budget Office estimates that HR 2427 – the Pharmaceutical Market
Access Act of 2003 – could reduce total prescription drug spending in the US by around

111
1% from 2004-2013. Innovator companies in the US have already moved to limit their
exposure to by stopping supplies drugs to Canadian online pharmacies in that sold to US
consumers.

The US government is currently championing non-PT measures to reduce seniors’ drug

expenditure. Medicare reforms will see new prescription drug benefits introduced in
2006, including prescription discount cards offering 10-25% off retail prices. US parallel
imports could threaten the generics market if neighboring countries or other, lower cost
industrialized markets become accessible to US importers, consumers and wholesalers.
The two main possible sources are:

Canada;

Re-importation of exported US products.

In April 2004, a group of Senators including Senator John McCain, one of the sponsors
of the McCain–Schumer Act, proposed a draft bill to permit individuals to import a 90-
day supply of their own prescription medicines from Canada under the title “The
Pharmaceutical Market Access and Drug Safety Act of 2004”. The bill also proposed a
possible extension after one year to allow wholesalers to import from the EU and other
countries such as Australia, New Zealand, Japan and Switzerland on behalf of
individuals. What is to stop this being further extended to commercial importation, that
is to say importation in bulk quantities rather than just for individuals in the future?
There is nothing apart from the probable lobbying by the branded industry to prevent it.
The FDA, which had earlier expressed reservations about safety issues, was prevented in
an amendment to a June 2004 bill from using its funds to block such imports.

The Congressional Budget Office (CBO) in a paper on the topic reported that “The
Food and Drug Administration (FDA) has responded to calls for importation with
warnings that the safety of imported drugs cannot be guaranteed and that patients using
those products face elevated health risks”. The CBO however expressed itself in favour
of the measure and calculated that if introduced,

112
 “CBO estimates that the import volume would be in the range of about 10
percent to 15 percent of the U.S. market”.

It did also put the matter in perspective by pointing out that,

“CBO has concluded that permitting the importation of foreign-distributed

prescription drugs would produce at most a modest reduction in prescription
drug spending in the United States. H.R. 2427, for example, which would have
permitted importation from a broad set of industrialized countries, was
estimated to reduce total drug spending by $40 billion over 10 years, or by
about 1 percent”

A growth in parallel imports would serve to drive prices down, as in Europe, and
ultimately affect generic prices. The US government has expressed a reluctance to
consider new legislation but has been sharply criticized by some consumer groups for
resisting legislation. However, public pressure is mounting, supported by bipartisan
support in Congress. Allowing re-importation is a policy position of Democrat
Presidential candidate John Kerry.

113
Individual company strategies

The US generic market is still undergoing change, which will increase levels of
competition between domestic generics companies themselves, between generics
companies and pharmaceutical companies, domestic and foreign generics companies,
and generics suppliers and parallel importers. Company survival will depend on choosing
the right strategy or combination of strategies, itself partly dependent on depend on
financial strength due to the cost of other strategic options. These costs favor larger,
consolidated players over smaller players. Strategic options include:

Including a proportion of commodity generics in the range;

Movement away from normal release oral commodity generics;

Adjustment of product portfolio to include higher margin products;

Investment in original R&D;

Expansion into overseas markets;

Acquisitions;

Alliances with overseas manufacturers in India or Latin America;

Biogenerics.

At the moment, generics players fit into three main categories:

1) True generics specialists with a greater than 70 per cent focus on the generics
markets; e.g. Teva, Barr and Mylan;

2) Companies heavily focused on the generics arena with between 40–70 per cent of
revenues derived from generics; e.g. Watson and Alpharma;

114
 3) Major pharmaceutical companies with established, but proportionally minor,
generics operations. E.g. Sandoz (Novartis), Merck KGaA.

It is likely that there will be migration of companies between these categories as

individual companies seek the best ways to survive the continuing pressures on margins.
In view of the trend amongst US domestic generic companies to move upstream in
terms of technology and profitability, the direction of any migration will most probably
be from Category 1 to Category 2 for those companies that do not have Teva’s or
Mylan’s broad product ranges. On the other hand, in a maneuver that is in effect coming
full circle some companies that are shown in Category 3 will return to Category 1, at
least in the US, as they increase their generic activities in the American market.

Movement away from normal release oral commodity generics

Several companies have begun to move away from normal release oral commodity
generics as a means of achieving higher margins and meeting reduced competition.
Commodity generics will remain important in the portfolio, as most companies will
continue to look high volume sales as their main target. Leading players that are
balancing the need to stay in high volume commodity generics with moves into higher
value drug delivery systems include Teva, Sandoz, Mylan, Alpharma, IVAX and
Ratiopharm. In the case of Ratiopharm, it is using the commodity drugs to enter the US
market.

Other examples of companies looking at higher value products include:

Impax and Andrx (controlled release products);

Taro (topical products);

SICOR, now part of Teva, (injectables);

In each of these areas, there is a technological barrier to entry. Further examples of

companies moving upstream include Teva, which originally allied with Biovail to gain

115
access to a series of controlled release drugs, including versions of Cardizem CD and
Procardia XL. Teva also allied with Impax Labs to access a portfolio of 12 controlled
release products, including a number with the elusive first-to-file status. Alpharma
formed an alliance with Xactdose to create new delivery solutions to boost its liquid
generic portfolio. Novartis’s generics business partnered with Atrix to develop new
formulations for generic drugs. While the barriers to entry for specialty generics remain
in place and limit competition, these strategic moves will help drive growth. However, it
is expected that competition in this sector will increase and serve to drive down margins.

Adjustment of product portfolio to include higher margin products

High margin branded products that do not compete on price are still attractive to
generics companies, despite the cost barrier to entry. For example, Barr lost exclusivity
for Fluoxetine and Tamoxifen and suffered a decline in generic revenues in 2002. With
no products in the pipeline expected to repeat the success of Fluoxetine, Barr’s generics
sales are forecast to decline over the next five years. Barr is looking to its proprietary
portfolio to provide future growth in the long term, as the company increases its focus
on branded products to provide a more consistent revenue stream in the future. This
approach does carry inherent risks, outlined below.

Barr’s principal competitor, Mylan, is forecast for lower than average growth to 2007
due to increasing domestic competition. Following the success of Buspirone in 2001 as
a result of its “first to file“ exclusivity, the company will now have to look outside the
commodity generics to maintain revenue growth. Mylan’s branded pipeline offers few
growth opportunities, which will force the company to invest in R&D for its branded
business unit or else invest in or form an alliance with a company that does.

Moves into high margin, branded and specialized products, however, highlight the main
weaknesses of the generics sector: the lack of sales and marketing experience. In some
cases, competing generics companies have formed alliances to market proprietary
products, such as Mylan and Watson’s joint venture to market a small range of
proprietary products, Somerset Pharmaceuticals, which has been jointly owned since

116
1988. Although not an alliance with another generics company, Teva formed Teva
Marion Partners in 1997 as an equally owned marketing partnership between Teva and
Aventis to promote its MS treatment Copaxone in North America.

An alternative solution is to use acquisitions to acquire the expertise. This is covered

below in more detail in the section on acquisitions. Brands could of course be OTC
brands but this, in turn, needs another form of acquisition – the acquisition of new
consumer marketing skills.

Investment in original R&D

This is perhaps one of the riskiest and most resource intensive steps that generic
companies can take. The R&D risks incurred by traditional pharmaceutical companies
are a clear indication of the issues faced by generics companies moving upstream. There
are five major R&D strategies open to players in the generics market. Starting from the
most difficult and expensive R&D targets, they are:

Proprietary drugs - development of new chemical entities;

Supergenerics - development of value-added reformulations of off-patent drugs that

require new drug application (NDA) submissions;

Biogenerics - develop bioequivalent or clinically equivalent versions of biological

products;

Specialty generics - development of bioequivalent versions of barrier-to-entry

products;

Commodity generics - development of simple-to-manufacture, multi-source products

following patent expiry.

Teva, for example, has pursued an R&D strategy in tandem with its generics business.
Apart from its Copaxone MS therapy, it has established Teva Oncology Europe. The
company is third largest player in oncology generics in France, and in the top three in

117
Germany and Italy. Similarly, IVAX’s Indian R&D operations and Institute for Drug
Research in Hungary demonstrate its view of its future growth areas. Ranbaxy is
currently cooperating with Glaxo in a joint venture (JV) on urology, anti-diabetic, anti-
bacterial, asthma and anti-fungal products.

The Ranbaxy/Glaxo model or the Teva/Ivax model may provide a route for generics
companies that are also increasingly investing in R&D to follow, due to the advantage
that its R&D costs in India are approximately 1/20th of those in the US. To date as
noted earlier, US generics companies have proved very reluctant to move outside their
own borders but given the fact that skilled Indian researchers cost less than 10% of their
US counterparts the saving may overcome traditional resistance to operating outside the
US.

However, the R&D approach carries inherent risks for generics companies: for example,
the failure of some of the products in Barr’s R&D pipeline have left it dependent in the
short term upon the outcome of its pipeline paragraph IV filings to provide revenues.
While on the one hand the smaller, more streamlined R&D functions of former generics
companies may prove more cost-effective than those of big pharma, the traditional
generics business model will be radically changed, with a high potential returns and
lower competition matched by greater investment and risk. These factors could
ultimately expose the vulnerability of generics companies moving into R&D that suffer
pipeline failures.

118
Figure 6.8 clearly illustrates the trade-off between increasing risks and reducing levels of
competition.

Figure 6.8: Generics R&D strategies – trade off between risk and competition
level

Increasing
risks, costs Proprietary brands
and return

Supergenerics

Biogenerics

Specialty generics

Increasing
Commodity generics
competition

Source: Business Insights Business Insights Ltd

Acquisitions

Acquisitions can accelerate growth by facilitating geographical or sector market entry.

Examples include IVAX, which prepared for the launch of its branded respiratory line
through the acquisition in 2000 of Wakefield Pharmaceuticals, an operation focused on
detailing drugs to respiratory specialists. Similarly, in 2001 Andrx acquired CTEX,
which had its own marketed product line and, most importantly, 100 sales
representatives. In October 2001, Barr finalized its merger agreement with Duramed,
providing the company with an experienced physician detailing force. In 1998, Mylan
Pharmaceutical bought Penederm, also for access to its detailing teams.

Merger and acquisition (M&A) activity will continue as a major driver of growth within
the generics industry. However, generics market leaders in the drive for industry

119
consolidation such as Teva and IVAX, may be limited financially as to what they can
spend since they have already made some major acquisitions and so will need to get
some returns from them before they can continue their buying activities. This leaves the
gap open to companies such as Sandoz, Mylan and Andrx to lead the next wave of
industry consolidation. One key source of acquisitions comes from mergers within the
mainstream pharmaceutical sector. For example, the merger of Pfizer and Pharmacia in
2001 allowed SICOR to acquire several of Pharmacia’s generic and branded oncology
products, to add to SICOR’s existing oncology portfolio. Teva’s subsequent acquisition
of SICOR has underpinned the future growth of its oncology portfolio The European
Commission’s clearance of the recent Sanofi-Aventis merger has also required the sale
of a range of products.

Merger and acquisition between generics companies is likely to be driven by strategic

moves into new geographical markets, which are covered below in the next section.

Expansion into overseas markets

US generic companies have largely resisted expanding outside the US, In a case where a
US generics companies made a foreign acquisition, Watson bought Genus, the UK
offshoot of the former Bayer-Schein generic joint venture, but sold it in 2003 to Stada.
However, IVAX, in order to expand its representation outside the US completed six
acquisitions between 1999 and 2002, gaining a presence in Eastern Europe, South
America, Scandinavia and France.

The lack of overseas expansion by US companies compares starkly with strategies by

players outside the US. Teva expanded its presence in North America through the
acquisitions of Copley, the Canadian Novopharm, and in France through the purchase of
Bayer Classics. Sandoz (Novartis Generics) in particular has pursued a very ambitious
acquisition with a long shopping list and greatly helped by its massive financial
resources. It has grown with the acquisition of Lagap in the UK and Lek in Slovenia, in
South America through Labinca, in the US through Apothecon and throughout Europe
through the generics operations of BASF.

120
US companies have arguably not done enough to diversify geographically, although they
have been more proactive in entering higher margin and branded sectors. If competition
continues to increase within the US market, domestic companies will have to also look
to newer markets, either in Europe or in South America. The main difficulty for US
companies will be the lack of experience in operating in new overseas markets.

Figure 6.9: Drivers and resistors to geographic expansion

Lower competition

Competition from Lack of local market

established players knowledge

Stabilization of
Domestic market Efficiencies of scale
earnings

Complexity of local
regulations

Expanded revenue base

Driver of geographic expansion

Resistor to geographic expansion

Source: Business Insights Business Insights Ltd

121
Alliances with overseas manufacturers in India or Latin America

Alliances provide a key means for larger generics companies to leverage their existing
supplier relationships and expertise while either accessing new specialties or lower cost
manufacturing facilities. Continued involvement for US domestic generics companies in
the lower margin commodity generics sector is likely to depend on alliances with foreign
manufacturers.

IVAX already has an R&D centre in India and API facilities in Latin America and
Eastern Europe. Sandoz has Indian manufacturing facilities, Teva acquired an Indian
API manufacturing facility (Regent Drugs Limited), the Indian company Cipla has
relationships with IVAX and Watson and Dr Reddy’s has established a relationship with
PRI. However, the leading Indian company in the US, Ranbaxy, has established itself in
the US directly rather than forming a partnership with an existing player.

Biogenerics

Biogenerics, or biological generics, take the concept of specialty generics a step further
by targeting highly complex compounds. Biogenerics represent generic equivalents of
biologically derived rather than chemically synthesized preparations and are one of the
most uncertain, but potentially profitable opportunities up the value chain from
commodity generics. In the US, the uncertainty over the future of biogenerics lies in the
way in which equivalence can be proved. Simple bioequivalence is not enough -
although there is a European precedent as the EMEA have established a regulatory
pathway via the new Directive.

Some of the significant biological products with imminent patent expiries are shown in
Table 6.11 to demonstrate why these are potentially so significant. Although some of the
products have already lost their patent protection, they are still listed because the US
generic industry has yet to take advantage of them due to the absence as a suitable
regulatory mechanism.

122
 Table 6.11: Key US patent expiries, 2001-2006

Company Brand (generic) 2002 sales ($m) US patent

expiry

Genzyme Cerezyme/Ceredase (alglucerase) 619 2001

Novo Nordisk Novolin (human insulin) 1,881 2002
Eli Lilly Humulin (human insulin) 1,004 2002
Schering-Plough Intron A (interferon alpha-2b) 2,736* 2002
Biogen Avonex (interferon beta-1a) 1,034 2003
Eli Lilly Humatrope (somatropin) 329 2003
Genentech Nutropin (somatropin) 306 2003
Amgen/J&J/Sankyo Epogen (epoetin alpha) 6,668 2004
Genentech Protropin (somatrem) 297 2005
Genentech/ BI/ Mitsubishi/ Kyowa Activase (alteplase) 180 2005
Amgen Neupogen (filgrastim) 1,380 2006

Total sales 16,434

Source: Author’s research and analysis Business Insights Ltd

Biogenerics are attractive due the current market exclusivity of the products. Biological
products are highly expensive and the current legislation lacks a mechanism for approval
of generic forms of these drugs. This is mainly due to the inability to prove
bioequivalence for such complex molecules.

Nevertheless, leading generics companies are not waiting for the actual regulatory
mechanism to evolve but are anticipating that it will arrive eventually. Teva, IVAX and
Barr are all are actively planning to pursue biological generics Sandoz is targeting the
high barrier to entry biogenerics market. Teva’s acquisition of SICOR will provide it
with a portfolio of biogeneric products that will in turn allow it to move further into the
specialty generics market in Europe. Ratiopharm with its subsidiary BioGeneriX and
Stada (Bioceuticals Arzneimittel) have also both established of companies with
biological portfolios that will put them in a good position to target the US when the
FDA finally develops its mechanism.

123
The role of trade associations

Generics companies have begun to consolidate the expression of their interests. In 2001,
the country’s two leading generics associations merged to form the Generic
Pharmaceutical Association (GPha), which united the lobbying power of the US
generics industry. The GPhA now lobbies on potential threats to the industry and other
industry issues.

One key issue is Indian competition, which domestic US generics companies regard as a
major threat. A specific concern is the Indian government’s scheme of export incentives
to encourage exports, which is part of its efforts to boost exports, particularly in the
high tech pharmaceutical industry. The Indian incentives fell foul of the EU in the late
1990’s when the EU decided that these incentives allowed Indian manufacturers of
semi-synthetic API’s to dump them in European markets and it imposed fines on several
of the Indian manufacturers. A consolidated trade body is in a better position than
individual companies to collect evidence of whether incentives are still being given and
whether this is granting the Indian companies an undue advantage when selling their
formulations to the US, and to lobby against them.

A second area where, the trade body might usefully intervene to lobby the government is
the interlocking of patents and regulatory decisions. This complication that does not
exist in Europe. Pressure on Congress to decouple patents and the regulatory process as
in Europe would, however, eventually lose generic companies their 180-day exclusivity
but reduce their exposure to patent litigation.

Pushing for generic substitution might also benefit the industry as long as safeguards
were built in to the scheme such as allowing the doctor to overrule substitution if he felt
it inappropriate on medical grounds. Similarly a reference price scheme could encourage
generic use as long as it is not structured in such as way as to push generic prices into a
downward spiral that could threaten the domestic generics companies, as occurs in
Germany. To avoid this downward price spiral, a scheme would need to ensure that

124
pharmacists can substitute from any of the products in a reference price group rather
than just the lowest priced third as the German scheme mandates.

However, despite the GPhA’s membership of approximately 145 companies, it cannot

match the political lobbying power of the pharmaceutical industry. This has restricted
the market opportunity available to the generics companies due to the tactics used by
brand companies to delay generic competition and to switch patients to newer therapies.
Nevertheless, as a result of the way healthcare is funded in the US, the generics industry
has gained powerful allies in the shape of a number of business groups that are feeling
the pressure to reduce healthcare expenditure, as well as consumer groups.

In early 2002, 11 major US corporations, through the lobbying group Business for
Affordable Medicine Information, began to push Congress to amend laws that they
claimed kept generic drugs off the market. This group, including companies such as
General Motors and Wal-Mart Stores, has the potential economic clout to match the
$75m that the pharmaceutical industry is estimated to have spent on lobbying Congress
in 2001. It is probable that this contributed to the eventual success of the McCain-
Schumer Bill.

125
126
 CHAPTER 7

European barriers to generic

growth and strategies to combat
them

127
Chapter 7 European barriers to
generics growth

Summary

Europe’s fragmented markets present a major barrier to generic growth. New

legislation (Directive 2004/27/EC) has tried to remove some of the other barriers.

Widely varying prices offer an opportunity for low cost manufacturers to find new
markets in higher-priced countries. This presents a considerable competitive threat
to established European players. As in the US, this will force market leaders to
move upstream, although geographic expansion offers another key route to
growth.

Mature markets such as Germany, Denmark and the UK offer little prospect of
organic growth but have higher prices. However, newer generic markets such as
France, Greece, Italy or Spain are underdeveloped and most likely to provide
volume growth although at lower prices.

One of the key factors driving down prices is reference pricing schemes are acting
to force prices. Where domestic European companies leave the market, Indian
companies with a lower cost base will exploit the gaps. Similarly, East European
manufacturers will similarly be able to exploit their lower cost base to gain
advantage in the new EU markets that are available to them.

A pan-European market may result from commercial pressures rather than

regulatory measures as companies register particular products in all EU markets.
Furthermore, expansion by key players into new European markets and possible
consolidation could create pan-European generics players, which will lobby for
central European legislation to facilitate generics companies.

Biogenerics will offer an opportunity to companies that develop R&D specialisms.

Biogenerics will probably appear in Europe earlier than in the US since the EU has
set up a specific mechanism to approve them.

128
Overview

Probably the greatest barrier to generic growth in Europe is its structure. While the US
market the US market is unified, the European market is disparate and fragmented,
consisting of 25 separate generic markets, following the accession of 10 new states on
1st May 2004. Efforts have even been made to move closer to the idea of a single
market, including significant changes in 2003 and 2004 in the Directive 2001/83/EC that
governs pharmaceuticals in the EU resulting in the new Directive 2004/27/EC.

A single market and legislative framework for pharmaceuticals is not forecast in the
short term. As a starting point, prices fluctuate widely across Europe creating uneven
levels of competition between countries. A survey conducted by the Danish
pharmaceutical association LIF shows how prices for a basket of pharmaceuticals
compare to those of other countries and how they have compared to the same countries
in previous years. It is notable, however, that pricing levels in 2003 are less varied than
in 1999.

Table 7.12: European price comparisons, 1996-2003

Country 1996 1999 2003

UK 87.0 130.3 117.5

Liechtenstein 131.1 115.5
Ireland 92.5 116.1 114.8
Germany 102.7 110.8 114.0
Iceland 120.8 112.9
Holland 95.5 108.3 103.9
Denmark 100.0 100.0 100.0
Sweden 104.6 99.8
Finland 92.8 99.4 99.3
Belgium 84.6 100.7 95.3
Italy 69.1 91.5 94.9
Austria 93.2 100.3 93.0
France 81.7 97.0 92.9
Spain 68.9 113.7
Portugal 92.6 92.6
Greece 99.3 72.5

Note: Denmark set at 100

Source: LIF Denmark Business Insights Ltd

129
The fragmentation of the market is not the only key issue facing generics companies in
Europe. There are some issues that represent a threat to the generics industry as a whole
and others that weigh on individual companies. The second main issue is the different
degrees of maturity of country markets, with mature markets such as the UK and
Germany with high levels of generic penetration and generics saturation, and
underdeveloped markets such as Spain with low penetration, where prevailing prices
levels and existing medical practice act as constraints on growth.

Threats to the industry

Market saturation

In some markets, such as the UK where generic prescribing rates exceed 70% and
generic dispensing is over 50%, or Germany where generic prescription of multi-source
products similarly exceeds 70% and dispensing is over 50%, there is little room for
organic growth.

As in the US, companies selling commodity generics into these markets require revenue
growth from periodic patent expiries before intense price competition leads to price
erosion, and the descent of price levels to as low as 15 – 20% of the original brand
price. A further obstacle for domestic companies in these countries is that their markets
are highly attractive to foreign manufacturers from India and other, lower priced EU
markets. The German trade association DGV illustrated the degree of price competition
in a paper defending the industry from the accusation that German generics were too
expensive. It cited the example of Simvastatin, which had turnover of €242 million in
2002 as a brand and whose patent expired on 6th May 2003. By the end of the month the
generic market share had risen to 85.4% while the price had dropped by 40% from €77
to €45 per pack. In June 2003, it had dropped further to €39.90.

Domestic generics companies operating in only commodity generics face poor long term
prospects without either: diversifying into higher margin products that present some

130
technical, manufacturing or regulatory barrier or expanding into new geographical
markets.

Increasing wholesaler consolidation

There has been consolidation during the 1990’s amongst wholesalers across Europe,
giving rise to such large players as Celesio (formerly Gehe), Alliance-Unichem and
Phoenix, which became Europe’s third largest wholesaler at the end of 2003 after its
acquisition of the Finnish companies Tamro. A pan-European reach may offer
advantages to generic companies, but it is not without drawbacks. The main advantage
is that, in theory, a generics company could use a pan-European wholesaler as quick
means to achieve penetration in a number of markets. This cannot happen at the moment
without pan-European generic registrations. The main disadvantage is that the immense
purchasing power of such a wholesaler would allow it to squeeze the generic supplier’s
margins even further in return for access to the wider horizons, and would also place the
supplier open to direct competition from cheaper manufacturers competing on price
alone.

It is perhaps of more concern to most generics companies that there is increasing

consolidation within countries (rather than across Europe), thereby forcing them to
compete harder to get the necessary distribution even in their own domestic market.

Overseas competitors – India

Companies such as Ranbaxy, Wockhardt, Dr. Reddy’s, Zydus-Cadila and Intas have
already set up a presence in one or more European countries either through buying local
companies to use as marketing/distribution arm for market entry or else by setting up
their own subsidiary. Indian generics companies have initially concentrated on the UK
for historical and cultural reasons, but Ranbaxy has also bought companies in Germany
(Bayer Classics) and France (RPG).

131
Indian companies have lower overheads than European-based companies, as well as self-
sufficiency in API’s in many cases. In addition, until the implementation into local law of
the “Bolar” clause that forms part of the new Directive 2004/27/EC, Indian companies
can take advantage of being able to develop their own generic versions of major brands
years before EU competitors that do not have access to manufacturing facilities outside
the EU. These advantages have enabled Indian generics companies to gain a competitive
advantage where companies compete on price alone.

The choices facing Western competitors are therefore:

Exit the commodity generic market;

Form an alliance with an Indian company;

Contract out manufacture to an Indian companies;

Acquire an Indian subsidiary.

Few European companies are likely to completely abandon the commodity generic
market, because their customers require them to supply as large a range of generics as
possible. Companies are also attracted to remain in the market by the promise of large
profits following a new patent expiry, while prices remain high before price erosion. The
most common response will be to increase the proportion of high margin products and
outsource the manufacture of commodity generics, either to an alliance partner,
subsidiary or a contract manufacturer. Several companies have already opted for this
compromise, and either buy dossiers and finished products from an Indian supplier or
allow an Indian manufacturer to produce the formulation that they have developed.

132
Overseas competitors – Europe

For generics companies in the high cost Western markets, should the new EU members
from Eastern Europe be viewed as “The Enemy Within”? Or should this term be applied
to the emergent generic markets now taking off in the Southern or Mediterranean
countries?

There is no doubt that many of these countries, both Eastern and Southern European,
enjoy advantages over the Northern or Western markets that parallel those of India.
Many of them had no product patents until the early 1990’s giving them a major
opportunity to develop copies of major brands years ahead of the protected markets.
They also have a relatively low cost of living, albeit not as low as India, and in some
cases such as Italy a large domestic API industry.

For example, Krka, Gedeon-Richter and Lek (recently acquired by Novartis/Sandoz)

were all active in the EU before their home countries joined the EU. The removal of
trade barriers and will increase their activities within other EU markets, although it
removes the competitive advantage of being able to produce generic copies domestically
to bring to market before the patent expiry date. In May 2004, Sandoz announced its
decision in to build a new generic manufacturing plant in Poland. The output is not likely
to be meant for the domestic market alone, but rather for sale in other EU markets that
have now become more accessible to Poland.

In Southern Europe, the Greek government is aiming to have the lowest prices in
Europe – its domestic companies will therefore be forced to look to higher priced
markets for revenue. The governments of France, Italy and Portugal are all making
efforts to develop a domestic generic market. Because these markets are starting off
with branded prices at or below the European average, and those prices are pushed
down still further by reference price schemes, these manufacturers will look for higher
margins in their higher priced EU neighbors’ markets.

133
Reference prices

Seven countries – the Netherlands, Belgium, Spain, France, Italy, Sweden and Germany
use a reference pricing system. With the exception of Germany, these countries also
operate a price setting procedure. Many of the Southern European countries, including
Italy, Spain, Greece and France have a reference pricing system that imposes strict
government controls over drug prices. If companies do not agree to sell products at the
imposed price, the drugs will not be reimbursed, which can cripple sales prospects. In
2004, the EGA carried out a survey of reference price schemes detailed in Table 7.13.

Table 7.13: European reference pricing systems in each country, by type

System Countries

Free Pricing – no restrictions Finland, Germany, Sweden, UK, Lithuania, Malta

Generic priced at fixed Austria (25-30%), Belgium (26%), Spain (30%),

margin below Originator France (30-40%), Italy (20%), Netherlands (40%),
Portugal (35%), Croatia (5%), Cyprus (10-20%),
Estonia (30%), Hungary, Latvia (20%), Romania,
Slovenia, Turkey (20-30%)

Fixed Maximum price Denmark, Bulgaria, Czech Republic, Poland, Slovakia

Negotiable (price/volume link) Ireland, Poland

Source: EGA survey Business Insights Ltd

It is questionable how free the German system is, in practice, when the “Aut Idem”
scheme forces a regular reduction of prices to keep products eligible for substitution in
place of a more expensive alternative. In addition, while the UK has free pricing for
brands, generics are now subject to maximum prices since 2000 and the Department of
Health has subsequently advanced further proposals for constraining generic prices.

134
 Figure 7.10: European prices compared against reference price systems

Portugal*

Spain*

France

Austria Free pricing

Generic price at fixed margin
Italy below originator
Belgium Fixed maximum price
Finland Negotiable (price/volume link)
Sweden

Denmark

Netherlands

Germany

Ireland

UK*

0 20 40 60 80 100 120 140

Price relative to Denmark, 2003 (Denmark=100)

Note: Portugal & Spain both refer to price comparisons based on 1999 data. UK has instituted maximum
prices for generics since 2000.

Source: LIF, Business Insights analysis Business Insights Ltd

In many of these schemes, the customer retains the option of paying the difference
between the reimbursement price and the actual price for drugs for which there are
generic products or cheaper branded alternatives on the market. Price fixing systems can
easily mutate into fully-fledged reference price schemes. For example, Slovenia is
currently reforming its pricing policy into a formal reference pricing system, which is
weighted towards ‘cheaper’ imported generics. Following their accession to the EU in
May 2004, it is anticipated that key accession markets will reformat their pricing
systems by following Slovenia’s example. The potential for these schemes to hit generics
as well as the high priced brands that are usually the local government’s target, means
that they are a significant threat to generics.

135
Parallel imports

Parallel imports only cannibalize sales from brands during the period of patent
protection when no generics exist. After patent expiry, parallel imports exert a negative
influence over generics in two significant ways:

Parallel imports determine the maximum price that generics can charge when they
become available;

Parallel imports can be dispensed against generic prescriptions as an alternative to

the generic if they are cheap enough.

Parallel imports can account for a significant part of the market and thus represent a
very serious competitor for generics. According to figures from EFPIA, parallel imports
took around 15% of the UK market in 2001, 9.9% in the Netherlands and 9.5% in
Denmark. Governments see parallel imports as another way of reducing the drugs bill -
Germany, for example, has introduced a parallel import quota requiring pharmacists to
dispense at least 5.5% of drugs as parallel imports after April 2002 which was further
increased to 7% from January 2003, indicating that parallel imports remained a strong
focus of cost containment.

The main pharmaceutical industry is disappointed that the EU has done little from a
legislative perspective to address the issue of parallel importing with regards to
enlargement. Although the European Commission (EC) does recognize the need to
block increased parallel trade post-accession, the pharmaceutical industry is still
expected to have great difficulty in securing the protection it requires. Currently, there is
no political motivation to restrict parallel imports and the idea of contravening the EU’s
laws on free movement of pharmaceuticals is not popular within member states.
Furthermore, the pharmaceutical industry has had little success in fighting off parallel
trade, having lost a number of key legal battles in the European courts. Thus the scale of
parallel import activity is likely to grow as more sources of low priced supplies from the
new accession states become available.

136
Individual company strategies

Given all the potential threats and obstacles standing in their way, how will the
successful generic companies of the future survive and thrive? As with the US, the
answers for individual companies will depend on individual circumstances but will fall
into one or more of these categories:

Some proportion of commodity generics in the range;

Movement away from normal release oral commodity generics;

Adjustment of product portfolio to include higher margin products;

Investment in original R&D;

Expansion into overseas markets;

Acquisitions;

Alliances with overseas manufacturers in India or Eastern/Southern Europe;

Biogenerics.

137
Portfolio adjustment

Commodity generics will inevitably remain a part of any generic company’s range as
these remain the basis on which the rest of the business is built. Equally inevitably,
companies will be caught between the opposing pressures of clients who expect them to
supply commodities on the one hand and the pressure of diminishing margins on those
products due to government cost containment measures and heavy competition.
Companies such as Teva, Novartis and Ratiopharm are looking to remain in commodity
generics as can leverage economies of scale in manufacture and purchase of supplies
that are not available to their smaller competitors.

Most generics companies cannot rely solely on commodities to generate profit growth,
even if the sector ensures high turnover. The proportion of commodity generics in a
company’s product range will depend on individual circumstances but the rest of the
range will necessarily consist of products such as modified release formulations,
transdermal patches, inhaler or nasal preparations, injections or any other technologies
that presents a technological barrier to entry. Individual companies will have to be
selective about which area they move into as the costs of overcoming these barriers will
be too high for some of the smaller companies and this in turn will lead to a shakeout
and some consolidation through merger and acquisition.

Examples of European companies that have already moved in this direction include:

Ratiopharm, which formed an alliance with drug delivery company SkyePharma to

develop oral controlled release versions of Diclofenac;

Alpharma, which acquired Faulding’s oral solid dose business (including Faulding
Laboratories), which produces and markets an oral, sustained release formulation of
morphine in the US. Alpharma can exploit this specialist R&D expertise in its
generics business by developing difficult, high margin specialty generics.

138
Because not all generics companies possess the specialist drug delivery technology
themselves, manufacturers will collaborate with other companies who have expertise in
drug delivery technologies and enhanced purification. By using these technologies,
generics companies can not only copy existing therapies but also create novel, value-
added generic versions of originator drugs, increasing demand due to therapeutic
improvements and increasing profit margins through reduced competition. This option
will not be open to all generic companies because the increased demand for their
technologies will allow the drug delivery specialists to be very selective about which
partners they chose. As a result, smaller companies who cannot offer the levels of
distribution that the specialists will be seeking will struggle to find alliance partners.

Whether or not the move into this area brings long-term higher margins for these
specialist products will depend on the local regulatory situation in each country. If the
authorities allow modified release products for example to be prescribed generically,
then there will be a degrees of price erosion albeit slower than for commodities due to
the smaller number of players. However, if the regulatory authorities insist that all
modified release products must be prescribed by brand name, then companies will have
to set up detailing forces to visit physicians and this will move them from one area of
competition, against generics companies, into another against mainstream
pharmaceutical branded marketing with its much higher promotional costs and different
business model.

However, moving into value-added products is not a solution in itself: Indian

manufacturers are increasing their R&D investment and moving into the same high
margin product areas that Western generics companies are using to drive future growth.
For example, Ranbaxy has developed a number of once-daily formulations of drugs that
it now markets in India and has even licensed one of them, Cipro OD, a once-daily,
controlled release formulation of Bayer’s antibiotic Cipro (Ciprofloxacin) back to Bayer
who invented the product in the first place. Intas, which has primarily acted as a contract
manufacturer Western Europe for standard generics, set up a dedicated biotech research
company called Indus Biologicals in 2001. The company now offers biogeneric bulk and

139
formulations. Other Indian players such as Dr Reddy’s, Wockhardt and Zydus-Cadila
are all investing in R&D capabilities.

Supergenerics also provide core growth opportunities. They can be defined as:

Controlled or extended release formulations of existing oral therapies that reduce

side effects and increase patient compliance;

Products with alternative delivery routes;

Products manufactured using enhanced purification methods compared to the

original product to reduce dosing and to limit side effects.

IVAX is one of the market leaders in supergenerics, having established its position in
Europe initially through marketing of its specialty and supergeneric respiratory products
through its UK subsidiary Norton, which had developed the technology.

A final strategy is to buy up existing, higher margins branded products (that also carry
higher promotional costs) that branded companies wish to sell.

Expand abroad

Northern European markets have high generic penetration rates, large generic markets
with little growth potential and relatively high prices. They are now approaching
saturation, and the companies within them are feeling their margins squeezed by
competition and government intervention. As a result, the underdeveloped generics
markets of Southern Europe are targets for overseas expansion. Southern European
markets have low generic penetration rates, small generic markets with high growth
potential but relatively low prices. Despite their immature status, they are developing
slowly, the companies are feeling their margins squeezed by competition and
government intervention. However, despite government initiatives to keep generic
prices low, Southern European markets are still attractive, because there is government
pressure to increase generic penetration rates, and these markets currently still have a

140
low penetration. Major players, such as German companies, are already moving into
Southern Europe because they feel that they can exploit their long experience in the
mature markets to take advantage of he newer developing markets. This could create a
de facto European market, which may spur initiatives in the EU to create a more
manageable pan-European market.

Governments are likely to support this if it means they get cheaper drugs bills (and it
benefits companies from EU leaders such as France and Germany). However, companies
such as Pliva in EU accession countries are leveraging their lower cost manufacturing
bases to move into larger commodity generics markets and compete on price. These
companies will, most likely, compete in this arena with big European players and Indian
entrants. This situation will create a number of players who look to leverage their
economies of scale by expanding across Europe. The real losers will have to be smaller
domestic players, who will have higher costs, less favorable supplier relationships, less
ability to move upstream, and more vulnerability to market entry by a key European,
American or Indian competitor. This in turn will lead to a market shakeout and the
possibility of a round of consolidation among key European players bidding to create a
pan-European network.

Even though the trend will be for companies to move south into the newer markets,
companies that want to expand cannot afford to stay only in their own market but must
seek ways into other markets by implantation, acquisition or cooperation. Some of the
companies from the newer markets will also fall into this category and will seek to enter
the mature markets. Commercial pressures on individual companies to expand as part of
their search for relief from domestic competition may lead some of the bigger companies
to register certain products in every EU market. Thus commercial pressure rather than
sluggish, albeit well-intentioned, pressure from Brussels may be the spur that eventually
creates a true single market.

Major German players such as Ratiopharm, Stada and Hexal have already set up or
acquired operations in Italy, Spain and Portugal for example and some may continue on

141
beyond the boundaries of Europe. Going in the opposite direction, the Croatian
company Pliva has made acquisitions in the UK, Germany, Denmark and Spain amongst
others. Figure 7.11 illustrates the factors that explain the relative attractiveness of both
Northern and Southern European markets.

Figure 7.11: Pharmaceutical prices and generic penetration in Europe

Generic penetration by value (%)

France
Price in €

Spain

Italy

Netherlands

UK

Germany

0 5 10 15 20 25
Average price for medicinal products in 2001 (€)
/ Generic penetration by value in 2002 (%)

Source: EGA, Business Insights Business Insights Ltd

It is clear that the greatest growth opportunities will come from the newer generic
markets since they have much further to grow and their governments have repeatedly
stated their intentions of making sure that this happens. In France at a meeting with the
pharmacists in June 2004, the Minister of Health declared that one of the main elements
of his new policies was the development of the generics market.

However, the growth prospects of the generics market are tempered by the Minister of
Health’s plan to extend the TFR reference pricing system and foresaw a reduction in the
price of generics. Nevertheless, generics are making an impact on the market by
increasing their penetration – the French pharmaceutical journal ”Le Moniteur des

142
Pharmacies” reported in June 2004 that one month after the expiry of the patent for
Mopral, more than one out of every two packs of Omeprazole 20mg dispensed is a
generic.

Belgium also has a tiny generic market. Its Health Minister spoke in early 2004 of
measures such as higher fees for doctors prescribing generics. He also mentioned
measures to ease the financial burden on wholesalers of stocking generics and revival of
moves to implement the generic substitution law passed in 1993 but never actually used.

Attack patents – risks and opportunities

There are only national patents in Europe. Proposals for a community patent that is
genuinely pan-European and allows protection across the entire EU through one
application have repeatedly foundered on concerns about its practical implementation.
Further attempts to reach agreement in May 2004 failed due to a lack of unanimity
about the number of languages in which patents could be secured.

Thus companies that wish to attack a pharmaceutical patent, whether product, process
or formulation, have to do so on a country-by-country basis. This is a key issue for
generics companies, as no country’s patent court will necessarily accept another
country’s decision as setting a precedent for its own deliberations. In consequence, a
successful challenge in one territory must be repeated in every other territory where the
challenger wishes to attack a patent – at high cost to the challenger.

However, generics companies have attempted to contain the costs of litigation by acting
together. In 2004, four generic companies in the UK – CIPLA, IVAX, Arrow and
Generics UK combined to launch a successful attack on the GSK patent for the
combination of two asthma therapies Salmeterol and Fluticasone, sold under the brand
name Seretide. Similarly in 2003, also in the UK, Teva, Arrow and Generics UK joined
together to launch a successful attack on two critical patents relating to Merck Sharpe
&Dohmes’s Sodium Alendronate, sold as Fosamax. When the German patent on

143
Omeprazole neared expiry in 1999, AstraZeneca fought Ratiopharm, Stada and other
smaller companies although the companies did not actually combine forces.

However, it is not only the generic companies that attack branded patents – in 2003, the
European Commission announced an investigation into AstraZeneca’s patent defence of
Omeprazole (Losec), charging that the company had misused the patent system in order
to protect itself by blocking or delaying the entry to market of generic versions.
Amongst the allegations that the EU made was the charge that AstraZeneca had
deceived local authorities about the length of the regulatory process for Losec in order
to gain SPC patent extension to which it was not entitled.

Patent attacks often occur when generics companies challenge a formulation or process
patent that continues to run for several years after the original molecule patent has
expired. Branded pharmaceutical companies use these patents to extend their period of
exclusivity beyond that obtained from the original product, a process sometimes referred
to as “evergreening”. Each of these additional patents must be attacked separately. The
costs involved in doing so, even with a successful outcome, can prove to be worth more
than potential gains to the individual generics company. This is in contrast to the US
system where the successful generic companies enjoys 180 days’ market exclusivity as
no such system exists in Europe and, once the patent is overturned, any company with a
marketing authorization can launch immediately.

A key upcoming concern for generics companies is the Fourtou report on Intellectual
Property that was approved by the Eureopan Parliament in March 2004. The original
intention of the report was to deal with issues such as counterfeiting but during the
course of its revision it came to include patents. The ramification for the generics
industry is that, according to the EGA, there is a “lack of safeguards against unfounded
or even frivolous patent litigation”. The Directive includes a provision for the
destruction of infringing goods at the expense of the infringing party and also stipulates
that the goods to be destroyed should include materials and instruments used to create
or manufacture the goods in question. It is possible that if a generic company were to

144
lose a patent challenge, it would be obliged to destroy not only the finished formulation
but also the machinery used to manufacture the formulation and all the stocks of API.
This potentially makes manufacture outside the EU additionally attractive.

Form an alliance with multinational

Both generics and multinational branded pharmaceutical companies have accepted that
alliances can mediate the competition between them. Cooperation depends on how
pragmatic the originator is in respect of generics. Shortly before the patent on Zantac
(Ranitidine) Form I expired in 1997, Glaxo and Generics UK (GUK) reached an
agreement for Glaxo to supply the generic exclusively to GUK six months prior to
patent expiry thereby granting GUK a massive lead and advantage over its competitors.
Both parties benefited by avoiding a series of patent disputes that Glaxo could ultimately
have lost but which otherwise would have delayed GUK’s launch of generic Ranitidine.
Unlike in the US, where this arrangement could cause problems due to a potential abuse
of 180-day exclusivity granted to the first to file, there is no special protection granted
to the first to file or launch a generic in Europe.

In theory, a generic companies could develop a generic version of a brand and then
reach an arrangement with the originator to not launch the generics company in order
not to damage its market, but such an arrangement would be anti-competitive and thus
illegal. There have been cases of this in the US as mentioned in the chapter dealing with
the US where the FTC statement mentioned amongst others the lawsuit against Aventis
and Andrx, following the agreement whereby where Aventis paid Andrx not to market
generic Cardizem.

145
Conduct own R&D

A riskier strategy is investment in original R&D to develop new formulations rather than
buying them in and, budget permitting, to try and synthesize a New Chemical Entity.
However, given the R&D productivity problems encountered by large, mainstream
pharmaceutical players, companies even after repeated mergers, the risks for generics
companies high, but so are the potential rewards. However, with the increased focus on
in-licensing by big pharma, generics companies that become more R&D led can mitigate
sales and marketing risk of their drug discovery programs, following the biotech model.
Generics companies will benefit from more streamlined administration and, perhaps,
more focus, by targeting only a narrow range of research areas.

R&D companies such as Novartis and Merck Darmstadt have moved into generics –
what is to stop generic crossing over the border in the opposite direction, apart of
course from the high costs of doing so? In fact, some generic companies have already
taken this step since they already have the understanding of the subject and
technological skills to move in the opposite direction.

Teva is perhaps the leader in generics companies moving into R&D. It has produced its
own MS treatment, branded as Copaxone and also has a dedicated oncology business
unit. Hexal has formed a subsidiary, Hexal Gentech, to develop novel molecular
therapeutics and diagnostics for cancer and infectious diseases. In 2003, 20% of Stada’s
revenues in Germany came from branded products. Ranbaxy has a new chemical entity
research program to provide it with products for the domestic market after 2005, when
India is due to move from a process patent to a product patent regime under TRIPS.
This has already resulted in the development of a benign prostate hyperplasia (BPH)
treatment, RBx-2258, which it has licensed to Schwarz. Other Indian players such as Dr
Reddy’s, Wockhardt and Zydus-Cadila are also investing in R&D capabilities

146
Biogenerics

Biologics offer a core growth opportunity in the pharmaceutical sector, and as such,
generics companies have identified biogenerics as a vital sector. Stada, started producing
biogenerics in 2001, having established Bioceuticals Arzneimittel to finance the
development of its biogeneric line, and holds a 10% stake in the company. Stada
retained the option to buy back the remaining stake in the company in 2010, and has
also retained the global marketing rights to any products developed by the company. It
is developing versions of Erythropoietin (=Eprex, / Johnson & Johnson), Filgrastim
(=Neupogen / Amgen) and Interferon Beta (=Rebif/Avonex from Serono/Biogen) all of
which it hopes to launch by 2006. Of course there is still the major hurdle of finding a
suitable regulatory pathway for registering them and proving their equivalence to the
original. Nevertheless, it should be worthwhile as the three drugs together had European
sales of almost $2.1 billion in 2002.

Stada’s competitor Ratiopharm has BioGeneriX and its German neighbour Merck KgaA
is also developing an ability in this area. UK company GeneMedix is also developing
biogenerics, although it is not otherwise active in generics. Teva, has entered an
agreement with Biotechnology General, while Sandoz is in detailed consultation with
European regulatory bodies to gain approval of its human growth hormone Omnitrope.

Eastern European companies are especially experienced in biogenerics, because lower

regulatory barriers have meant that some products are already on the market. SICOR
(now part of Teva) increased its presence in the biogenerics market with the acquisition
of a Lithuanian company, Biotechna, in 2001, which has experience in the development
and production of biological products.

It is probable that biogenerics will reach Western Europe before they reach the US
market due to the recent legislative changes that resulted in Directive 2004/27/EC. A
section specifically sought to create a suitable regulatory mechanism for such products,
while there is no such provision in US legislation.

147
The potential rewards of biogenerics as illustrated Table 7.14.

Table 7.14: Biologics patent expiries, 2001-2006

Company Brand(generic) 2001 sales ($m) US patent EU patent

expiry expiry

Amgen/Johnson & Johnson Epogen/Procrit 5,772 2004 2005

/Sankyo (epoetin alpha)

Novo Nordisk Novolin (human insulin) 1,829 2002 2005

Amgen/Roche Neupogen (filgrastim) 1,533 2006

Eli Lilly Humulin (human insulin) 1,061 2002 2005

Biogen Avonex (interferon beta-1a) 972 2003 2003

Schering Plough Intron A (interferon alpha-2b) 700e 2002 2002

Genzyme Cerezyme/ 570 2001

Ceredase (alglucerase)

Eli Lilly Humatrope (somatropin) 311e 2003 2002

Genentech/Bo’ger Ingelheim Activase (alteplase) 276* 2005

/Mitsubishi/ Kyowa Hakko Kogyo

Genentech Nutropin (somatropin) 250 2003 2002

Genentech Protropin (somatrem) 250 2005

Total susceptible to generic competition 13,524

Estimated sales of Genentech's Activase at $130m

e = estimate

Source: Business Insights Business Insights Ltd

148
Add parallel imports to the range

Parallel imports represent both a significant threat and an opportunity to generic

companies. Generic companies’ customers also purchase parallel imports. Parallel
imports represent an opportunity for generics companies in Europe. The similarity of
their commercial models can be seen by the fact that some companies such as Waymade
and Sigma in the UK or Centrafarm in Holland that started off as parallel importers are
now adding generics to their range. Parallel imports took around 15% of the UK market
in 2001, 9.9% in the Netherlands and 9.5% in Denmark according to EFPIA. Generics
companies have much to gain from expanding their portfolio and tackling competition
from parallel importers, particularly in countries such as Germany, where the
government has already introduced measure to compel pharmacists to dispense a certain
proportion of parallel imports.

Enter OTC market

The ease with generics companies can enter the OTC market varies by country,
depending on how willing regulatory authorities are to allow switches from prescription
to OTC. The UK’s MHRA has enabled switching, with products as Zantac (Ranitidine),
Zirtek (Cetirizine) and most recently Zocor (Simvastain) becoming available as OTC
products. In other countries such as Germany former prescription products that are
available, as OTC’s tend to be restricted to simple analgesics and cough and cold
remedies. In general, European regulatory authorities have been unwilling to liberalize
their healthcare markets. There is a good strategic fit between the OTC market and
generics companies due to the high volume of OTC sales and the ability of generics
companies to leverage their existing supplier relationships. However, the main barrier
for generics companies would be the need to learn or buy in new consumer marketing
skills.

149
The role of trade associations

Lobby for legislative change

Generic companies in most countries of Europe enjoy the benefit of an active generic
trade association such as DGV in Germany, BOGIN in Holland, the BGMA in the UK,
AESEG in Spain and so on. These country trade bodies joined together to form the
EGA so that generic companies can be represented at all levels of government, both
national and European. This in turn has resulted in a powerful lobby for changes in the
European pharmaceutical legislation that has found a generally sympathetic reception in
Brussels. Many of the changes that were introduced into the directive were a result of
active lobbying by the industry to the EU Parliament and then the Council to explain
how such changes would benefit the public. It is still necessary for individual national
associations to keep pressure on local governments as the directive still has to be passed
into local law and this is subject to interpretation by each national authority.

Lobby against legislative change

National associations and the EGA also have a key role in lobbying to prevent
legislation that could harm the generics industry. However, they have failed to lobby
successfully against the Fourtou report on Intellectual Property, which looks likely to
cause problems to the generics industry unless it is subject to amendments to the
sections dealing with patents. The second main area which the associations will target in
each country are pricing mechanisms that are fixed nationally, intended to target high
margin brands but end up also affecting generics. Generics companies, and their
representative bodies may seek a decoupling of pricing mechanisms, so that generics
companies are not affected by systems intended to bring down the price of branded
drugs. However news from Germany in July 2004 suggests that the trend may be in the
opposite direction as the German authorities announced that they will permit higher
reference prices for patent protected brands but compensate this by lowering prices for
generics.

150
151
 CHAPTER 8

Future prospects and conclusions

152
Chapter 8 Future prospects and
conclusions

Summary

Generics growth will continue to be driven by governments’ need for low cost
medicines, although the short term future will be difficult for the industry in
countries with reference price systems as the price controls bite into their margins.
The generics market is forecast to grow strongly in both Europe and the US
although it is reaching its ceiling in mature markets such as the US, the UK,
Germany, the Netherlands and Denmark. In those markets the growth will, for the
most part, come from boosts caused by major patent expiries.

For the newly established generic markets growth will be a consequence of

increased prescribing and usage of generics: France and Italy will be among the
most dynamic due to the overall sizes of their pharmaceutical markets.

Manufacture will gravitate to India and Eastern or Southern Europe. For US

companies, manufacture will also gravitate to S America. Competition from Indian
manufacturers is considered by domestic US and European companies as a
significant threat to their business. Many companies are also highly concerned
about the effects of government cost controls.

Accordingly, successful generic companies are evolving from their current

business model into more complex organizations that resemble big pharma
companies. For example, Teva is becoming a generics/R&D hybrid as it develops
core franchises such as oncology.

The generics industry in both Europe and the US will see some consolidation and
a shakeout of smaller domestic commodity generics companies in mature markets.
The impact of foreign entrants into the main US and European markets will
exacerbate price pressure and high levels of competition and force generics
companies to contain costs further, diversify geographically, or by moving
upstream into higher value products.

The majority of survey respondents forecast growth or 5-10 % for the generics
market. Almost one third of respondents forecast annual growth in excess of 10%.

153
Overview

Figure 8.12: Generic penetration rates in Europe, 2003

Austria
Belgium
Denmark
Finland
France
Germany
Ireland
Italy
Netherlands
Norway
Portugal
Spain Value Market share

Sweden Unit Market share

United Kingdom

0 10 20 30 40 50 60

Market share (%), 2003

Source: EGA, situation as at end 2003 Business Insights Ltd

The dynamics of the global generics market raise a number of key questions:

Is the generics industry vulnerable?

Will generics companies be able to cope with increasing competitive pressures?

Will domestic or foreign companies drive growth in the US market?

What strategies will companies need to adopt to become generic superheroes?

154
This chapter forms a conclusion to the report and provides the answers to these
questions.

Generics growth will continue to be driven by governments’ need for low cost
medicines, although the short term future will be difficult for the industry in countries
with reference price systems that affect profit margins. The generics market is forecast
to grow strongly in both Europe and the US although it is reaching its ceiling in markets
such as the US, the UK, Germany, the Netherlands and Denmark. All of these already
have high rates of generic penetration and so must be nearing saturation.

While growth will continue in mature and immature markets, growth rates will vary
according to the market. Where generic penetration is already high, generics market will
reach a ceiling in the short term due to high levels of generic prescribing. In those
markets, growth will be primarily driven by major patent expiries. By contrast, for the
newly established generic markets, growth will be a consequence of increased
prescribing and usage of generics.

Figure 8.13: Opportunities and saturation in generics markets

High

Ireland UK, US, Germany

Prices

Netherlands

France, Austria, Italy,

Portugal, Belgium, Finland, Denmark
Spain, Sweden

Low Penetration High

Source: Business Insights, using EGA, LIF Denmark data Business Insights Ltd

155
Figure 8.13 shows how the main European and US markets sit in terms of penetration
vs pricing. In Ireland, the government will find it difficult to force price reductions, as
the local industry is mostly a branded generics industry that it will not want to harm by
opening it up too much to imported unbranded generics. In addition, Ireland has
attracted a great deal of investment in pharmaceutical manufacturing and will not want
to alienate major local employers. Low penetration/price countries offer the greatest
possibility of volume increases. Of these, perhaps France and Italy will be among the
most dynamic due to the overall sizes of their pharmaceutical markets. They will
therefore, over a period of years, eventually join Finland and Denmark in combining low
prices and high generic penetration. Denmark and Finland are unlikely to change.

The countries in the top right corner will eventually also move into the lower right
corner by controlling prices – Germany though its reference prices and the UK through
its generic maximum price scheme. It is a strong possibility that the US will seek to
implement some of the price control methods used in Europe.

Trends in manufacturing

Movement of manufacturing facilities

Commodity generics are the products whose margins are most under threat. For
generics companies, the ability to control costs will remain paramount. It will become
increasingly difficult for Western European and US based manufacturers with their
relatively high costs bases to remain competitive and so manufacture will inevitably
gravitate to India and Eastern or Southern Europe. For US companies, there will also be
the option of contracting out manufacture or sourcing products from Latin America.

The advantages that companies in developing countries enjoy – low overheads, low
labor costs and often control over the API mean that they can control their
manufacturing costs more tightly than companies in the west to continue to offer still
lower priced formulations. The recognition of the competitive advantage of, for

156
example, Indian manufacturers has given rise to some concern amongst Western generic
companies.

One response has been to abandon domestic manufacturing. In the UK, for example,
few of the major companies still have domestic manufacturing facilities: IVAX has
moved its facilities to Ireland; the APS-Berk subsidiary of Teva obtains its bulk tablets
and capsules from Biogal in Hungary; Merck-Generics UK retains only limited facilities
in the UK with most of its formulations coming from Ireland or other manufacturing
locations. In the case of Ireland, lower costs are achieved because the Irish government
have offered tax incentives in order to attract high tech and pharmaceutical companies.
This raises the issue of whether the generics industry should be lobbying governments,
such as in Germany and the UK for tax incentives to protect domestic pharmaceutical
manufacturing industries. In particular, the model provided by the Irish Finance Act of
2004 introduced a tax credit for R&D expenditure, which would enable generics
companies to move upstream more easily.

As a result of falling margins and higher manufacturing costs in mature markets,

alliances with manufacturers in low cost areas have therefore multiplied, a significant
number of which are with Indian companies. However, these efforts to cut cost by tying
up with contract manufacturers may bring only short-term benefits, and ultimately could
be counter-productive if contract manufacturers begin to move upstream and compete
more intensively with established European and US generics companies.

Threats to generics companies

In June 2004 Business Insights conducted a survey that attracted 287 respondents from
over 200 companies, both branded and generics, with a worldwide distribution. Of the
respondents, 46% were in Western Europe, 32% in the US with the rest in India (7%),
Eastern Europe (3%) and other countries. The branded: generic split was 77:23. The
concern about the threat of foreign manufacturers was underlined in the survey, which

157
showed that, after governmental cost control methods, competition from Indian
manufacturers was considered the most significant threat.

Figure 8.14: Threats to generics companies

40%
% of responses from each group

35%
(branded drugs/generics)

30%

25%

20%
Branded drug companies
15%
Generic drug companies
10%

5%

0%
Indian manufacturers
Competition from low cost

Competition from low cost South

import penetration
Eastern European manufacturers

control measures
Chinese manufacturers

American manufacturers

Western European manufacturers

Competition from low cost

Competition from low cost

Competition from low cost

Government cost

Increased parallel

Question: What do you see as the biggest threat to your domestic generic market in the next 5 years?

Source: Business Insights Business Insights Ltd

It is interesting to note the concern expressed by companies outside Europe and the US
about competition from China. It is probable that Western companies do not see the
Chinese threat as being on the same level as the Indian threat – at least not yet.
Nonetheless, within 10 years Chinese manufacturers will follow their Indian generics
companies, move upstream from relatively low cost and low margin API’s into higher
margin formulations and present a significant threat to domestic players in Europe and
the US.

158
The lack of transparency in China means that European and US generics companies are
still reluctant to form alliances with Chinese manufacturers of formulations until such
time as they can be sure that GMP standards are being regularly applied to
pharmaceutical manufacture. In addition, European and US companies want to see the
same standards of accountability in companies and supervision by regulatory authorities
as are practiced in India before they risk buying formulations from China. Ultimately,
however, the trend for manufacturing is eastwards: in the short term to former CEE
countries and India, and in the longer term to China.

Trends in marketing

Movement upstream

European and US generics companies have already begun to reduce the proportion of
commodity generics in their business model. An analysis of development plans shows
higher margin modified release, transdermal, inhalation and alternative delivery systems
recur commonly. In some cases, increased activity can be seen in areas such as
supergenerics and biogenerics plus prescription and OTC brands.

The increased involvement in original R&D by generics companies such as Ranbaxy,

Barr, Mylan, Stada and Teva (which has launched products such as its Copaxone MS
treatment using its own sales force, and co-operated with Lundbeck over its Rasagiline
Parkinson’s treatment) is creating a hybrid generics/R&D pharmaceutical company. In
the future, it is possible that some of these companies will make the transition into
becoming not just multinationals, but rather R&D-led multinationals that face
competition from other generics companies. At the same time, R&D-led multinationals
such as Merck and Novartis are increasing their involvement in generic drugs, perhaps
leading to a new class of pharmaceutical companies that do not fit neatly into either
R&D or generics categories.

159
 Figure 8.15: The evolution of successful generics companies

Secondary business

Primary business Contract

manufacture

Contract Generics Generics

manufacture manufacture manufacture

Speciality Speciality
Contract Generics
generics / generics /
manufacture manufacture
Biogenerics Biogenerics

Speciality R&D / R&D /

Generics
generics / Proprietary Proprietary
manufacture
Biogenerics drugs drugs

Generics Hybrid generics

company / R&D-led
Increasing involvement in R&D company

Source: Business Insights Business Insights Ltd

Figure 8.15 shows some of the possible components of the business structure of
generics companies as they evolve from simple generics company to a more complex
organization with one foot in both the generics and R&D side of the pharmaceutical
industry. The successful companies will be those that find a strategy that enables them to
move upstream into R&D and compete with higher margin products.

160
Expansion overseas

In the next five years, both the generics industry and the branded pharmaceutical
industry will seek to expand to new, more profitable geographical markets.

Figure 8.16: Plans for overseas expansion

100%

90%
Branded drug companies
% of respondents within each group

80% Generic drug companies

(branded drugs/generics)

70%

60%

50%

40%

30%

20%

10%

0%
Not expand abroad Expand abroad

Question: Do you anticipate expanding abroad in the next 5 years?

Source: Business Insights Business Insights Ltd

The survey results show that the great majority of companies believe that their own
expansion will be limited if they confine themselves to their domestic market and that
success is necessarily linked to expansion abroad. Close to 90% of generics companies
believe this to be the case and some of them will be more confident that barriers will
begin to disappear for them within Europe following the recent legislative changes. The
result will be a criss-crossing of Europe and possibly across the Atlantic with companies
looking to expand either globally or on a pan-European basis. This period will be
characterized by more intense competition, and as a corollary, an increased prospect of
consolidation and a shakeout of the market in generics.

161
Target areas for expansion
Figure 8.17: Target areas for expansion

30%
Branded drug companies
% of responses from each group

25% Generic drug companies

(branded drugs/generics)

20%

15%

10%

5%

0%
Northern Southern Eastern US Other countries
Europe Europe Europe

Note: respondents could select multiple choices

Question: What is your target area for expansion?

Source: Business Insights Business Insights Ltd

An analysis of where companies want to expand into is dependent on from where they
are starting out. The higher margins of US market are clearly the most attractive target
for both generic and branded companies. Nearly as many respondents see the mature
markets of Northern Europe as a desirable target. This is especially the case for
companies in low cost and low priced developing generic markets. It is probable that
most of the domestic US companies will remain in the domestic market and focus on
moving into more R&D-led market sectors to counter increasing competitive pressures
in commodity generics.

162
 Figure 8.18: Use of regional offices, subsidiaries, acquisition and local agents

40%

35%
% of responses from each group

Branded drug companies

(branded drugs/generics)

30%
Generic drug companies
25%

20%

15%

10%

5%

0%
Through regional Through a By acquisition By appointing a
offices/facilities subsidiary local agent

Question: How do you plan to grow your business abroad?

Source: Business Insights Business Insights Ltd

Acquisition is the least favored, probably because it is the most investment-heavy. The
appointment of a local agent is the favorite choice, primarily due to the low cost and
speed which companies can establish a sales partner. Some companies may buy up local
registrations, but as the MRP (Mutual Recognition Process) difficulties and other
regulatory problems are solved in Europe, some companies will end up with
registrations of certain products in several countries, which will give them something
immediate to offer to potential distribution partners in those countries. For US
companies that are looking for a way into Europe, this route could offer them speedier
market entry into several countries than is available to them at present. For most
European companies seeking a way into the US, the costs of making a US acquisition
will be far beyond their budget and so appointing a domestic US companies as their
agent will be the most attractive route of entry.

In the next phase, more generics companies will succeed in registering their products in
all EU countries. Some, principally the larger companies with larger ranges and who are

163
in a strong negotiating position, will resort to distributing them through the large
wholesalers. However, with increasing numbers of generic manufacturers seeking
distribution quickly and widely, it is probable that distribution through the largest
wholesalers will only be open to selected few key generics players.

The European situation may parallel that existing in the US with major pan-European
wholesalers favoring relationships with only large, high volume players with broad
product portfolios.

The future of generics in the US

US profit margins

Profit margins in commodity generics will in continue to fall except for cases where
companies make Paragraph IV filings, are first to market and can benefit from high
short-term margins during the exclusivity period. The commodity generics market will
continue to benefit from high-level patent expiries. For example, in June 2004 Dr.
Reddy’s, Ivax, Par, Ranbaxy and Teva announced FDA approval of their generic
versions of Bayer’s Cipro. All announced that they would begin selling the product
immediately into a market valued at approximately US$1bn per annum.

Profit margins will also rise for those companies that successfully move their product
portfolios upstream into specialty generics and branded pharmaceuticals, although this
will carry with it increased long-term risk and exposure to R&D productivity issues.
Market leaders Barr, Mylan and Watson have all increased their activity in high margin,
R&D-led areas. In the longer term, pressure on the government to restrict the cost of
drugs and bring them more in line with Europe and Canada will affect those companies
that move upstream. Margins for branded pharmaceuticals will come under renewed
pressure as Congress examines the possibility of a European-type pricing controls. Price
control measures, as in Europe, would also have a corollary effect on generics if they
were introduced into the US. This pressure on prices could also lead to the introduction

164
of generic substitution to compensate generics companies for reduced margins. While
this means prices would fall, the compensation to offset this would be higher volumes
for the generic companies as pharmacists obtain the right to dispense their products in
place of a brand.

Future legislative changes

US based companies either felt that the legislation was either balanced (46%) or favored
the generic companies (37%). Only 5% of US respondents thought that there had been
benefits to the branded pharmaceuticals. It is likely that branded companies fear that
these legislative changes to favor generics will be repeated in the future.

Figure 8.19: The impact of recent changes in pharmaceutical law

% respondents within each geographic group

60 Respondents from North America

Respondents from Western Europe
50 Respondents from Other countries

40

30

20

10

0
Balanced the needs of Branded drug Generic drug
both types of company companies companies

Question: To whom do you think that recent changes in pharmaceutical law (e.g. Gregg-Schumer in the US
Directive 2004/27 in the EU) have been most of benefit?

Source: Business Insights Business Insights Ltd

If such amendments to the legislation do occur, then it is likely that generics companies
will also face lower profit margins. A good candidate for legislative reform are the
arrangements whereby the FDA is intricately linked with patent matters.

165
In a June 2002 document concerning generics, the US NIHCM (National Institute for
Health Care Management) pointed out in respect of the Orange Book “And, most
recently, the FDA’s role in listing patents in the Orange Book has become the subject of
mounting debate.” The document also points out that,

“The FDA has steadfastly maintained for years that it has no expertise in
patent law.”

And then further adds,

“But FDA non-involvement has proved impossible given existing law.”

These comments suggest that a review this linkage cannot be far away. A restructuring
of the US regulatory system could involve moves to decouple regulatory issues from
patents so that there is no FDA involvement in patent litigation. The FDA’s role would
then become restricted to quality, safety and efficacy, as in Europe. This should lead to
accelerated processing times for generic registration applications as the FDA would no
longer be obliged to consider IP issues but rather just concentrate on the technical
aspects of the registration dossier submitted to them.

The future of generics in Europe

Pan-European generics

Figure 8.17 has shown that a significant proportion of generics companies intend to
expand within or into Europe. A total of 60% of respondents saw Europe as their target
areas although respondents could chose more than one areas of expansion. Generics
companies favor the appointment of a local agent, which will speed up the transition of
new generics across country markets. The development of large-scale European
wholesalers also means that some of the larger players may be able to access a pan-
European network.

166
Legislation

The new pharmaceutical Directive 2004/27/EC has been welcomed by generics

companies as Figure 8.19 shows. Issues have been resolved in a manner that is generally
beneficial for generics, due to pressure to reduce the cost of drugs in Europe. There will
be a period of stabilization and lack of any new legislative moves for some time until the
new or revised articles are incorporated into local law.

Generics companies will also continue to press for a European equivalent of the Bolar
clause to be implemented as quickly as possible. Responses from European executives
suggest that opinion is slightly more polarized in terms of how new legislation will affect
branded and pharmaceutical companies. 46% of respondents indicated that the new
legislation would benefit generics companies, while just under 10% believed that
branded drugs companies would benefit. The remainder, 44%, believed that the
legislation balances the needs of both companies.

IP Problems

The main upcoming issue for generics companies is IP Problems, which has come about
as a consequence of the inclusion of patents in the Fourtou report. While the Fourtou
report was not directly connected with the review of pharmaceutical legislation, it was
coincidentally discussed and passed at around the same time. The concern from generics
companies is that it will lead to a more aggressive stance by multinational branded
pharmaceutical companies against European generic companies on patent infringement
issues.

If the fears of the trade association are realized and there is no move to rescind this
particular section it could, according to the EGA, lead to a situation where

“new EU intellectual property legislation will give major pharmaceutical

companies a blank cheque to unfairly delay competitive medicines from
entering the market immediately after patent expiry”.

167
Generics companies are concerned that the legislation, which was intended to protect
manufacturers against counterfeiting of their products, could also be used by branded
manufacturers against companies producing generic copies by the originators accusing
the copies of being “counterfeit”. This concern was also outlined by the EGA:

“Whilst we totally welcome all the measures in the proposed Directive aimed at
combating counterfeiting and piracy, we are not fully convinced that the
measures proposed to prevent abuse of the litigation system against legitimate
competition are strong enough.”

The generics competitive landscape

Generic superheroes

Having reported first quarter sales for 2004 in excess of US$1bn, Teva will continue to
dominate the global generics market. However, Sandoz is attacking Teva’s position by
increasing its US focus. Another company with potential superhero status is Merck
Generics: a strategic acquisition by Merck Generics could radically alter the US generics
competitive landscape. No US companies qualify as true generic “superheroes” due to
the fact that the three leading US domestic players, Mylan, Barr and Watson remain
focused on the US market. Only IVAX has made strategic moves to expand into new
geographies.

Consolidation of generic companies

The generics industry in both Europe and the US will see some consolidation and a
shakeout of smaller domestic commodity generics companies in mature markets. The
impact of foreign entrants into the main US and European markets will exacerbate price
pressure and high levels of competition and force generics companies to contain costs
further, diversify geographically, or by moving upstream into higher value products.
These three strategies favor larger players, who can leverage economies of scale,
establish offshore manufacturing facilities, form strategic alliances and absorb the

168
expense of either setting up in new geographies or establishing R&D functions.
However, consolidation may also create some gaps within the existing markets, which
Indian and former CEE countries will exploit.

Branded pharmaceutical company consolidation

The prospect of consolidation among branded pharmaceutical companies will also lead
to some benefits to generics companies as the merged company either seeks to, or is
forced to, sell some of its commercial interests. Although these sales are relatively small
in the context of large pharmaceutical mergers, they provide a quick way for generics
companies to acquire proprietary brands. Generics companies may also acquire R&D
expertise following mergers. Mergers are also unlikely to create a situation in which
R&D-focused companies re-enter the generics market, as anti-trust concerns will force
divestment rather than continued diversification into new areas. However, in the medium
term, the generics competitive landscape could be radically changed by the purchase of a
hybrid player such as Teva. The increasing R&D focus of leading generics companies
will serve to make them more attractive to mainstream pharmaceutical companies.

169
Growth prospects for generics

Figure 8.20: Annual growth predictions for generic drugs, 2004, responses by
type of company

50%

45%
% of responses from each group

40%
Branded drug companies
(branded drugs/generics)

35% Generic drug companies

30%

25%

20%

15%

10%

5%

0%
0% or less 0-2% 2-5% 5-10% 10+%

Question: In your market what annual growth do you predict for generic drug sales?

Source: Business Insights Business Insights Ltd

Respondents are clear on the growth prospects of the generic drug market. The majority
forecast growth or 5-10 % foreseen and both branded and generic respondents shared
this view, irrespective of their actual geographic locations. While just under half of
respondents forecast annual growth of 5-10%, almost one third of respondents forecast
annual growth in excess of 10%. However, a growth in revenues will not necessarily
translate into a growth in profits. This report has shown how much of the generic
growth will come from those markets that are undeveloped, but these same markets, are
also subject to price controls. While governments seek to encourage generic growth,
these measures run tandem to cost controls.

170
 Figure 8.21: Annual growth predictions for generic drugs, 2004, responses by
location of respondents

45%
% respondents within each geographic group

40%
Respondents from North America
35% Respondents from Western Europe
Respondents from Other countries
30%

25%

20%

15%

10%

5%

0%
0% or less 0-2% 2-5% 5-10% 10+%

Question: In your market what annual growth do you predict for generic drug sales?

Source: Business Insights Business Insights Ltd

The continued growth of generics will elicit a more aggressive response from branded
pharmaceutical companies. However, recent legislative changes in both the US and
Europe have removed some of the tactics that branded companies have has available
such as last minute patent filings or removing the reference product from the market so
it is difficult to see how they could put this into practice. Competitive pressure from
generics companies may also lead to more alliances with generics companies. Generics
companies that have developed specialty franchises could become attractive in-licensing
partners and compete with biotechs and smaller R&D organizations for alliances with
big pharma.

171
Outlook by therapeutic area
Figure 8.22: Most attractive therapy areas for generic drugs growth

45%

40%
% of responses from each group

Branded drug companies

35%
(branded drugs/generics)

Generic drug companies

30%

25%

20%

15%

10%

5%

0%
Oncology Cardiovascular Central Infectious Immune
Nervous diseases disorders
System

Question: In which therapy areas do you expect to see the most growth of generic drugs?

Source: Business Insights Business Insights Ltd

Both generics company executives and branded pharmaceutical executives believed that
cardiovascular drugs will see the most generic growth. It is unclear, however, whether
both sets of executives have reached this forecast for the same reasons. Cardiovascular
is the highest value market sector, and therefore is a natural target for drug development
by both branded and generic pharmaceutical sectors. However, it is likely that generics
companies see cardiovascular drugs as having the highest future generic growth because
that is where the major patent expiries (see Table 1.2) will occur. Of the top ten best-
selling global drugs in 2003, five are cardiovascular.

Simvastatin (ZOCOR) comes off patent in 2003 in Europe and 2006 in the US,
Amlodipine (Norvasc) comes off patent in 2004 and 2007 and Atorvastatin (Lipitor)
comes off patent in 2010. Approximately US$84bn of leading products will become
available up to 2008. However, this is likely to be followed by fewer opportunities for

172
generics companies in the following years. In the short and middle term, therefore,
growth in the generics market will be driven by patent expiries, which will continue to
drive dynamism in the generics market and increase pressure on mainstream branded
pharmaceutical companies.

173
Index
Alliance.................................................... 131
Alpharma 12, 34, 41, 48, 49, 54, 60, 108, 114,
115, 116, 138
APS-Berk ............................... 34, 45, 65, 156
AstraZeneca............................ 47, 48, 96, 144
Aventis ................................34, 117, 120, 145
Barr 11, 38, 41, 43, 47, 50, 114, 116, 118, 119,
123, 158, 163, 167
Bayer ......... 34, 45, 47, 65, 120, 131, 139, 163
Belgium..24, 56, 87, 88, 91, 96, 129, 134, 143
Bioequivalence ...........................................82
Biogalénique...............................................34
Biogenerics 17, 51, 61, 68, 114, 117, 122, 123,
128, 137, 147
Biovail.................................... 41, 49, 76, 116
Bolar ... 13, 14, 25, 63, 70, 73, 86, 89, 95, 132,
166
Canada .............. 24, 31, 43, 49, 111, 112, 163
China ....................................... 106, 157, 158
Consolidation ................................... 104, 167
Copley.......................................... 34, 45, 120
Czech Republic....................... 30, 87, 88, 134
Denmark ..... 10, 16, 17, 20, 45, 65, 87, 88, 91,
128, 129, 134, 136, 142, 149, 152, 154, 155
DGV........................................... 40, 130, 150
Dr Reddy’s .............. 12, 47, 54, 122, 140, 146
EU... 12, 14, 16, 17, 23, 25, 27, 28, 29, 30, 54,
59, 63, 64, 67, 86, 87, 88, 89, 91, 92, 95,
97, 112, 124, 128, 129, 130, 132, 133, 135,
174
136, 141, 143, 144, 145, 148, 150, 162,
164, 166
European Commission .... 87, 90, 96, 120, 136,
144
Finland ....................56, 88, 91, 129, 134, 155
France.... 11, 16, 17, 20, 21, 22, 23, 24, 29, 30,
32, 35, 45, 56, 63, 65, 66, 87, 88, 91, 111,
118, 120, 128, 129, 131, 133, 134, 141,
142, 152, 155
Galen ..........................................................32
Gedeon Richter ...................................41, 108
Generics UK ............................. 143, 145, 156
Genus ............................... 34, 42, 45, 65, 120
GlaxoSmithKline ...27, 28, 47, 64, 67, 82, 143
Greece . 10, 16, 20, 21, 25, 31, 87, 88, 91, 128,
129, 134
Gregg-Schumer..11, 13, 26, 38, 40, 70, 78, 79,
81, 82, 83, 111, 164
Hatch-Waxman..11, 13, 38, 40, 46, 70, 71, 72,
73, 75, 77, 78, 80, 82, 89, 110
Hexal .........................12, 54, 60, 66, 141, 146
Hungary. 24, 45, 63, 65, 87, 88, 108, 118, 134,
156
India17, 23, 25, 43, 63, 64, 105, 106, 114, 118,
122, 130, 131, 133, 137, 139, 146, 152,
155, 156, 158
Intellectual property....................................57
Ireland ..... 45, 56, 65, 66, 87, 88, 91, 129, 134,
155, 156
Italy . 10, 16, 17, 20, 23, 24, 25, 30, 32, 45, 56,
65, 66, 87, 88, 91, 118, 128, 129, 133, 134,
141, 152, 155
Ivax ...................................... 50, 64, 118, 163
IVAX30, 31, 32, 41, 47, 48, 49, 60, 62, 66, 82,
108, 115, 118, 119, 120, 122, 123, 140,
143, 156, 167
Lagap ................................35, 45, 60, 65, 120
Legislation................................................ 166
Lek ..................................................... 35, 108
McCain-Schumer....... 13, 70, 77, 78, 111, 125
Merck.... 34, 35, 42, 60, 63, 64, 109, 115, 143,
146, 147, 156, 158, 167
Merger.............................................. 119, 120
Mylan11, 38, 41, 42, 43, 44, 47, 49, 50, 59, 75,
82, 108, 114, 115, 116, 117, 119, 120, 158,
163, 167
Netherlands . 17, 56, 87, 88, 91, 134, 136, 149,
152, 154
Norton ................................ ii, 30, 60, 66, 140
Norway......................................... 31, 91, 108
Novartis..... 34, 60, 62, 75, 115, 116, 120, 133,
138, 146, 158
Parallel imports ........................ 111, 136, 149
Patent .... 22, 27, 28, 40, 46, 61, 63, 64, 71, 72,
144
Pfizer...........................27, 28, 35, 47, 48, 120
Pharmacia .......................................... 35, 120
PLIVA........................................................41
Poland ........... 24, 30, 62, 87, 88, 92, 133, 134
Portugal. 10, 20, 31, 87, 88, 91, 129, 133, 134,
135, 141
PRI/Par.......................................................41
R&D 11, 14, 15, 17, 34, 35, 38, 40, 51, 57, 66,
71, 72, 86, 91, 98, 102, 106, 114, 116, 117,
118, 119, 122, 128, 137, 138, 139, 146,
152, 156, 158, 159, 161, 163, 168, 170
175
Ranbaxy...ii, 12, 32, 34, 41, 44, 49, 54, 59, 82,
105, 107, 118, 122, 131, 139, 146, 158, 163
Ratiopharm ..12, 30, 32, 42, 54, 57, 58, 59, 62,
65, 66, 67, 68, 108, 115, 123, 138, 141,
144, 147
Roche................................ 25, 49, 73, 95, 148
Sandoz... 12, 32, 33, 35, 38, 41, 45, 48, 51, 60,
62, 65, 66, 68, 82, 108, 115, 120, 122, 123,
133, 147, 167
Sanofi-Synthélabo.......................................35
SICOR. 41, 42, 45, 48, 50, 115, 120, 123, 147
Slovenia45, 62, 65, 87, 88, 108, 120, 134, 135
SmPC ...................................................98, 99
Spain16, 21, 23, 24, 25, 30, 31, 45, 55, 56, 57,
58, 63, 65, 87, 88, 91, 128, 129, 130, 134,
135, 141, 150
Stada 12, 24, 30, 34, 38, 41, 42, 45, 51, 54, 57,
58, 65, 66, 67, 68, 108, 120, 123, 141, 144,
146, 147, 158
Sterwin .......................................................35
Supergenerics ................................... 117, 140
Sweden ........................... 31, 88, 91, 129, 134
Taro....................................................41, 115
Teva. 11, 12, 17, 29, 32, 34, 38, 41, 42, 43, 44,
45, 47, 48, 49, 50, 51, 54, 59, 60, 62, 63,
64, 65, 66, 68, 82, 114, 115, 116, 117, 118,
120, 122, 123, 138, 143, 146, 147, 152,
156, 158, 163, 167, 168
UKii, 10, 16, 17, 20, 21, 22, 23, 24, 27, 28, 29,
30, 32, 33, 34, 42, 45, 56, 60, 61, 62, 63,
64, 65, 66, 67, 87, 91, 96, 108, 120, 128,
129, 130, 131, 134, 135, 136, 140, 142,
143, 145, 147, 149, 150, 152, 154, 155, 156
Watson .. 11, 34, 38, 41, 42, 43, 44, 45, 47, 48,
50, 59, 114, 117, 120, 122, 163, 167
Wholesaler................................................104
Wockhardt ........................ 105, 131, 140, 146
176