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GUEST COMMENTARY BY PHIL TAYLOR
How to compete: originals versus generics?
For years, large pharmaceutical companies have generally shunned generic drug production, with its lower margins, in favor of researching new medicines that command premium pricing.
That has changed of late, however, with a string of generic manufacturer acquisitions and licensing deals that have seen some traditional brandname companies catapulted among the top ranks of generic suppliers.
What is driving this trend? Pam Narang, an analyst with Datamonitor, believes it comes down to the pressure felt by branded drugmakers at the moment. “We are seeing fewer and fewer innovative branded products coming to the market as a result of declining R&D productivity, and many pharmaceutical companies are facing a patent cliff from 2011,” she said.
Bain & Co recently estimated that annual cash flow of $30bn will vanish in the next few years as patents on blockbuster products expire, a sum of money equivalent to around half the industry’s entire yearly spending on R&D.
Big pharma companies are also seeing fewer new products coming through the pipeline and tighter control on drug pricing by governments in the world’s largest pharmaceutical markets – North America, Europe and Japan.
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"Many pharmaceutical companies are facing a patent cliff from 2011."
Pam Narang, analyst
One reaction to this has been to seek out mega-mergers to combine product pipelines and allow for cost cutting(1), but there are alternatives.
"With little in the pipeline to sustain them in the coming years, branded companies are looking at other ways to maintain revenue streams," according to Narang. "Moving into generics is a good way of doing this."
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Emerging markets
"Getting bigger in emerging markets via generics: This is one strategy being explored by big pharma companies."
Phil Taylor, journalist
Sanofi-Aventis is a good example of this, as it is facing a particularly precipitous patent cliff. Around a third of current revenue will be exposed to generic competition in the coming years as products such as its top-selling anti-platelet drug Plavix (clopidogrel) lose patent protection.
The company is at the forefront of the convergence of generic and branded pharmaceuticals, under the leadership of CEO Chris Viehbacher. He says Sanofi needs targeted acquisitions to expand in emerging markets such as Asia, Latin America, and Central and Eastern Europe (CEE) - as these will provide future growth.
"These markets are dominated by generics, and particularly branded generics," according to Narang. "A good way to gain entry is to buy local companies which can also create a platform for branded products, as and when the market is more receptive to them."
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Almost all the deals announced by the three companies at the forefront of this trend – Sanofi, GlaxoSmithKline and Pfizer – are in regions such as Latin America, Asia, CEE and Africa. These companies are also not buying commodity generics - they are buying local brand leaders.
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Phil Taylor
Initially starting out as a science reporter covering pharmaceutical R&D and with a background in biomedical science, Phil Taylor has held editor-level positions at a range of publications covering pharmaceutical technology, science and business. He now runs a freelance editorial and communications services agency.
Sanofi’s biggest acquisition to date is Czech generics firm Zentiva – a deal which made it the 11th largest generic drugmaker, and it has also snapped up Brazil’s Medley, Switzerland’s Helvepharm, Kendrick of Mexico and Indian biotech Shantha. The latter deal indicates it is also interested in the emerging biosimilars sector.
Meanwhile GlaxoSmithKline has taken a stake in South Africa’s Aspen Pharmaceuticals and recently signed a distribution deal with India’s Dr Reddy’s Laboratories. Pfizer has stated its intent to make purchases in the generics space, but for the moment is bolstering its portfolio though licensing agreements with the likes of injectables specialist Claris Lifesciences and Aurobindo. If it does dip into its warchest, Icelandic company Actavis and Germany’s Ratiopharm are among the likely targets.
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Diversification is the key
While getting bigger in emerging markets via generics is one strategy being explored by big pharma, not all branded companies believe they have to diversify in this way.
Bristol-Myers Squibb is one that is bucking the trend. Rather than going into generics it is exiting the sector and recently sold a swathe of Egyptian products to GlaxoSmithKline. Bristol-Myers Squibb is simply diversifying in other ways. Recent agreements to buy Medarex and ImClone have doubled its pipeline of biologics, another growth sector, while Sanofi and GlaxoSmithKlinehave also been boosting their positions in vaccines, animal health and consumer products.
It seems that convergence of branded and generic manufacturers is part of a much wider trend towards diversification by pharmaceutical manufacturers into new product areas and geographies. Time will tell which companies’ strategies will be the most successful.
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References:
(1) Inside Life Sciences News, Pharma consolidation: what is the impact on market growth?, June 2009 
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