Shifting fundamentals in the innovator-drug market are helping to drive change in the generic-drug market. Despite strong opportunity presented in the near term by a wave of patent expirations, the generic-drug industry has its own set of challenges and opportunities. Generic-drug companies face increased competition not only within the sector, but from newer entrants, including from the pharmaceutical majors and emerging-market players. In response, generic-drug companies have been consolidating and partnering to build economies of scale, improve their access to emerging markets, and build their technological expertise in select sectors, such as follow-on biologics (FOBs). These issues also are influencing the composition and direction of the supply base of generic active pharmaceutical ingredient (APIs) manufacturers.
These dynamics were recently explained by Kate Kuhrt, director of generics and API intelligence at Thomson Reuters. Kuhrt spoke at a program, “The 2011 Pharmaceutical Outlook,” as part of series of educational programs held by the Drug, Chemical and Associated Technologies Association (DCAT) during DCAT Week in mid-March in New York. Kuhrt pointed out the number of small-molecule drugs that are losing patent protection in the US during the next several years is substantial, with 43 small-molecule drugs losing patent protection in 2012, 34 in 2013, and 40 in 2014. On a value basis of brand sales, this loss of patent protection represents nearly $22 billion in product sales in 2012, $13 billion in 2013, and $13 billion in 2014.
Facing generic-drug incursion and poor productivity in their pipelines, Big Pharma companies are increasing their focus on generic drugs and emerging markets, thereby becoming a competitive force within the generic-drug sector. At the same time, emerging-market players are raising their profile in the generic-drug market. “There is increasing competition, both from emerging-market players and from Big Pharma, in generics,” said Kuhrt, who also points to other trends in the generic-drug market. “We also see cost-containment measures by private and public payers for near universal encouragement of brand to generic substitution. And lastly, there is an increased focus on biologics.”
For the generic-drug industry, these dynamics create both opportunities and challenges. “Generic-drug companies need to get the maximum out of remaining small-molecule opportunities,” said Kuhrt. At the same time, generic-drug companies are consolidating and partnering to build economies of scale, expand into emerging markets, and target select market segments, including FOBs.
Consolidation and partnering in the generic-drug industry has come from within the generic-drug industry and among established Western generic-drug manufacturers and counterparts in emerging markets. Some notable deals over the past several years include several by industry leader Teva: the acquisition of Ivax in 2006, of Barr Laboratories in 2008, and of ratiopharm in 2010. Other notable deals include the acquisition of Andrx by Watson Pharmaceuticals in 2006; the acquisition of a majority stake in Ranbaxy by Daiichi Sankyo in 2008, and the acquisition of Qualitest by Endo Pharmaceuticals in 2010.
At the same time, Western generic-drug companies and Western pharmaceutical companies have acquired or partnered with emerging-market companies to gain footholds in those markets. In Latin America, for example, Teva acquired the generic-drug manufacturer Laboratorio Chile in 2006 and Corporación Infarmas, a Peruvian generic-drug manufacturer in 2011. In 2010, Watson Pharmaceuticals invested $30 million for a minority stake in Moksha8, based in Sao Paulo, Brazil, to expand Watson’s commercial presence in Brazil and Mexico. Watson also committed to invest an additional $20 million, further increasing its equity position, contingent upon successful execution by Moksha8 of additional third-party product acquisitions. Pfizer acquired a 40% stake in the Brazilian pharmaceutical company, Laboratorio Teuto Brasileiro, in 2010, and sanofi-aventis acquired the Brazilian pharmaceutical company Medley and the Mexican pharmaceutical company Kendrick in 2009.
In Russia, STADA acquired the pharmaceutical companies Makiz in 2006 and Nizhpharm in 2005. Other acquisitions of Russian pharmaceutical companies include a majority stake in Zdorovje by Actavis in 2006 and a majority stake in Akrihin by Gedeon Richter in 2007. Key deals in Asia are: Mylan’s acquisition of a majority stake in India’s Matrix Laboratories in 2007; Watson Pharmaceuticals’ acquisition of India’s Sekhsaria Chemicals in 2006; and Fresenius Kabi’s gain of a majority share in India’s Dabur in 2008. Among innovator companies, Daiichi Sankyo acquired a majority stake in India’s Ranbaxy in 2008, and Abbott Laboratories acquired India’s Piramal Healthcare Solutions business in 2010.
Another factor coming into play is the rising role of India and China in the generic-drug industry in the US. This trend is seen in recent abbreviated new drug applications (ANDA) filings and approvals in the US. In 2009,152 US ANDA approvals and 132 US ANDAs approvals in 2010 went to Indian companies, noted Kuhrt. Twenty-two Indian companies received US ANDA approvals in 2009 and 23 received approvals in 2010.
The participation of Indian companies, particularly well-established companies, such as Dr. Reddy’s Laboratories and Ranbaxy, in the generic-drug market, has been ongoing, but a more recent development is the emergence of Chinese companies in Western generic-drug markets. For example, in December 2010, Novast, based in Nantong, China, became the first Chinese company to receive an US ANDA approval when FDA approved a combination product of ethinyl estradiol and levonorgestrel, noted Kuhrt. She also pointed to three other Chinese companies with final ANDA approvals in the US: Zhejiang Huahai (Linhai, Zhejiang Province), Beijing Pharmaceutical (Beijing), and Yabao Pharm Group (Beijing). These three companies acquired the final ANDAs from existing US market players.
On a product basis, FOBs represent a growing area of investment by established generic-drug companies, select Indian biotechnology companies, and several pharmaceutical majors. A handful of leading generic-drug companies are already equipped for full production for recombinant proteins and others are working with partners in this area, and several have monoclonal antibody (mAb) development underway, noted Kuhrt. For example, Teva, Sandoz, Hospira, STADA, Actavis, Ranbaxy, Dr. Reddy’s Laboratories, and Apotex, have development programs for FOB proteins. Teva, Sandoz, Hospira, STADA, Ranbaxy, Apotex, and Cipla have programs under development for FOB mAbs, and Dr. Reddy’s already is involved in production for FOB mAbs. Moreover, Indian companies are likely to play a role in the competitive landscape for FOBs. Kuhrt pointed to several Indian companies with biopharmaceutical production capabilities either in place or in development for recombinant proteins or mAbs. These companies include Biocon, Shantha, Intas, Lupin, Zydus Cadila, Torrent, Wockhardt, Glenmark, Bharat, Avesthagen, USV, Serum Institute, and Reliance. Additionally Big Pharma companies, such as Merck & Co. and Pfizer, have expressed a strategic interest in biosimilars, and certain companies, such as Novartis (through its generic-drug arm Sandoz), are currently positioned in the FOB market.
As the generic-drug industry undergoes these changes, the API manufacturing and supply base also changes. Thomson Reuters classifies the global API manufacturing base into four main categories: “established” companies (i.e., companies with experience in supplying regulated markets), companies that are “less established” (i.e., companies with some experience in supplying regulated markets), companies with “future potential” for supplying to regulated markets, and “local” companies that supply products locally in emerging markets. Using that classification in evaluating the global API manufacturing sector, the overwhelming majority of companies, 1578 companies, supply at a local level. The other companies break down as follows: 171 are “established” API manufacturers companies, 265 are “less established,” and 302 have “future potential.”
Of the more than 450 “experienced” API manufacturers, approximately one-third of the companies are pure-play API players, and almost 20% make generic-drug finished products as well for the US market. Also, close to one-third of the 450-plus “experienced” API manufacturers are located in India and China, although the US still accounts for the largest number, according to Kuhrt. The US has 153 API manufacturers, followed by India at 131, 66 in the rest of the world (excluding the US, India, China, Italy, and Japan), 50 in China, 36 in Japan, and 34 in Italy, according to Thomson Reuters. On a comparative basis, Italy surpasses India and China with the largest number of “established” API suppliers, with approximately 25 in 2010 although this level is down from 31 manufacturers in 2006. In contrast, the number of “established” Indian players is increasing, with 22 manufacturers in 2010, up from 14 in 2006. The number of “established” API manufacturers in China is still relatively small; 12 in 2010. However, India surpassed all countries in US drug-master filings with 284 in 2010.
As Indian and Chinese companies seek to assume a greater role in the API market, however, their cost base is also shifting. Kuhrt noted rising labor costs in India and China, although costs are still below those found in the US and Western Europe. Energy is another input, which is affecting the cost structure for Chinese companies as are the costs for increased cGMP compliance and monitoring.?
Technology investment is another important factor for API manufacturers as a whole. Kuhrt pointed out that certain niche sectors, such as high-potency API manufacturing, is an attractive target. Several companies, such as SAFC and Novasep, have made investments in those sectors. She also pointed to increased activity by Asian API manufacturers to invest in higher technology-based API manufacturing, such as in biocatalysis and microreactor technology.
Looking to the the next decade, Kuhrt pointed to several key trends: continued intra-generic-drug company consolidation, opportunistic uptake of generic drugs by Big Pharma, and continued mergers and acquisitions as a vehicle for generic-drug companies to buy into next-tier, emerging, growth-oriented markets. She also pointed to the emergence of Big Pharma and Big Biotech as dominant forces in biosimilar markets. On a supply basis, costs of API manufacturing in India and China will continue to increase.