The fading generics industry and essential medicine supply

As the US and Europe experiences shortages of crucial medicines, Ben Hargreaves looks at how a once thriving generics industry is now struggling, with many companies seeking to exit the space.

Generic medicines are crucial to healthcare systems globally. They offer a low cost means of providing treatments, especially when treating common conditions. According to a KPMG report published in 2019, volume penetration for generics in the US was at 90% of the overall market, 85% in the UK, 84% in Australia, and 84% in China – with many other countries showcasing similarly high levels. This is why it is beginning to worry governments where certain essential medicine products are going into shortage.

The lack of supply is impacting products in a range of areas, including antibiotics, cancer treatments, and ADHD medications. The importance of such treatments means that the shortages are a serious threat to public health, especially as some of the supply issues have not been resolved quickly, indicating that there are more systemic challenges facing the supply of generic products.

Where is it going wrong?

The challenge facing governments looking to better secure their supply of generic products is that the reasons behind the shortages are varied. Medicines for Europe, an industry association representing the European generic and biosimilars manufacturers, suggested in a recent report that a critical factor for manufacturers is pricing.

The authors of the report state: “A holistic approach to generic pricing should be adopted, considering different aspects of healthcare systems and needs of various stakeholders. Not only do generic manufacturers need to make profits to stay on the market and supply, but also fair pricing is necessary for patients so they can have access to affordable medicines. Pricing policies that allow for a long-term sustainability of the generic business model are the key enabler in terms of access to high quality, affordable medicines.”

Medicines for Europe proposes that additional policies are needed on the demand side. Current pricing policies are aimed at increasing price competition among off-patent medicines in order to allow healthcare systems to reduce costs. However, achieving savings can reduce the prices of products to a point where competition among manufacturers leads to smaller competitors exiting the market – with the potential for medicine shortages as a result. In the US, analysis by AARP found that, between 2006 and 2020, retail prices for 56 chronic-use generic drugs had decreased by an average of 38.7%.

In addition to greater pressure on pricing, cost pressures are also increasing, due to the impact of COVID-19, inflation, and the war in Ukraine. The mentioned factors have led to an increase in the price of energy, fuel, ingredients, and logistics. In an industry where the margins on products are naturally lower, due to the reliance on volume, this adds another barrier to achieving profitability for manufacturers.

What happened to the manufacturers?

Backing up the conclusion of Medicines for Europe, that pricing and profitability are significant issues, is the fact that a number of major pharma companies divested or spun-off their generics businesses in recent years. The reasons provided were based on the profitability of such divisions as not strong enough to be sustainable, or that growth in the area is too slow, lowering the potential of the main business.

Teva, one of the largest generics manufacturers globally, recently revealed to Bloomberg that it would pull back from generic drug production and focus instead on innovative products. The company stated that the decision was taken due to needing to find growth in its drug portfolio, while the generics industry was referred to as a ‘contracting business’. As a part of this process, the company announced in second quarter financials that it had reduced the size of its manufacturing operation from 80 sites down to 51 sites, with an additional two sites planned for closure by the end of the year.

Teva is part of a steady trickle of major manufacturers that are exiting the generics business, particularly divisions within larger pharma companies. Mid-way through August, Novartis confirmed that it plans to spin off its generics division, Sandoz, at the beginning of October. Novartis is following similar action taken by Pfizer, when it merged its generics portfolio with Mylan to create Viatris. Prior to this, Sanofi had chosen to sell its own generics division./p>

The trend is clear, which is that the bigger companies do not see clear value in holding onto a portfolio of generic products, principally because the growth in such divisions are lower than in the innovative products business.

What is the end result?

With most of these major manufacturers being Europe or US-based, India and China now dominate the production of generic products. A paper by Washington University cited the fact that 97% of antibiotics, 92% of antivirals, and 83% of the top 100 generic drugs consumed have no US-based source of active pharmaceutical ingredients (APIs). As the major manufacturing source of APIs are India and China, it is logical that nine out of the 10 largest global generic companies are based in Asia, according to GlobalData.

Though politically it may be an issue that Western countries are dependent on certain countries for their generics supply, the process is a natural one, where production shifts to a location where the cost is lower. However, the COVID-19 pandemic highlighted how the concentration of generics and APIs manufacture being located on the opposite side of the world to major end markets could create problems. Global events such as this are hard to predict, but even smaller scale events, such as the recent partial destruction of one of Pfizer’s manufacturing facilities by a tornado, have led to suggestions that shortages of some products could happen – further highlighting the fragility of the ecosystem.

The long-lasting impact of COVID-19 led to a situation where some products are still struggling to recover supply. As more manufacturers, such as Teva, choose to exit the market, it is difficult to see these issues not increasing. The company stated that its action would be taken strategically to ensure no shortages occurred in the short-term. However, major questions remain over the long-term ability of the generics industry to maintain supply over various essential medicines, and what needs to be done to better protect that supply.