The generics industry at a crossroads
Thimo L. Sommerfeld
The global pharmaceutical market was valued at 837 billion US-Dollar in 2009 and has been steadily growing at ten per cent (CAGR) between 2001 and 2009. This growth was, to a large degree, driven by the generics market that showed an impressive growth rate of 14 per cent by value over the last decade (CAGR 2001-2009) reaching a size of almost 90 billion US-Dollar in 2009.
In 2009 alone, generics outgrew the pharmaceutical drug market by a factor of four. Such growth rates over multi-year periods raise high expectations on the future market development. In comparison to the total pharmaceutical market that is expected to grow at a CAGR of three to six per cent through 2013, the generics market is forecasted to sustain its attractive growth rate.
“In 2009 alone, generics outgrew the pharmaceutical drug market by a factor of four.”
The end of the generic market?
However, the never-ending growth story of the generics market encounters some serious headwind. After successfully switching originals to generics, the future focus will be on switching all generic prescriptions to the lowest-priced generic product available: in effect, large parts of the world are turning “unbranded”, at least for mass-market products. Still, the pharmaceutical and the generics market in particular are more complex than that, offering a range of opportunities and challenges in each segment.
During the last decade, the generics industry has changed at a rate not observed in any other segment of the healthcare sector. The developments during recent years herald the end of the generics market as we know it today. Few industries find themselves in a comparably dramatic transformation process. The generics industry of today will soon look very different, it may even carry a different name.
“The generics industry of today will soon look very different, it may even carry a different name.”
Influencing factors of the generic market
Some dynamics will help shape the pharma industry of the future, just to point out three:
• The generics and R&,D pharma industries are still perceived by many as opposites instead of asking which benefits a pharma or any healthcare business could draw by acting as a player in the generics industry. There is a mutually synergistic triplet of innovative drugs, generics and OTC products with often underestimated synergy potential. Generics overlap with OTC and with innovative drugs, for example, with regard to the customer structure, marketing activities, brand management, product development and production. R&,D pharma, however, still pursues a decidedly different business model.
• The prescription generics business is increasingly becoming a pureplay commodity business, resembling more the fast-moving consumer (FMC) goods industry than the scientific marketing of innovation. Each management team has to fine-tune its strategy around the experience and expertise of its talent in order to allow the business to thrive in a dramatically different environment in the future.
• Generics players have to make the crucial decision whether to develop biosimilars (products corresponding to the biological reference product) or biosimilars USP (enhancements of biosimilars offering a Unique Selling Proposition). The developer needs to take into account that the development of the pure biosimilar costs a fortune, that the originator will be prepared to enter a price war and that the cost for patent research and legal disputes will cost another fortune. This begs the question if it is not commercially more attractive to develop a technologically superior biosimilar in the first place do you exit the market?
The generics industry is now at a crossroads: Part of it is going to focus on the pure-play commodity business, part will step up and become “innovative” in the comparatively more complex fields such as biosimilars, vaccines or substances applied through medical devices, for example, inhalers for asthma therapy or insulin pens.
If the “commodity route” is pursued, success will be measured in terms of cost reduction. There is considerable doubt that the generics division of a R&,D pharma conglomerate can be managed competitively unless decisions are taken, to some degree, separately from its research-focused parent. Such a parent needs to be comfortable with development activities in galenic or production technology or even of biotechnological products pursued by its generics division.
“However rapidly the generics industry may develop, certain necessities are not going to change during the transition period…”
Those who are surprised by this perspective have not analyzed the present situation: It is the current one in the UK and in the US. Only those companies that are capable of developing exclusive or semi-exclusive products and, of course, have superior cost structures, are successful.
Product approval through the so-called Paragraph IV regulation is crucial as it secures exclusivity for six months. This, however, requires control over the development of APIs and galenic formulations. If pharmacy chains and “hypermarkets” start selling generic commodities as own brands then the generics companies can learn from the food industry where the market will be going.
However rapidly the generics industry may develop, certain necessities are not going to change during the transition period: the prerequisites of performance, flexibility and risk appetite.
There are four strategic options that generics businesses may pursue to survive mature market competition. These are:
• Achieving operational excellence,
• Growing profitable niches,
• Complementing the generic product offering, and
• Exploiting opportunities for corporate restructuring.
Choosing any one of these options and allocating resources to it is a critical decision for large and mid-sized companies alike. The diagnosis starts with a good understanding of how market segments should develop under the various future scenarios (“what you would have to believe to commit to an option”) and to what extent the business’s own capabilities match the challenges (“what is required for successfully pursuing an option”).
Even after defining the preferred “generics strategy” national markets will remain heterogeneous and will require as much brain and work as the corporate strategy itself, though now on a local level. The individual sale is won in substantially different local environments. Rather than creating some European healthcare system, the English PPRS (Pharmaceutical Pricing and Reimbursement System) is undergoing minor adjustments to account for the latest regulatory developments, the German government examines individual incentives used by US HMOs to complete the goals of its recent healthcare reforms and the French look into complementing the existing system by individual elements from the German tender system!
About the author:
Thimo L. Sommerfeld is a managing director of Abolon Group, London, the healthcare-focused strategy consulting and M&,A advisory firm. Sommerfeld has, previously, been a non-executive board member of a number of healthcare companies including generic companies Zentiva, Leciva and Slovakofarma.
Thimo is author of The Generics Fascination.
Which way can you see the generics market heading?