Generics in Europe

Looking beyond savings

The past decade has seen a massive uplift in the fortunes of generic companies, as they have forged ahead in pushing the benefits of substitutability and bolstering the argument of savings through cost containment. This dual-pronged strategy has really been the basis of a thriving generics industry which has grown from its humble beginnings over two decades ago to an industry worth $178 billion today (IMS 2012 estimation of the size of the generic industry).

The generics industry in Europe has been at the forefront of this change along with the United States in pushing the envelope and garnering support from cash-strapped governments who have utilized the savings potential of generics in curtailing the overall healthcare spend. However, as we look to the next decade the cost argument will remain important but not be the sole mechanism to drive growth and create sustainability that is critical for the industry’s health. What then are the shifts that are taking place within the generics industry in Europe that will underline future growth and profits?

In this article, I would like to talk about four fundamental shifts that are shaping the future of the generics industry in Europe. These shifts challenge the two basic tenets which the generic industry rests on – Savings and Substitution! As the industry matures, these basic principles will continue to evolve and will remain relevant, but not in the shape and form that we recognize today.

Consolidation: The paradigm is that the industry is becoming bigger and smaller at the same time. In terms of pounds and euros, there is no doubt that the industry is growing at a rate of 12–13% globally (in contrast pharma growth is 2–3%); however, the number of players is shrinking mirroring the natural evolution of commodity-driven industries. The mergers of the past decade have seen the market share consolidating in the hands of fewer players who typically operate across several geographies. In Western Europe, the large acquisitions have been through Sandoz (acquisition of Hexal), Teva (acquisition of ratiopharm and Ivax), Mylan (acquisition of Merck generics, Matrix, Agila, Abbott’s branded generics business outside the US), Watson (acquisition of Arrow & Actavis (and re-branding as Actavis)) and Sanofi (acquisition of Zentiva). The top four generic companies comprising Teva, Sandoz, Actavis and Mylan have between them, cumulative revenues of $31 billion and a market share of over 15% globally of the entire generics industry.

While consolidation at a supplier side is relatively well documented, it is important to recognize that the purchasing power is also getting concentrated in the hands of fewer players. We see this taking shape in different ways across different markets; in the UK and the Netherlands and several Central and Eastern Europe (CEE) markets for instance, the Walgreens-Boots alliance has already begun exercising its power through leveraging on purchases made by the group across these multiple markets. The recent Celesio McKesson deal is likely to have the same effect across European markets and for transactions across the Atlantic. The Health insurance companies on the other hand, are making suppliers pay out massive discounts in markets such as Germany and the Netherlands where it is practically impossible to operate without engaging with the ‘Krankankasse’, as the Health Insurance companies are known in Germany. In Germany, the leading Health insurance companies such as AOK and Barmer insure 24 million and nine million patients, respectively, giving them access to 40% of the population – a huge leverage when it comes to extracting rebates from pharmaceutical companies. It is without doubt that ‘lowest cost’ is the mantra while operating in the commodity pure play generics.

There are two significant areas where we might expect to see changes in the future leading to further consolidation. The first of these relates to the absence of dominant wholesalers with a presence across most or all of the European markets. While Celesio, Alliance and Phoenix are important players, there is still much room for further consolidation. The other feature of the European markets is the fragmented ownership of pharmacies in several countries where local laws prohibit ownership of more than four or five retail pharmacies under a single owner. As pressure on healthcare costs mounts, the forces of competition may unshackle this and create consolidation opportunities on the retail pharmacy level.

Branded models in a generic environment: Generic companies find themselves as victims of their own success as the traditional model of building size and scale on costs alone is rather difficult to ‘scale-up’ when other nimble, lower cost manufacturers chew away at the margins. The complexity of supply chain and finite production capacity inevitably creates trade-offs between higher and lower margin products adding to the dilemma, which the larger generic companies face in choosing which products to bring on market. This impact of commoditization is being felt across generics in Western Europe even more keenly, as generic prices can and do plummet and price erosions of 95% to 99% are neither unheard of nor uncommon. A few companies have taken the lead in consciously moving away from pure play generics and into building ‘branded models’. Stada which operates through two companies in the UK – Genus pharm and Britannia pharmaceuticals, offer ‘branded’ prescription, OTC products and Orphan drugs and while they have generics on offer, the overall model is in fact very unlike what most generic companies operate with. The other examples in the UK are that of AMCo and Consilient Health, both of whom operate with virtual supply chains (no internal manufacturing of active pharmaceutical ingredients (APIs) or finished products) and, therefore, have had to build on creating a competence where costs are important to success but the main driver really is prescriber engagement and a product offering composed of branded and generic products.

As more generic companies realize that their future growth and profitability will come from going beyond a cost-leader, I anticipate that more companies will begin following this hybrid approach in building their business. It is worthwhile noticing that Big pharma is loosening its grip on ‘established’ products and through a mixture of private equity investment and interest from generic companies, these tail end brands are likely to find a new home. The recent Abbott–Mylan deal is a pointer in this direction, and generic companies are likely to thirst for more of such deals that bring in the elusive element of predictability to their fluctuating revenue models. Looking to the future, many of the molecules expiring in the next 5–10 years are Biologics and what is different this time around is that the originators will be actively defending their portfolios. If generic companies hope to take on the big boys on their own turf, there is little choice but to up the game and build up competence in bringing branded products to market.

Differentiated generics: The ground reality is that there will be fewer commodity generics to bring to the market in the future. While looking at products in the 2015–2019 time frame, there are many which lend themselves to a ‘branded’ approach and future opportunities will go well beyond the traditional preserve of solid oral dosage forms. In a study by Evaluate and McKinsey, for products going off patent between 2015 and 2018, the share of oral solids goes down to 37% (in 2015) to an even lower 28% of value (in 2018). This pales in significance to Biologics and other Respiratory products which constitute the two largest categories contributing to an enormous value of products going off-patent. Especially for Biologics, the share of value in 2015 is a staggering 42% and in 2018, it is even higher at 55%. Generic versions of these biologics commonly known as Biosimilars will not be sold as generics, but rather as brands.

To get an idea of Biosimilar uptake in Europe, let us look at Filgrastim biosimilar where the uptake is at an average of 71% standard units (source: IMS Midas Feb ‘13) and what is noteworthy is that several CEE markets (Romania, Czech, Slovak Republic, Poland and Hungary) have a penetration over 85% and amongst the EU5, only the UK has a share of 94% while the other four have shares between 59 and 68%. On business potential, Sandoz generated sales of $420 million, up 23% on previous year for its portfolio of Biosimilars with a market share of over 50% in US, Canada, EU, Japan and Australia from a portfolio of only three marketed products (Somatropin, Erythropoetin and Filgrastim). Biosimilars present a huge opportunity today and the future presents an even rosier picture. There are 10 biological products with patents expiring between 2014 and 2019 in Europe, and these add up to a $62-billion opportunity globally. It is clear that Biology is the future, as Chemistry takes a backseat in terms of new product launches. Generic companies with deep pockets and those who have invested in early will stand to reap the benefits of this upcoming biosimilar deluge. The biosimilar opportunity while massive is not for the faint hearted, as investments per product run into a few hundred millions of dollars and the returns are only guaranteed by establishing brands and building up awareness and loyalty with the prescriber and payer stakeholders. Differentiated generic opportunities in the respiratory space is another interesting opportunity, and we see the larger generic companies such as Teva (through its internal pipeline and developmental capability following the acquisition of Ivax), Sandoz (internal and partnerships with others such as Vectura) and other leading generic companies have all jumped onto this bandwagon. Generic versions of GlaxoSmithKline (GSKs) Seretide will provide a huge opportunity in Western Europe, and while the business potential of the dry powder inhalers (DPI) and the metered dose inhalers (MDI) versions vary across these markets, the difficult development pathway, the intellectual property (IP) surrounding the drug–device combination and the high regulatory hurdles will ensure that there are limited number of companies operating in this space. This has also opened up some really interesting opportunities for companies specialized in this space such as Prosonix and 3 M who will be positioning themselves as specialists to help companies get on to the respiratory ladder as well as newer entrants like Cipla and Glenmark who are investing heavily in this space. There are several other niches including injectables, dermatology and liquids where differentiated generics will present unique opportunities and these products will certainly not be pivoted around costs as their main differentiator. This has implications for generic companies, and I believe that it will lay the foundation for generic companies to establish therapeutic portfolios and generate prescriber engagement in Europe, previously unthinkable with pure generic portfolios.

Regulatory compliance: The searchlight on ensuring compliance is shining more brightly today than it has ever before! The Food and Drug Administration (FDA) has taken a lead in coming down heavily, a trend evidenced by the number of warning letters it has issued over the years. To get an idea of how important this issue has become, a review of the past few years presents a telling picture. In 2010, the FDA issued 673 warning letters; compare that with 4882 letters issued in 2012 and a whopping 6760 FDA warning letters in 2013. The European position has been more muted, but there are clear signs that the FDA and the EU regulatory agencies are moving closer to sharing data regarding inspections. In December ‘13, FDA and European Medicines Agency announced the launch of a joint initiative to share information on inspection of bioequivalence studies submitted in support of generic drug approvals. This collaborative effort provides a mechanism to conduct joint facility inspections for generic drug applications submitted to both agencies. As the bar for ensuring compliance consistently rises up, it will push out companies that are not equipped or serious about maintaining high good manufacturing practice standards. India has over 150 FDA-approved sites, and about 40% of Abbreviated New Drug Applications in the US come from Indian generic players and while in Europe, this proportion is lower, it is reasonable to expect that as companies bolster up their internal compliance, the impact on costs will push the EU and Indian manufacturing sites closer to each other. It remains to be seen how long the famed cost advantage of Indian manufacturing will remain as the cost of compliance shoots up across the supply chain beginning with the advanced intermediates through to APIs and eventually finished formulations. The hidden costs of EU batch release and testing and freight over long distances will level out the playing field and cost arbitrage may diminish over time. We have recently seen product shortages exacerbated by manufacturing and regulatory compliance issues and such shortages or worse still, product recalls, damage the fundamental basis of trust that companies rely upon to build stakeholder relationships with payers, prescribers and patients. Generic companies operating in Europe would do well to balance out the single-minded focus on cost with compliance risk as they build up size and scale.

It is said that the only constant is change, and while the generic industry in no stranger to this concept, it will find it hard to let go of its past success mantra of low costs, small investment product development spend and simple regulatory approvals as the main drivers for their business growth. The generics industry is sometimes its own worst enemy, as its pushes down prices to unsustainable levels in its desire to enhance market share and generate higher revenues. The road to the future will undoubtedly be littered with the “pragmatics” that comprehend the importance of sustainability, but it will also inevitably consist of the courageous who do not fight shy of infusing a healthy dose of ‘uncertainty’ through complex products, riskier regulatory approvals, longer investment cycles and new stakeholder relationships with prescribers. There will always be a future for the brave!