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Major Pharmaceutical companies see generics as a bridge to the future

MOST PHARMACEUTICAL innovators treat patent expiry like a terminal disease and the generics business as a sort of hospice where dying products ease into commodity oblivion, but recent deals and acquisitions suggest growing faith in an afterlife of emerging markets.
Some saw the light sooner than others - $41bn (€28bn) pharma giant Novartis has maintained one of the largest generics businesses in the world, Sandoz, since it was formed by the merger of Ciba-Geigy and Sandoz in 1996. The Switzerland-based firm has always considered Sandoz strategic, and the $1.3bn acquisition of Austria-based Ebewe Pharma, a specialist in generic injectables, does not represent a new direction.

Much more surprising have been moves in the sector by companies such as US-based Pfizer, the largest pharmaceutical company in the world, with annual revenues of $48bn. Pfizer has traditionally dedicated only modest resources to its off-patent business, which accounts for about 15-20% of total revenues. The contribution of developed markets to this sum has actually been in decline, falling by 37% in 2007 and 19% in 2008.

However, recent deals in generics indicate that the pharma giant has adjusted its stance. In March, Pfizer announced an expanded relationship with Indian firm Aurobindo. In May, Pfizer announced another deal with Aurobindo, as well as a deal with Indian injectable generics specialist Claris Lifesciences.

Other major innovators have made moves into generics as well.
In June 2008, Japanese drug company Daiichi Sankyo acquired India's Ranbaxy for $4.9bn. In July 2008, UK-based GlaxoSmithKline (GSK) spent $410m to acquire a 16% stake in South Africa-based Aspen. GSK kept busy, one month later announcing a license and supply agreement with India's Strides Arcolab and Onco Therapies. In June 2009, GSK announced a marketing with India's Dr. Reddy's Laboratories.

In October 2008, French major Sanofi-Aventis acquired Czech Republic-based Zentiva for $2.6bn. In April 2009, Sanofi bought Medley, of Brazil, for $664m and Mexico-based Kendrick for $30m.

Why the late conversions? As the saying goes, there are no atheists in foxholes, and big pharma is nothing if not embattled.

Growth in key markets is steadily declining; the US market may even shrink this year, according to US research firm IMS Health. New product pipelines have been disappointing for years, as well, and there is no sign that drug discovery is going to become easier anytime soon.

However, at least one opportunity offers grounds for hope: the emerging markets, particularly Brazil, Russia, India, China, Mexico, Turkey and South Korea - what Tim Anderson, senior analyst at New York-based investment research firm Sanford C. Bernstein calls the EM-7.

The total size of the EM-7 markets is relatively small, just $91bn last year, versus global pharma sales of $733bn. However, those seven markets accounted for 32% of overall global sales growth, a contribution that will only increase going forward. Whereas global sales growth has steadily declined from 7.9% in 2004 to 4.8% in 2008, growth in the EM-7 has been 14.2% (2008) and higher, even reaching 27.2% in 2005, Anderson notes, referring to figures from IMS Health. "Shorter-term disruptions aside, the longer-term momentum in emerging markets seems to be very sustainable," he states in a May 7 report. The sources of this momentum, he says, are a growing middle class; greater dedicated public spending on health care, as well as the more robust health care infrastructure that results; greater attention and investment by multinational drug companies; and better intellectual property protection.

Exploiting the opportunity is no simple matter, however, even for big pharma. Obviously a marketing organization has to be put in place. But there is also the very nature of the markets in question. Drug consumers in emerging markets have lower levels of disposable income and spend more out of pocket, so that generic products dominate. Multinationals cannot simply transplant the same innovation-heavy portfolio that is successful in the US, Europe or Japan and expect similar penetration.

Bernstein senior analyst Ronny Gal believes this dynamic explains big pharma's moves into generics.

"The [moves] could be interpreted as strategic interest by pharma in generics, raising the possibility of enhanced competition or the potential for acquisitions of US-focused generic companies by big pharma," Gal observed in a June 4 report. "We believe the acquisitions made by pharma are less strategic and reflect leveraging their investment in emerging markets infrastructure and, to an extent, offsetting more rapid erosion of off-patent drugs in developed markets."

The rationale is straightforward. The market for generics in developed nations is well established. Margins are relatively low, overall volume growth is 5-7%/year, leaders such as Teva Pharmaceutical Industries, of Israel, and US-based Mylan are firmly entrenched, and brand differentiation is a minor consideration. The emerging markets are fundamentally different. Growth is considerably higher, the competition much smaller, and brand plays a key role in consumer choice.
"Using their commercial infrastructures to sell generic drugs is an attractive opportunity," says Gal. "These are primarily self-pay markets where patients are brand conscious - for fear of forgeries and low-quality products - and generic drugs are primarily sold as brands - branded generics. Drugs are detailed, advertised and command higher prices close to relatively low innovative drug prices. Innovators building a presence in emerging markets are well positioned to increase near-term revenue through licensing in already approved generic drugs and sell[ing] them through the same infrastructure as innovative drugs"

Pfizer acquired the rights to market 55 solid oral dose products and five sterile injectable products in more than 70 emerging markets through its May 2009 deal with Aurobindo.

In Ranbaxy, India's largest pharmaceutical company, Daiichi Sankyo acquired one of the generics industry's top 10 players, with operations in 49 countries and distribution to 125.

GSK's many moves into generics have all centered on emerging markets. The deal with Strides Arcolab and Onco Therapies provided for marketing injectables in emerging markets outside India and Africa; the Dr. Reddy's deal allowed GSK to sell generics made by Dr. Reddy's in emerging markets around the world; and more recently, GSK acquired the branded generics business of US-based Bristol Myers Squibb in Lebanon, Jordan, Syria, Libya and Yemen for $23.2m.

For Sanofi, Zentiva not only boosted the company to leading place among global generics players, it also provided a platform for growth in the emerging markets of Central and Eastern Europe, Turkey and Russia. The Kendrick acquisition firmly established Sanofi in the growing Mexico market. The purchase of Brazil's Medley instantly made Sanofi the biggest generics player in Latin America.

But do these companies see their future in generics? Ken Cacciatore, analyst with New York-based investment bank Cowen and Co., believes big pharma is pursuing a branded-generic strategy in emerging markets primarily to establish their footprint.

"They don't know exactly how it's going to be monetized, but they need to be in those markets because of the explosive population growth and the potential that we continue to have the creation of a middle class in those areas," says Cacciatore. "Generics [firms] don't necessarily need to be there. Right now they have the capabilities and low-cost manufacturing to get involved when they want to, but large cap pharma actually needs to accumulate that capability."

Anderson has a similar perspective. "Drug companies are doing two things to help optimize their positioning within the EM-7. The first is that more companies are making local investments in each country which can have both direct and indirect impact," he says.
Anderson points to research and development (R&D) sites that not only save costs, but also facilitate local regulatory review and influence opinion leaders. Other examples are R&D collaborations with local companies and academic institutions.
"All companies appear to have been on a trend towards increasing the size of their field force in local markets, an obvious prerequisite to building relationships with prescribers and purchasing entities," he concludes.
Acquisitions in generics are not so much strategic as tactical, adds Gal. "As pharma companies are all investing in sales and marketing infrastructure in these markets, sales of branded generics offers a way to leverage that investment until additional innovative products are approved."


Even if the innovators do not aim to unseat broad-based generics leaders such as Teva and Mylan, they are showing greater interest in leveraging inherent advantages - for example, defending more aggressively the market share of products that have lost patent protection, or deepening their involvement in select segments of the generics market, as Pfizer is doing in hospital-based sterile injectables.

"Our aspiration is to be the leader in this area," David Simmons, general manager of established products at Pfizer, said at an investor conference on September 14. "Specifically, in the next five years, [we are] looking to be one of the top five ¬companies." He puts Pfizer's current rank at about 14th.

Simmons estimates the value of the US market for hospital-based sterile injectables at $11bn, growing at 8%, while he puts global sales volume at roughly $30bn.

"This market is characterized by difficult to make products that have very high quality standards," he explains. "One cannot mess up in this area because it's so critical to patient care in hospitals. This is an area where Pfizer has very good strengths. Our costs of goods are in very good shape. We should be able to compete here."

Pfizer developed a strategy for hospital-based sterile injectables in 2008. The company had 30 legacy products in its portfolio, but it needs more than 100 to be a top-tier player, says Simmons. The deals with Aurobindo and Claris address that situation, he says.

Going forward, similar moves are a certainty, not only at Pfizer, but also other leading innovators.

"Given the slowdown in established markets, large pharma is looking to squeeze every last drop of sales out of existing products, including those off-patent and outside its traditional markets," says Gal.
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Mahesh Sundar,
Oct 10, 2009, 10:46 AM