Generics: Challenge or Opportunity?
Income Shifts
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Despite healthy growth forecasts for many of the 17 emerging markets surveyed by IMS, a closer look at the numbers may staunch
initial enthusiasm: It's worth noting that market growth and pharma company growth is not the same thing. Spending on innovative
brand drugs is expected to decrease across the board, with any gains offset by patent losses. Even though the global pharmaceutical
market is predicted to cross the $1 trillion mark in 2015, approximately $400 billion to $430 billion, or 39 percent, will
come from the sale of generic drugs. In 2010, generics accounted for just 27 percent of the global drug market.
To capitalize on the skyrocketing generics spend, top pharmas have dusted off brands with expired patents and rejiggered them
for emerging markets, often with the help of local generics players. In India alone, partnerships have been forged between
Merck and Sun Pharmaceuticals, AstraZeneca and Torrent Pharmaceuticals, Bayer and Cadila Healthcare, GSK and Dr. Reddy's Laboratories,
and Abbott paid $3.7 billion for key parts of Piramal Healthcare last year. But the branded generics game is not without risk;
while some patients in emerging markets are willing to pay extra for the prestige (or presumed safety) that comes along with
a drug manufactured by a Pfizer or a Merck, the margins necessary to make a deal worthwhile are beginning to face a crunch,
as local governments intervene in negotiations or try to scale back reimbursement coverage.
Drug Spending by Geography
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Latin America, which represented 6 percent of the $856 billion global pharmaceutical industry in 2010, provides an example
of the growing pains for pharma. Drug spending in the region is expected to rise by between 11 percent and 14 percent in the
next five years, to as much as $82 billion by 2015. Brazil leads Latin America in terms of spending on drugs, and while that
spending will increase, brand drugs will take a hit, despite a relatively large original brand market, says Michael Kleinrock,
research director, IMS Institute for Healthcare Informatics. "Government policies will have longer-term impact on brand growth
over the next five years ... a lot of the growth is essentially going to be volume-driven," he says.
Indeed, brand drug prices in Latin America have been driven down by the adoption of international price referencing, where
the lowest price wins. "Brazil's international price referencing significantly impacts the rest of Latin America," said John
Brennick, director, worldwide market access, Janssen Global Services, at a panel at the Drug Information Association's (DIA)
annual meeting in June. "Brazil takes the lowest price reference available," based on nine reference countries including Australia,
Canada, France, Greece, Italy, New Zealand, Portugal, Spain, and the US or the drug's country of origin, said Brennick. That
price can then represent "your product's maximum price for its entire patent life on the market in Latin American countries."
Brand growth is also hampered by the fact that 79 percent of drug costs in Brazil are paid for out of pocket; Mexico's out-of-pocket
percentage is even higher.
Some traditionally innovative drug-oriented companies have opted to buy in to Brazil's generics market. Last October, Pfizer
bought 40 percent of Teuto, a Brazillian drug company, for $238 million. Sanofi bought Medley, and its portfolio of 189 generic
products, for €500 million in 2009, although the deal was held up for a year by antitrust concerns.
Global Drug Spending by Segment
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Many of the growing pains present in Latin America hold true for other emerging market countries. Generic drug buy-ins are
likely to continue, particularly with the shift in the profile of disease caused by things such as urbanization, diet, smoking,
and rising life expectancy. "By 2030, the burden of disease in the emerging markets will look very similar to the burden in
terms of chronic conditions in mature markets, "says David Campbell, senior principal, IMS Consulting Group. As the bulk of
drug spending moves from acute disease to chronic disease, R&D-driven organizations are increasingly considering a play in
branded generics, or pure generics sales. As an illustration of the pricing pressures in Brazil, and the appeal of generic
buy-in, consider the following case presented at DIA by Alexandre Schiola, head of regional market access for Latin America
at Bayer. Elan and Biogen Idec's Tysabri received regulatory approval in August 2008, and was eligible to be classified as
a category 1 drug by the Brazilian Health Ministry. The wholesaler price in August 2008, as well as the accepted international
price, was $2,400 per dose. The expected price in Brazil, with taxes and margins, was $3,900. But the price that received
approval was $2,219.
Examples like the one above can be impossibly frustrating. But challenges in pricing and market access have a way of weeding
out companies without a stomach for change and innovation. Where some companies see a prohibitive set of circumstances, others
see opportunity. In some cases, product process can be the source of innovation.
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