The pharmaceutical industry is facing challenges and changes more radical than any in the past 50 years. The worldwide economic recession has had a profound impact on a sector that is normally resilient to market ups and downs. In addition to cutting costs and restructuring, the industry has had to confront the fact that its trading environment has fundamentally changed because its customers are more cost conscious than ever. At this critical time, the pharmaceutical world has also stumbled upon the so-called patent cliff: R&D pipelines have not been able to produce a sufficient supply of replacements for blockbuster drugs that have lost patent protection.
Hence the door was thrown wide open for generic drug producers to do what they do best—provide low-cost alternatives to branded pharmaceuticals. In addition, over the past two decades, advances in biotechnology have led to a generation of biologic medicines that are often more efficacious than traditional small-molecule drugs at treating their target diseases. The oldest of these biologics are now losing their patent protection too, offering yet another opportunity for the manufacture of generic copies (in this case, called biosimilars). Biosimilars open up a new market for generics companies that have (or are prepared to buy) the technological expertise required to create them.
Research by BCC Research predicts that the global generic drugs market will reach $533 billion by 2021, driven by originator drugs facing patent expiry, pressure to control healthcare costs, the rise of biosimilar drug technologies, and high-growth market activity in emerging regions. BCC Research’s study, Global Markets for Generic Drugs, reports that the generics sector has consistently outperformed the sales of original branded drugs for the past five years. It seems set to continue growing at an annual rate significantly higher than the pharmaceutical sector overall, as cost-containment efforts intensify and many of the blockbusters mature and go off patent.
Loss of Patent Protection is Generics’ Gain
The value of small-molecule products facing patent expiry in developed markets from 2014 to 2018 is estimated at $121 billion (IMS Institute for Healthcare Informatics). The price of a generic copy may be roughly 60% of the original brand immediately after patent loss, whereas after a year, when several generic copies have been launched, the average price may be less than 20% of the original. Generics, which already dominate several leading classes, are rapidly becoming the first-line option in many key therapy areas as fewer new pharmaceutical products reach the market.
BCC Research examined strategies used by companies specializing in generics to meet the challenges of this highly competitive market, while also summarizing strategies used by originator companies to forestall generic competition. Originator companies are deploying formidable tactics to protect their franchise, including marketing their own branded generics.
Initially, generics suppliers relied on low cost as their main market advantage. It was a potent strategy, as government health departments in most European countries operating national health schemes began introducing measures designed to curb pharmaceutical expenditure. In the United States, developments in managed care had a similar effect. Everywhere, these cost-cutting exercises favored generics.
However, the low-cost argument that served as the main rationale for generic products began to work against the commercial promise of this industry sector. Competing to introduce low-cost copies, generic drug makers were driven to undercut each other to the point where, a year after patent expiry of the original brand, the mean price of copycat products may have fallen to less than 20% of the original. In addition, generic price competition was fueled by government reimbursement measures, which favored low-cost drugs and thus tended to trigger further price cutting among generics contenders.
This development had two far-reaching effects. First, it began to weed out the weaker generics companies in favor of those with the means and the resolve to exist in an environment where profit margins were severely cut, often to less than 10%. One survival strategy adopted by these companies was to broaden their appeal beyond mere cost cutting, to include, for exam...
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