Generic Drugs: A Big Business Getting Bigger

When Novartis International announced in February that it was making a play for two generic drug companies, it was viewed as an acknowledgment that generics could play an increasingly important role in the pharmaceutical business.

Jun 20, 2005
Alicia Ault(aault@the-scientist.com)
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When Novartis International announced in February that it was making a play for two generic drug companies, it was viewed as an acknowledgment that generics could play an increasingly important role in the pharmaceutical business.

In late May, the company received European Commission clearance for its purchase of Hexal AG, the second-largest generics company in Germany. And Novartis hopes to get approval from the Federal Trade Commission by late 2005 to purchase a majority stake in Eon Labs, Inc., an American generics company that has a strategic partnership with Hexal. If both deals close, Novartis would become the world's largest generics manufacturer, displacing Israel-based Teva Pharmaceuticals, which had $4.8 billion in sales in 2004. The plan is to integrate the companies into Novartis' existing generics business, Sandoz, which had sales in 2004 of $3 billion.

Novartis spokesman John Gilardi says the company's further foray into generics broadens its portfolio, allowing it to offer low-cost drugs in addition to novel brands and over-the-counter medicines. "There is interesting growth potential in generics over the next few years, and we feel [the acquisition] is making the case," says Gilardi.

While other big name drugmakers are dabbling in generics, most companies aren't jumping in with two feet the way Novartis has, says Ira Loss, a senior healthcare analyst with Washington Analysis. "I don't see any stampede at the moment," he says. "The others haven't made it part of their up-front strategic plan the way Novartis has."

Worldwide generic sales, $18.1 billion in 2004, still pale in comparison to the overall sales of brand-name drugs, which totaled $235 billion globally last year, according to the market research and data collection company IMS Health. But as more prescriptions are filled with generic products – 53% of the total prescriptions written in the United States in 2004, according to the Washington, DC-based Generic Pharmaceutical Association (GPhA) – brand-name pharmaceutical companies are finding ways to make sure they grab a piece of that pie, too.

The near future does look bright for generic manufacturers, with robust sales growth expected thanks to blockbuster drugs going off patent, an aging population needing more and cheaper medications, and the addition of the Medicare drug benefit, which goes into effect in 2006. But in the next two years, consolidation will most likely rise; the sector is expected to be rocked by increased competition from companies in Eastern Europe and India, as well as brand-name companies seeking to protect their franchises by moving into generics.

FEELING THE SQUEEZE

In 2003, six of the top 10 fastest growing drug companies were generic firms, according to Selena Class, an executive editor at IMS Health, who recently wrote an overview of the sector.1 That same year, sales of generics grew three times as quickly as brand names, according to Class.

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This is due in part to huge sales growth over the last few years, driven partly by the number of blockbuster drugs that have come off patent, including Prozac (fluoxetine), the antibiotic Cipro (ciprofloxacin), the antidepressant Celexa (citalopram), and the antiviral Rebetol (ribavirin). Other major drugs due to lose US patent protection soon: Merck & Co.'s Zocor (simvastatin), with sales of $4.5 billion in 2004; Pfizer's Zoloft (sertraline), with sales of $3 billion in 2004; and Pfizer's Norvasc (amlodipine), with sales of $2.3 billion in 2004.

But the pharmaceutical companies aren't taking the potential loss of revenue lying down. When generic competitors launched versions of Pfizer's anticonvulsant Neurontin (gabapentin) in October 2004, it ate into sales and market share. For the first quarter of 2005, sales of the brand were off 90% in the United States, down to $56 million from $570 million in the year-ago quarter. Pfizer introduced its own generic gabapentin, and is waging a patent fight against Ivax Pharmaceuticals, Alpharma, and Teva Pharmaceuticals, which are marketing the competing drugs.

A Thicket of Lawsuits

Ivax Pharmaceuticals, Teva Pharmaceuticals, and Dr. Reddy's Laboratories are challenging Eli Lilly's antipsychotic Zyprexa, which has patent protection until 2011, and had sales of $2.8 billion in 2004. So far, Lilly has prevailed, with a US District Court for the Southern District of Indiana judge ruling in mid-April that the generics were infringing.

Such patent challenges are common. At a presentation in early May to investors at a Deutsche Bank Securities meeting, Carol Ben-Maimon, president and COO of Barr Pharmaceuticals (parent of Barr Laboratories), proudly noted that her company had challenged patents on nine products, including Eli Lilly's Evista, a blockbuster osteoporosis drug.

Generic companies can challenge the validity of brand-name patents under the 1984 Waxman-Hatch law, which brought generics to the forefront. If the generic company wins, it may get its product on the market much sooner than anticipated and with six months of exclusivity. Barr Laboratories in 2001 successfully challenged Eli Lilly's Prozac (fluoxetine); its generic came to market almost three years before the patent's expiration. Sales of the brand-name drug were devastated. Generic approvals often are delayed when brand-name pharmaceutical companies find ways to extend patent life by filing additional claims, on chemical processes, for instance. But more commonly, suits arise out of the FDA approval process. Many generic manufacturers, when applying for FDA approval of their product, do so under a process whereby they state that although there is a patent on the brand, they believe it is either invalid or won't be infringed by the generic. The brand-name company then has the right to sue the generic company for patent infringement. If the brand files within 45 days of the generic drugmaker's FDA application, the FDA is prevented from granting the generic approval for up to 30 months. A court decision in favor of the generic or the expiration of the brand's patent will allow FDA to grant the approval.

Patent challenges can take three to five years to move through the courts, which is why generic companies generally try to launch the fight several years before a patent is due to expire.

Brand-name pharmaceutical companies, of course, put some effort into fighting off these challenges. Pfizer, for instance, is embroiled in litigation over its antidepressant Zoloft and its antihypertensive Accupril (quinapril). Accupril had worldwide sales of $706 million in 2003; that figure dropped slightly to $665 million in 2004. Teva and Ranbaxy Laboratories launched a generic quinapril in December 2004. In late March, Pfizer got a preliminary injunction that halted sales of the generic, with the court ruling that Pfizer was likely to prevail in an infringement suit filed against Teva and Ranbaxy in January.

In another court action in January, the US Court of Appeals for the federal circuit upheld a lower court ruling throwing out a suit by Teva. The generic had been seeking to have the court declare in advance that it was not infringing Pfizer's patent on a crystalline form of sertraline, the active ingredient in Zoloft.

Teva won a battle recently against GlaxoSmithKline, with the two companies reaching a settlement that allows Teva to sell a generic version of Lamictal (lamotrigrine) in the United States – a market that was worth $875 million to GSK in 2004.

Brand-name pharmaceutical companies also ward off generic competition by coming up with drug combinations, once-daily versions, and slightly altered forms of existing products, all of which can extend patent life, according to IMS's Class. Some manufacturers have also attempted to switch their products to over-the-counter drugs. In 2002, Andrx, a generics company, made an unsuccessful attempt to block AstraZeneca's over-the-counter switch of Prilosec via a citizen's petition to FDA.

The fights aren't for nought: Clearly, all the parties believe there's something to be gained by seeking a bigger and bigger piece of the generics market.

Pfizer isn't alone. Brand-name pharmaceutical companies are increasingly likely to launch generic versions of their own products at the same time a competitor brings its generic to market. Known as "authorized generics," they are manufactured on the same line as the brands; the packaging and the markings on the pills are altered.

"So the true generic has to share the market with the competitor," says Christine Simmon, vice president of public affairs and development at GPhA. Under the 1984 Waxman-Hatch Act, the law that made approval easier for generics, the first generic to market is awarded 180 days of marketing exclusivity (see sidebar). An authorized generic "cuts in half or more the profitability of the value of the six-month exclusivity," estimates David Maris, a Banc of America Securities analyst who makes a market in generic companies' stocks. GPhA is taking its concerns about authorized generics to Capitol Hill, says Simmon. "We'd like Congress to address this issue."

IS LIFE GETTING EASIER FOR GENERICS?

Some signs suggest that the government is already trying to make life easier on manufacturers of generics. There's been a surge of generic applications submitted to the US Food and Drug Administration (FDA) over the last five years, with an equally accelerating number of approvals. According to the FDA's Office of Generic Drugs, in 2001, there were 234 full approvals and 73 tentative approvals; in 2002, 321 full approvals and 63 tentative; and by 2004, there 380 full approvals and 95 tentative approvals. The median approval time has been dropping as well, to about 15 to 16 months.

A Federal Trade Commission member recently said the agency would consider a congressional request to investigate the impact of authorized generics. However, increased competition is putting pressure on already-thin profit margins. In late 2001, the average price of a generic prescription was about $23.50; by the fall of 2003, it increased to $28.50, according to Maris. But late in 2003 and into 2004, the average price began to decline, reflecting increased competition.

With new players entering the fray, from India, Eastern Europe, and elsewhere, margins will continue to come under pressure, explains Maris. In a recent presentation to the GPhA, he predicted rising consolidation. "Most of our CEOs are on record saying that there is going to be further industry consolidation," agrees GPhA's Simmon.

Pittsburgh-based Mylan Laboratories, Inc., the second-largest generic company, did attempt to merge with King Pharmaceuticals of Bristol, Tenn., late last year, but the two called off the deal in February when they could not agree upon terms.

Generic companies are also looking forward to making knockoffs of ultra-expensive biologic products – which promise higher profit margins. But the area remains rife with uncertainty, particularly at the FDA, which is still developing general guidance on the development and approval of so-called "follow-on" products.

The Biotechnology Industry Organization (BIO) has been working to ensure that generic companies can't use innovators' clinical studies as the basis of approval of generic versions of genetically engineered products. Loss says BIO's position is legitimate given recent drug safety issues. He doesn't expect much movement by FDA until 2007, when he believes Congress will address generic biologics as part of the reauthorization of drug user fees.

BRAND NAMES FIGHT BACK

In the meantime, some brand-name pharmaceutical companies have not been shy about moving into the generics territory. Sanofi-Aventis, which is third biggest drug company, recently established a generics division, Winthrop Medicines. And when Pfizer purchased Pharmacia in 2002, part of the deal included Greenstone Ltd., a generics subsidiary created to launch authorized generics. It was perfect timing. Pfizer was facing the loss of patent protection on a handful of its blockbuster drugs, including Neurontin, Diflucan, Zoloft, and Norvasc.

<p>Major Patent Expirations/Top in Sales</p>

Source: IMS Health; Banc of America Securities, LLC

Initially, Greenstone didn't get much attention. But now, it's more important to Pfizer's success going forward. Pfizer spokesman Paul Fitzhenry says the company isn't talking much about its strategy with Greenstone. But, he adds, "We will authorize Greenstone Ltd. to serve as the platform to introduce generic versions of Pfizer products that lose patent exclusivity and become subject to generic competition."

Last July, Greenstone began selling a generic version of Diflucan, an antifungal that had sales of $1 billion in 2002 and 2003, but was buffeted by generic competition starting early in 2004. Sales of the brand were off 97% in the first-quarter of 2005 in the United States.

According to the analyst Maris, the brand had only a 6% share of the market in 2004, compared with 24% share held by the Indian company Ranbaxy Laboratories, 22% by Teva Pharmaceuticals, 17% by Sandoz, and 6% each for Dr. Reddy's Laboratories (another Indian company) and Par Pharmaceutical. Greenstone, however, had picked up a 15% slice of the pie.

It's likely Greenstone will be called upon to launch generics of Zoloft and most certainly, Lipitor, the top-selling drug in the world. There's likely to be a huge fight over the cholesterol-cutter, which had sales of $7.6 billion in 2004, and is due to lose its primary patent protection in 2010.

So far, Novartis is not saying whether it will use Hexal and Eon to create authorized generic versions of its flagship products. It's hoping to expand into new delivery mechanisms for existing products, and seeking out hard-to-make generics, said spokesman Gilardi. In the meantime, Hexal has launched 121 drugs in the last three years, including a generic Zocor in Europe, and it is about to launch a generic version of the painkilling fentanyl transdermal patch.

Novartis, at least, thinks generics are the place to be. In his interview with cNBC, Novartis CEO Daniel Vasella noted that with the aging of the population will come increased demand for drugs, and higher costs, leading to pressure to cut costs. "So with that, we will see a growing importance of the generic industry and generic drugs," he said.