Threats and Opportunities for the Generic Industry

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Threats and Opportunities for the Generic Industry

• KATE KUHRT
• JUNE 2006

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AT FIRST GLANCE, MANY OPPORTUNITIES

• Increasing demand for low-cost therapies
• Aging population
• Consumers becoming more cost sensitive
• Increased generic substitution
• Government involvement
• US Medicare Drug reimbursement
• Reference pricing in Europe

Proportion of Population Aged 60 or Over
Source United Nations, DESA, Population Division
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GENERIC OPPORTUNITIES IN THE U.S.

• Products with 100B in branded drug sales are
  coming off patent in the next 7 years
• Patent challenges by generic companies

Source Newport Strategies Horizon Global system
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A CLOSER LOOK

• Rapid price erosion in the U.S. and UK
• Diminishing margins on both dose and API sales
• New regulations in Germany (AVWG)
• Settlements between generics and brand companies
  are delaying generic entry in the U.S.
• ANDA approval backlog in the U.S.
• Fewer new launches by innovators over the past
  years will translate into fewer opportunities for
  generics down the road

5-10 of 100 billion over 7 years, divided among
many players and products, does not necessarily
translate into a lot of money for every generic
company
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DOWNWARD PRESSURE ON DOSE PRICES

• Demand
• Purchasers focus on price
• Past relationships matter less
• Reverse auctions
• Supply
• Generic filings and approvals at all-time high
• A number of new entrants, many from India, often
  with access to low- cost APIs
• Overcapacity in manufacturing
• Focus on market share rather than bottom line
• Authorized generics in the U.S.

U.S. ANDA Approvals
Source Newport Strategies Horizon Global system
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DOWNWARD PRESSURE ON API PRICES

• Demand
• Dose manufacturers focus on price
• Past relationships matter less
• Willingness to take the risk and go with
  less-known API sources
• Supply
• Overcapacity in manufacturing
• Record number of DMF filings
• Availability of low-cost APIs from India and
  China
• (Too?) many plants FDA approved
• Many companies hold COS

Number of U.S. DMFs
Source Newport Strategies Horizon Global system
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COPING STRATEGIES

• Consolidation
• Geographic diversification
• Backward integration into API
• Sourcing from India, China, and other low-cost
  countries
• Alliances with companies in low-cost countries
• Moving manufacturing to low-cost countries
• Focus on niche products

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COPING STRATEGIES CONSOLIDATION
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COPING STRATEGIES CONSOLIDATION

• Likely to see a period of consolidation in
  pursuit of
• Top-line growth
• Opportunities in new markets
• Synergies
• Result Industry will likely be dominated by a
  handful of global players plus many small players
• Barrs rumored 2.1B acquisition of Pliva
• Biogenerics
• 2005 deal to develop a generic version of Amgen
  Inc.'s Neupogen
• New dose forms
• Presence in emerging markets
• API

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COPING STRATEGIES GEOGRAPHIC DIVERSIFICATION

• Opportunities in Europe
• Counterweight to the U.S. generics market
• DRL-Betapharm, Matrix-Docpharma, Ranbaxy-Terapia
• Competition among Indian companies driving up
  prices of companies
• Commoditization of German generic market?
• Japan
• Merck KgaA in Japan since 1998
• In November 2005, Ranbaxy increased equity stake
  in JV with Nippon from 10 to 50
• In March 2006, Teva applied for approval to sell
  drugs in the Japanese market
• Dr. Reddy's considering setting up an office in
  Tokyo or Osaka by the end of next March

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COPING STRATEGIES BACKWARD INTEGRATION INTO API

• Recent example Watson - Sekhsaria
• Pros
• More control over cost and access to API
• Decreasing number of established API
  manufacturers still independent
• Different parts of the value chain may make money
  in different products
• Cons
• No one plant can make all APIs required by a
  typical generic
• Making just enough for captive use often not
  economical
• Other dose companies wary of buying API from a
  competitor

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COPING STRATEGIES MOVING MANUFACTURING AND RD
TO LOWER-COST COUNTRIES

• Applies to both API and dose manufacturing
• Recent example Watson
• Acquired from DRL a small solid oral dose plant
  in Goa
• Increased investment in an FDA-approved
  Chinese/Taiwanese API manufacturer
• Sandoz multiple units in India
• Teva scientists in Faridabad, acquired Regent
  Drugs (JK)
• Apotex manufacturing and RD facilities in
  Bangalore
• Ratiopharm RD center in Goa
• Stada
• Complementation of existing Group-owned
  production sites in GER, NL, and IRL by
  production sites in Low Cost Countries Russia,
  Vietnam (5050 JV) and China (currently only
  local orientation) (Stada Corporate Presentation
  2006)

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COPING STRATEGIES ALLIANCES WITH INDIAN COMPANIES

• Zydus Cadila
• Distribution agreement with Mallinckrodt
• 50/50 JV with Mayne for cytotoxic dose and APIs
• Glenmark
• Development and supply agreement with KV for 8
  ANDAs
• Agreement with Invagen for 7 products
• Deal with Konec for nitroglycerin and with
  Interpharm for naproxen
• Lupin
• Injectable ceph generics with Baxter
• Oral ceph generics with Watson

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COPING STRATEGIES SOURCING FROM INDIA CHINA

• Many highly qualified API sources in India and
  China
• India
• 68 FDA-inspected API manufacturing sites
• 33 FDA inspections in FY2005 (20 API, 7 Dose, 3
  API/Dose, 3 Labs)
• 22 NAI (no action), 11 VAI (voluntary action), 0
  OAI (official action)
• China
• 69 FDA-inspected API manufacturing sites
• 15 FDA inspections in FY2005 (14 API, 1 repacker)
• 6 NAI, 9 VAI, 0 OAI
• Are FDA inspections in India and China less
  stringent?

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COPING STRATEGIES SOURCING FROM INDIA CHINA

• Generic companies willingness to use second- or
  third-tier API manufacturers is particularly
  damaging to Italian API manufacturers

Source Newport Strategies Horizon Global
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COPING STRATEGIES FOCUS ON NICHE PRODUCTS

• Products with small sales no longer count as
  niche
• Even 20M products attracting a lot of interest
• Margins in difficult formulations likely to
  remain higher
• Inhaled products, certain injectables
• Biogenerics
• Teva, Sandoz, Pliva

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FUTURE

• Will focus on price backfire?
• Is the number of suppliers going to decrease
  enough to give the remaining players more
  negotiating power?
• What will be the impact of generic entries from
  China?

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THANK YOU!
Kate Kuhrt Director, Generics and API
Intelligence Thomson Reuters 215 Commercial
Street Portland, Maine 04101 USA 1 (207)
871-9700 x26 kate.kuhrt_at_thomsonreuters.com