Generic drug manufacturers are a painful thorn in big pharma’s side. Once a top-selling drug loses its exclusive patent, the launch of rival versions can lead to severe losses in sales and profit for the innovator company. But generic drugs makers could be just what the doctor ordered for investors.
After years of research and drug development (R&D) and an arduous approval process by the regulatory authorities, such as the US Food and Drug Administration (FDA), all the hard work can be wiped out in an instant.
Drugs companies call this the patent cliff, because the Big Pharma’s lucrative revenues and market monopoly fall off the cliff edge.
Equivalent but cheaper
According to the US FDA, a generic drug is a medication created to be the same as an existing approved brand-name drug in dosage form, safety, strength, route of administration, quality, and performance characteristics. In fact, the only difference is that they are cheaper in a bid to steal market share; simply because there are no discovery costs associated with generic drugs.
An investigation carried out by the European Commission found that the average generic price two years after its entry is around 40% below the price of the former brand name products. This is something that no doubt eases pressure on healthcare budgets, but it means that a drug maker only has usually 10 to 12 years to make a profit.
One of the best known examples was when Pfizer lost its patent on Lipitor, the best-selling drug in the history of pharmaceuticals. In 2010, the drug added $10.7bn in revenue compared to $1.9bn in 2015 following its genetic availability.
Generic drug investment opportunity
As demand for prescription drugs worldwide is increasing, would an investor be wiser to look directly at the generic drug companies? Can they make more money than the pharmaceutical companies who undergo an expensive and time-consuming process to develop new drugs?
It was a bill approved in 1984, known as the Hatch-Waxman Act, that altered the pharmaceutical playing field and established government regulations for generic drugs in the US. That made it easier for generic drugs to enter the market. Since then the number of generic drugs available has increased rapidly.
Many analysts say that generic drugs offer a unique opportunity for long-term and medium-term investors. The growth potential makes them a compelling investment opportunity and trends such as the ageing population can only make it more attractive.
In its latest report Evaluate Pharma estimate that patent expiries and generics could wipe out $194bn worth of pharma sales during 2017-2022. It also predicted that generics will continue on a steady growth path to $115bn in 2022, up from $80bn in 2016.
According to a report by Zion Market Research, the global generic drug market accounted for around $200.2bn in 2015 and is expected to reach approximately $380.6bn by 2021, growing at a compound annual growth rate of around 10.8% between 2016 and 2021.
The US holds the largest market share in the generic drug market with more than 88% of prescriptions filled by generic drugs. Europe, however, is expected to show significant growth for the generic drug market as a result of increasing prevalence of chronic diseases and government support. Some 55% of prescriptions currently use a generic formulation.
According to the latest IMS Health report, generics may account for 91%-92% of prescription volumes in the US by 2020.
NASDAQ recently stated that the patent cliff is a trend that is expected to continue and from 2011-2020, drugs with annual sales of $200bn will be losing their patent protection.
It added: “This may lead not only to revenue losses for the traditional branded drug companies, but also the potential for significant new revenues for generic drug manufacturers.
“In fact, the patent cliff has generated enough financial resources and market clout for the generic manufacturers to help them transition from fringe players into what can be called the “New Big Pharma” industry, and move into new and exciting area and products.”
Sick man of stock markets?
Evaluate’s latest World Preview report highlighted the increased scrutiny around the pricing of medicines and how this is starting to have an impact on drug sales growth.