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.”
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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.
It stated: “Despite consensus forecasts for worldwide drug sales hitting $1.06tn in 2022, this is down from the $1.12tn analysts forecast for the same period last year.”
Generic drug companies are not immune from these pricing pressures and they are more likely to feel the pinch when there are lower volumes as they are already working within tight margins.
Evaluate Pharma sad this fall in drug sales represents the first time in 10 years of Evaluate analysis that total drug sales have failed to beat previous year forecasts.
Who are the big generic drug makers?
Last quarter Teva Pharmaceuticals, the largest generic drug manufacturer in the world after its recent $40.5bn acquisition of Allergan’s generics business, reported significant weakness in its US generics business.
It attributed this to considerable price erosion and decreased volume for many of its generic products due to more competition and delays for some new product launches.
The second biggest company is Mylan and it also reported weakness in its US generic business.
Hikma Pharmaceuticals too has seen its share price fall by half since March following a series of disappointments for its generic division and it lowered its guidance for its generics business from $800m to $670m in May. In August confirmed that it only expects to make around $620m from generics.
The company that makes and markets branded and non-branded generic and injectable drugs, said the "tougher" market conditions are expected to remain in the second half of the year, with continued price and volume erosion on its marketed portfolio.
It cut its sales expectations for its injectables division that represents 40% of overall revenues to approximately $775m in the year to 31 December 2017 due to increased competition in the US.
Generic drug manufacturers have recently moved into more complex products including biosimilars. Due to processes associated with translating biologics from living cells in the laboratory to mass-production molecules, biosimilars can only be highly similar to the reference product they are designed to resemble.
As there is no way to make identical copies of biologics, generic companies can charge higher prices and enjoy wider profit margins and increased profitability.
The first biosimilar approved in the US in 2014 was called Zarxio. It is a biosimilar to Amgen’s chemotherapy drug Neupogen. In Europe, it seized 85% of overall market share within four years of its launch.
The Evaluate Pharma report said: “The pharma industry has just entered a second patent cliff era where top biologic blockbusters will be challenged by biosimilars. The investment of large biotech companies in this space, such as Biogen and Amgen, is likely to fast track the commercial impact of these therapies.”
As with the big pharma companies, investors should be reviewing a generic drug manufacturer’s patent or exclusivity period expirations, especially when it comes to drugs with large revenue streams. Investors should review the pipelines and the stages of drug governmental approval.
Despite current price erosion and decreased volume affecting companies, the growth of the generic drug market is hard to ignore. The ageing population and efforts to lower healthcare costs by both Governments and insurers will mean that the trend is likely to continue.
The pharmaceutical industry looks set to see some steep changes in the coming years and the canny investor would be wise to pay attention.