Cash-strapped governments, patent expiries, fuel generics growth

In the US alone, drugs collectively worth more than $62 billion¹ in 2006 sales are due to go off patent during 2008-12, with the likes of Pfizer's blockbuster Lipitor at the sharp end of generic erosion. The rate of generics sales growth is admittedly slowing in the more mature markets of the US, Germany and the UK, where generics use is already high. However, while less mature markets like France, Spain, Italy and Japan have experienced slower uptake to date, this is set to change with pro-generic legislation increasingly being implemented in a bid to moderate healthcare spending.

With the US market increasingly difficult to penetrate, generics manufacturers are looking elsewhere to make an impact. However, a new report* by independent market analyst Datamonitor highlights the fact that potential pitfalls exist in each of the seven major markets.

Market expansion in the US is likely to continue more slowly, with competitive pressure becoming a major obstacle to industry growth

The US is by far the world's largest generic market, says Datamonitor pharmaceutical analyst Pam Narang. “This, combined with the country's free pricing rules and pro-generic environment make it an extremely attractive prospect for foreign investors, despite the intensity of the competition.

“Of the major international acquisitions involving a US pharma company during 2005-07, two-thirds involve a foreign company acquiring a US one,” she says.

However, the level of competition in the US is increasingly putting a brake on growth, driving consolidation and global expansion. Therefore, for domestic players: “The diminishing growth opportunities in the US make the relatively less penetrated markets of Europe an attractive prospect,” Narang says.

Moreover, Wal-Mart's foray into the generics market is likely to be cause for concern for the industry, she says. “With US employers footing a large part of the healthcare bill, it has been suggested that a natural extension of Wal-Mart's current strategy would be for the company to enter directly into specific agreements with corporate healthcare providers.”

New legislation is also likely to impact on industry profits. As part of the Deficit Reduction Act (DRA) of 2005, manufacturers are now obliged to include sales of authorized generics in the calculation of average manufacturer price (AMP) and best price (BP).

New reforms bring a shift in the way generics companies sell drugs in Germany, with exclusive contracts likely to prove more lucrative than marketing directly to healthcare providers

Germany is the biggest generics market in Europe, and the second largest globally. Spiralling healthcare costs have driven the implementation of measures to increase generic use, with the result that uptake levels in Germany are among the highest in Europe.

The German healthcare system has been in a state of flux for several years, with new reforms introduced on an almost annual basis. The most recent changes have significant implications for the country's generics industry, Narang says. “A consequence of the reforms is that the market is more open, having previously been dominated by the larger German players.

“Now any company that is able to secure a Krankenkasse (sickness fund) contract is automatically placed in a strong position,” she says.

A government-led push towards increasing generic substitution for certain drug types in the UK, where generic use is already high, provides further room for growth

In the UK, says Narang, “Generic drug use has been embraced, with the UK showing the highest levels of penetration of the five major EU markets, at 26% by value and 64% by volume in 2006². The number of generic prescriptions has increased at a rate of 6% year-on-year³ from 1995-2005.”

Nonetheless, a recent report by the National Audit Office suggests that savings from generic drugs could be increased if all Primary Care Trusts used them at the same high level. The government is considering the recommendations, however, Datamonitor believes a wholesale shift in prescription behaviour is unlikely due to the nature of the drugs in question - chronic use statins among them - that makes patients unlikely to accept a change in drugs taken for many years.

Generic use in France is currently patchy, but once the set of targeted drugs is widened, this is likely to change dramatically

Generic substitution for those drugs that the French government has targeted is high, but a combination of physician reluctance and lack of awareness on the part of patients means that overall, France lags behind Germany and the UK in terms of generic uptake.

“Brand loyalty is a significant factor in the French pharmaceutical market, and may be responsible for the historically low levels of generic uptake in the country,” Narang says.

“Although generic penetration is low in France, the eventual increase in uptake that will undoubtedly occur as a result of rising healthcare costs means that there are substantial growth opportunities, particularly given that France is already the third largest generic, and second largest pharmaceutical market in Europe.”

Spain and Italy show low levels of generic use due mainly to general distrust of generics

The proportion of the Italian healthcare budget that goes on drug spending is the highest in Europe, while the country's generic use is the lowest. Datamonitor believes that ultimately this discordance is likely to disappear in the face of increasing pressures on healthcare spending, a fact which several international generic companies that have made forays into the Italian market, including Ranbaxy and Teva, are counting on.

Distrust of generic drugs among healthcare providers and patients is a major obstacle to industry growth in Italy, Narang says. “The withdrawal of 11 undisclosed generic drugs in September 2006 due to concerns regarding the veracity of their bioequivalence will make a significant dent in efforts to promote generic use.”

Distrust of generic drugs is also an issue in Spain. However, Datamonitor believes that price differentials between branded and generic drugs in Spain are almost the lowest in Europe and may have contributed to the relatively poor uptake of generics in the country to date. “As is the case in other countries, the rise in healthcare expenditure is likely to drive increased generic use,” Narang says.

With the recent reforms promoting generic use in Japan, the country is poised for rapid growth

Generic penetration in Japan is also very low, due in part to the mistrust with which generic drugs have traditionally been viewed. This stems from poor awareness regarding generic drugs, compounded with a lack of incentive for healthcare providers and patients alike. “However, with the most rapidly aging population in the world and rising healthcare costs, this is set to change,” Narang says.

Recent government legislation indicates a clear push towards generic usage: “Generic substitution in Japan has become mandatory, with physicians now required to explicitly state on the prescription if a branded drug is to be dispensed.”

Additionally, generics may now be listed for reimbursement twice annually rather than once, Narang says. “Japan therefore provides the prospect of immense growth potential for those companies that are correctly positioned - a concept driving the current interest in the country's generic industry.

“Poor awareness, and crucially generic supply have been major obstacles hindering generic penetration in Japan, and the industry has taken steps to remedy this. Because Japan is unusual in that a high proportion (43%) of pharmaceutical spending occurs in hospitals, manufacturers are beginning to forge stronger links with wholesalers as a means of increasing generic sales,” she says.

Notes

* Generics Series: Key trends and events in the seven major markets

References

¹ IMS sales data
² European Generic Medicines Association
³ Office of Fair Trading Report, 2007

Datamonitor's report Generics Series: Key trends and events in the 7 major markets, provides an update on the generics markets in the US, Japan, France, Italy, Germany, Spain, and the UK, highlighting recent issues that have and will continue to impact on the industry.