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CHICAGO For a number of reasons, we have all heard a lot about generic drugs lately.
The high cost of new drugs, the rise in number of people without medical insurance in the U.S. and perhaps even the U.S. governments efforts to accelerate the entry of generics into the market to help cap some of the rising costs of health care are just a few reasons.
In fact, it is estimated that 41.2 million Americans or 14.6 percent of the U.S. population have no medical insurance and lack access to health benefits such as prescription drugs. Generic drugs have become big business for all the above reasons. Some of the major pharmaceutical companies have even set up generic divisions so they can manage the life of their products.
Novartis is one of the worldwide players in generics with its Geneva Generics business. However, most Big Pharma companies dont manage their generic businesses well because the generics business model is the antithesis of research-based ethical pharmaceuticals. As a result, many companies have exited these businesses.
In general, generic businesses require very little R&D, no sales forces to visit physicians and very little marketing. These factors reduce the overall investment as a percent of sales by 40 percent to 50 percent.
Generic companies do invest in product formulation development (including cheaper ways of drug synthesis), good regulatory lawyers, limited sales forces to wholesalers, pharmacy chains and fat margins to pharmacies.
The savings in traditional pharmaceutical R&D and sales and marketing allows them to price their products 25 percent to 75 percent lower than the original drugs and still have healthy margins. This can be seen in the example below:
As can be seen above in the distribution expense line, much of the money in this category goes into the pharmacys hands and is a more attractive margin than what Big Pharma might pay (hence the pharmacist generic substitution of the product). The pharmacist makes more money and the patient is satisfied because medication is costing substantially less.
While Big Pharma generally is more profitable than the generic companies, the generic business is still very profitable and is growing quickly due to the increase of major blockbuster drugs with patents close to expiring. Generic Drugs Around the World
The penetration of generic drugs around the world varies from country to country. According to IMS statistics, the world pharmaceutical market during 2002 represented annual sales of about $400 billion. Of this, the U.S. represented about $183 billion.
It is also estimated by IMS that about 33 percent of the top 35 drugs are due to lose U.S. and European patent protection by the end of 2004. Other estimates predict that the top 20 pharmaceutical companies in the world are set to lose patent protection on products with estimated annual sales of $36 billion by 2007, which is a major force driving the growth of the generic drug industry.
In fact, it is estimated that the generic drug industry will grow twice as fast as the overall pharmaceutical market (20 percent versus 10 percent per year) during the next five years. Generics around the world are currently estimated at:
The above chart, however, only tells half the story because generic drugs are so cheap versus their innovator drug counterparts in terms of actual volume (units of drugs sold). The generic effect is therefore much more pervasive, which we can see below:
What about worldwide generic drug markets?
The U.S. is clearly the largest generic market in the world. This is logical since the U.S. has some of the highest drug prices in the world.
Although there are a number of U.S. companies that are strong in the generic market (such as Mylan, PAR Pharmaceutical and Barr Labs), some of the truly generic giants are companies that are from countries not necessarily known for pharmaceutical drug research innovation but are recognized as skilled in their chemistry abilities to retro-engineer other companies drugs quickly.
These foreign generic giants include TEVA (Israel), Dr. Reddy (India), Ranbaxy (India) and Cipla (India).
One of the few generic giants affiliated with a major pharmaceutical R&D-based company is Novartis Geneva Generics, which is managed independently from its R&D organization. Within the U.S., most of the generic business (like Big Pharma) resides on the east coast. Generic Drug Companies in Illinois
Surprisingly, the Chicago area has four thriving generic drug companies each with their own different approach to the generics market.
Developments that have taken place for all these companies within the last 12 month include:
1) American Pharmaceutical Partners
announced that it had shifted corporate headquarters from California to Chicago. This company went public in December 2001 and raised $154 million in its IPO.
just completed its new R&D center in Lincolnshire, Ill., which is its third expansion in seven years.
3) Morton Grove Pharmaceuticals
recapitalized its operation with major Chicago-based investor GTCR Golder Rauner making a large undisclosed investment in the company. The company has also just established new R&D facilities in Vernon Hills, Ill. in the former Apotex facility.
4) Halsey Pharmaceuticals
raised $25 million in convertible debt via Chicago-based life science investors Essex Woodlands Health Ventures and Care Capital. New management were brought into the company during the second and third quarter this year (namely chairman Jerry Karabelas, who previously was CEO of worldwide pharmaceuticals for Novartis from 1998 to 2000 and chairman of the Novartis BioVenture Fund, and CEO Andrew Reddick, who was previously the COO of Adolor and had been a senior executive with Faulding).
It is clear that all these companies and their investors see the potential growth of the U.S. generic drugs business and are ramping up activities to prepare for the opportunities presented when Big Pharmas patents expire. Once a drug loses its patent, sales of the original brand-name product can fall by as much as 70 percent in a matter of a few weeks.
See you next week!
Michael S. Rosen is the vice chairman of human health at the Illinois Biotechnology Industry Organization (IBIO). He can be reached at firstname.lastname@example.org
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