U.S.

Generic Drug Industry and Indian Pharmaceutical Companies

Jiny Kim April 26, 2004

Indian pharmaceutical companies are already well positioned into some of the generics pharmaceutical markets of developed nations. However, the smaller companies have yet to fully take advantage of this enormous opportunity presented by the generics pharmaceutical market. This paper attempts to evaluate the generics pharmaceutical market in the U.S. and the potential opportunity that exists for Indian pharmaceutical companies, the current market roles played by the larger Indian pharmaceutical companies, and most importantly, how smaller Indian pharmaceutical companies can take advantage of the giant market.

Pharmaceutical Industry in the U.S Although the pharmaceutical industry has always been an important part of the total health care system in the U.S., the industry is becoming increasingly important in the recent years due to the attention it has received from the government and the private sector. Prescription drug spending and utilization in the U.S. has increased rapidly in recent years. According to the Kaiser Family Foundations report on prescription drug trends, U.S. spending for prescription drugs was $140.6 billion in 2001, which represents more than a three-fold increase since 1990. 1 The National Institute for Health Care Management Foundation (NIHCM) reported that overall spending on prescription drugs in the U.S. increased 17.1% from 2000 to 2001. Spending on prescription drugs now represents 10-11% of health care expenditures in the U.S. There are three main factors driving the increases in prescription spending as mentioned in the NIHCM study: 1) The increasing number of prescriptions (utilization) 2) Changes in the types of drugs used 3) Manufacturer price increases for existing drugs2

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Kaiser Family Foundation: Prescription Drug Trends, May 2003. The National Institute for Health Care Management Research and Educational Foundation. Prescription Drug Expenditure in 2001: Another Year of Escalating Costs, May 6, 2002.

In addition, according to GAO, part of the increase is attributed to growth in the number of patients diagnosed with conditions that can be treated with pharmaceuticals, and the development of innovative drugs for some conditions.3

Generics Drug Industry in the U.S. According to a recent Bank of America report, pharmaceuticals are the fastest-growing component of health care costs. The U.S. currently spends approximately $150 billion on

prescription drugs and some industry sources project this number will reach $300 billion by 2010, equivalent to annual growth of approximately 9%. 4 Due to this increase in cost, managed care and other insurance providers are seeking to control pharmaceutical expenses through generic substitution. With continued pressure on cost, the aging demographics of the U.S. and the continuing rise in co-pay hurdles, the generic drug industry is expected to grow in coming years.

Definition of a Generic Drug A generic drug is a prescription drug which is not manufactured by the originator of the product; the molecule is off patent and available from multiple sources, and the product is known by the chemical name, not a trade name.5 A generic drug should possess the same active ingredients in the same dosage form and strength as the original brand drug. For generic drugs to be marketed and sold, it needs to demonstrate similar bioequivalence which means that there is a similar absorption rate as the original brand drug. The generic drug also needs to produce the same therapeutic effect and safety profile as the initial or innovators brand name product. Equal standards apply for brand name and generic drugs in regards to drug safety, efficacy,
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General Accounting Office report: Prescription Drugs, FDA Oversight of Direct-to-Consumer Advertising Has Limitations, October 2002. 4 David W. Maris, Bank of America, The Future of the Generic Drug Industry, June 23, 2003.
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Doug Long, IMS Health, Merrill Lynch, Specialty Pharmaceuticals Generics 101: An Introduction to the Industry, Feb 26, 2003.

purity, stability, manufacturing, and labeling, which are set and enforced by the Food and Drug Administration (FDA). Thus far, 7,000 generic drugs have been approved by the FDA.

Developing and Marketing Generic Drugs In developing generic drugs, the manufacturer only needs to demonstrate the bioequivalence of its drug to the branded product, and that the manufacturing process produces acceptable purity and consistency. The development does not involve lengthy and costly clinical trials because generic manufacturers only need to prove bioequivalence. On average, the development of generic drugs takes only three years, in contrast to the six to seven years of development time spent on branded products.6

Benefits of Generic Drugs The main benefit of generic drugs is the cost savings. According to Janney Montgomery research, U.S. retail sales of generic prescription drugs totaled $11.1 billion in 2001 versus brand name prescription drug sales of $121 billion. However, the generic drugs were dispensed in 47% of all prescriptions. These figures indicate that generic drugs represented 47% of prescriptions but only 8.4% of the cost.7

Major Trends in Generic Drugs Industry Favorable Economics: There has been upward pressure on health care costs in recent years. With the ever-increasing cost, generic drugs are in a favorable environment to grow in upcoming years.

George Shi, Janney Montgomery Scott LLC, Generic Pharmaceutical-Initiating Coverage, August 18, 2003. 7 George Shi, Janney Montgomery Scott LLC, Generic Pharmaceutical-Initiating Coverage, August 18, 2003.

Healthy Growth: According to IMS health, relative to a branded market which showed 0% growth in the U.S. last year, the generic drug group grew new prescriptions by 8% and sales by approximately 16%. IMS predicts this growth will continue, estimating that the generic drug industry will show approximately 15% compounded annual growth through 2005.

Patent Expiration: A huge pipeline of patents will expire between 2003 and 2006 for some of the major drug companies. Enormous opportunity exists for the generic drug companies to capture the increasing demand originally filled by branded drugs.

Competitive Environment: There is an increase of competition in the generic drug market due to the appearance and growth of Indian, Chinese, and Eastern European players. The long term sustainability for current pricing is in question.

Acceleration in Industry Consolidation and Partnering: Industry analysts predict that there will be increased consolidation in the near future and that the top 5 generic players will control more of the industry. They suspect that acquisitions and partnering will focus more on increasing strategic cost advantages, production capacity, and scale by adding local market presence and gaining pipeline products.

Indian Pharmaceutical Companies Many leading Indian pharmaceutical companies relied heavily on the domestic market until the mid-1990s. Most recently many Indian pharmaceutical companies have taken advantage of the lucrative global generics market. The anticipated $84 billion worth of blockbuster products set to lose patent protection by 2008 will drive growth of the U.S. generics market between 2002 and 2008. Within this market, one of the stronger forces is the economically competitive generic drug companies from China and India. India especially is well positioned in this industry with their product development skills through advance chemistry capabilities and low-cost manufacturing.

According to SSKI report, Ranbaxy was the first Indian pharmaceutical company to recognize and take advantage of the generics market. Ranbaxy is estimated to have USD 1 billion in revenue by 2004. As one of the ten largest generic companies in the world, Ranbaxy has established itself as a world player, not just an Indian player. Ranbaxy already sells 70 drugs in the US, and has a pipeline of 40 products pending approval; Generics sold to the US and EU accounted for USD 470 million in 2003.8

The other two companies that are also very active in the worlds generic drug industry are Dr. Reddys and Cipla. Dr. Reddys estimated generics sales is USD 100 million in FY 2004. Other Indian companies, Sun Pharma and Wockhardt, have reached USD 50 million in generic drug sales.

Strategies for Smaller Indian Pharmaceutical Companies In order for the smaller Indian Pharmaceutical companies to take advantage of this giant market, there are various ways of entering and capturing the market share. This market is highly competitive as these Indian companies are not only fighting with the domestic giants who are currently active in the generic drugs industry, but also with the multinational corporations and many American and European specialty pharmaceutical companies and generics drug companies in this space. In order for the smaller Indian Pharmaceutical companies to survive, it is vital to look for longer term gain instead of focusing on shorter term outlook.

Long term planning With large number of blockbusters coming off patent in next 4 to 5 years, smaller drug companies may be wise to invest in having a longer time horizon rather than focusing on the earlier patent expirations. I believe the rationale is twofold: 1) drugs with more
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Nahar, Pawan. SSKI: India Pharmaceuticals. March 3, 2004.

recent patent expirations and near future patent expirations are already investigated heavily by the larger companies, and 2) smaller drug companies need to focus its resources in one or two top priority drugs rather than broadening their scope with their limited resources.

Target non-vanilla generic drugs As suggested by Pawan Nahar in his report, the non-vanilla generic drugs might be more profitable in the long run. Currently, Orchid is focused on the technology-intensive sterile cephalosporins segment which will give them a competitive advantage when competing with larger domestic players as well as international players. 9 The smaller drug companies should develop a specialty in specific therapeutic areas (e.g. cancer drugs) or very technology-intensive drugs or manufacturing-intensive drugs.

Partner up with larger Indian Companies With distribution channels and know-how already established, it might be worth partnering up with the larger Indian pharmaceutical companies. The larger Indian drug companies, i.e. Ranbaxy, Dr. Reddy, Cipla, can help the smaller companies by offering their distribution channels and the smaller pharmaceutical companies can offer their technology, their current research, etc. Of course, this is under the assumption that Ranbaxy and Dr. Reddy and likes are willing to partner up with the smaller Indian companies. If the smaller companies have a special product to offer, this might be more

feasible. However, the larger companies might shy away from helping the smaller companies become their next competitors.10

Partner with larger U.S. or European drug companies If the partnerships with the domestic companies are difficult due to reluctance of the larger Indian companies, it might be an attractive
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Nahar, Pawan. SSKI: India Pharmaceuticals. March 3, 2004. This assumption is under my understanding of the competitive landscape of the Indian pharmaceutical industry. However, without having the first hand knowledge, I am not certain of the (un)cooperative nature of the competitors in this industry.
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option to seek international partnership. Many U.S. and European drug companies, especially mid-size companies, would welcome the opportunity to gain exposure to and partner with Indian pharmaceutical companies.

Outsourcing opportunities in pharmaceutical industry With large intellectual capabilities and existing cost advantage at all levels, India has become the outsourcing capital to the U.S. and European companies in many different industries. I believe that one of the most attractive industries beyond IT services and call centers are the pharmaceutical industries. Many

companies, such as GE with their new John F. Welch Technology Centre has identified immense amount of intellectual base that currently exists in India. Many large U.S. and

European pharmaceutical companies already have been outsourcing different functions such as drug discovery, clinical services, and manufacturing domestically and internationally. Kotak estimates that the global outsourcing opportunity in pharmaceuticals for the Indian companies, which was at $24 billion in 2002 will rise to $48 billion by 2007. 11 With additional pressure to cut cost coupled with thinning pipeline, the U.S. and European pharmaceutical companies are looking for creative solutions. Indian pharmaceutical companies are well positioned to capture a large share of outsourcing opportunities with the worlds largest pool of trained analytical and development chemists and low manufacturing costs. In addition, Kotak also expects the big firms like Ranbaxy and Dr Reddy's are not likely to be the ones that will look at manufacturing outsourcing as a major factor for their revenues. 12 This will open up a tremendous opportunity for small and medium sized Indian pharmaceutical companies to capture this market that is forecasted to almost double in next 3 years.

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Ganapati, Priya. India set to tap $48-bn pharma outsourcing mkt, October 31, 2003. www.rediff.com Ganapati, Priya. India set to tap $48-bn pharma outsourcing mkt, October 31, 2003. www.rediff.com

Enter the biogenerics industry The term biogenerics is used to designate pharmaceutical preparations involving a biologically active substance stemming from modern biotech tools. Similar to the pharmaceutical generics, the biogenerics are essentially similar to an original biopharmaceutical whose substance patent has expired. They are approved through a simplified abbreviated registration process, and are sold under the generic substance name as opposed to a brand name.13 According to IMS Health, the world market for biopharmaceuticals is

approximately USD 20 billion. Under the assumption that biogenerics will achieve the same 1015% long term penetration rate (as in the rest of the generic market), this implies the market size for the U.S. biogeneric is USD 2-3 billion. With large number of patents expiring in the biopharmaceutical areas (15 in next 5 years), the market is very attractive for those who can take advantage of this opportunity.14

There are higher barriers to entry in the biopharmaceutical industry because of the biologically active substance. The manufacturing and chemistry involved in this industry is exponentially more difficult than regular pharmaceuticals. However, I believe Indian companies can start developing the capability to get into this market as their counterparts in Europe, Japan, U.S. and Korea have done. Due to higher barrier to entry, the Indian companies that can establish and operate a biogenerics early can capture a large share of the market when the patents start expiring in the coming decade.

Conclusion The generics pharmaceutical market is an attractive market for many pharmaceutical companies, especially for the Indian pharmaceutical companies who have two main competitive advantages; highly talented pool of chemists and low costs. However, with fierce competition

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Polastro, Enrico T. & Little, Arthur D. The Future of Biogenerics. www.contractpharma.com Polastro, Enrico T. & Little, Arthur D. The Future of Biogenerics. www.contractpharma.com

already in place, the Indian pharmaceutical companies have to carefully select their market position within the industry and further define their specialties. With some of the larger Indian pharmaceutical companies already successful in the marketplace, the smaller company should also take advantage of their competitive advantage and enter the market. With disciplined approach to the market, and ability to plan longer term, many smaller Indian pharmaceutical can find their niche to succeed in this lucrative market.

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