After years of warding off generics, large pharma companies are embracing generic drug manufacturers and vying for a share of the off-patent drugs business. Indian generic companies, once considered business pariahs, are the focus of plenty of action, Anju Ghangurde reports.

Pfizer, GlaxoSmithKline and Sanofi-Aventis all established ties with Indian generic firms in 2009, while a string of generic acquisition deals were done across the world. Experts think this could mark the start of a large-scale blurring of the lines between pure innovator firms and generic ones and the emergence of a hybrid model, in the mould of Novartis-Sandoz or Daiichi Sankyo-Ranbaxy Laboratories.

In March 2009, Pfizer took its first real plunge into cut-price generics, signing a broad licensing deal with India's Aurobindo Pharma. This deal was seen as part of Pfizer's efforts to counter the loss of sales that it faces when huge revenue earners, such as the lipid-lowerer Lipitor (atorvastatin), go off-patent in various markets.

Pfizer's generics unit, Greenstone, a legacy of its Pharmacia acquisition, used to be limited to selling generic versions of Pfizer's branded drugs once their patents expired. With the Aurobindo deal, however, Pfizer acquired rights to 39 generic solid oral dose products in the US and 20 in Europe, plus another 11 specifically in France. Pfizer also gained rights to 12 sterile injectable products in the US and Europe, mainly antibiotics including penicillins and cephalosporins. Pfizer's alliance with Aurobindo was further expanded in May, the same month that Pfizer acquired rights to 15 injectable products from Claris Lifesciences, another Indian company.

In July 2009, Sanofi Pasteur acquired India's Shantha Biotechnics from Mérieux Alliance. The deal valued Shantha at €550 million and gave Sanofi Pasteur access to Shantha's portfolio of cut-price vaccines; several other products in development, including a rotavirus vaccine, conjugated typhoid vaccine and HPV vaccine; and manufacturing capabilities. Shantha went on to secure contracts worth $340 million to supply its pentavalent vaccine to the United Nations.

strategic detour

As well as the impending expiry of patents on blockbuster drugs, other drivers behind big pharma's strategic detour into the generics arena include declining R&D productivity and pressure from governments the world over to stem the costs of healthcare.

Tarun Shah, Asia head of Mehta Partners, the strategic business advisor to Japan's Daiichi Sankyo in its 2008 acquisition of Ranbaxy, argues that big pharma's interest in the generics business will not be a short-lived romance. Intelligent pharma companies understand that payers including the US, European and Japanese governments, and insurance companies, can no longer afford to pay "top dollar" for products when the same therapeutic effect can be achieved using generics that cost a couple of cents, Mr Shah said. In the US, for example, former President George Bush's PEPFAR (President's Emergency Plan for AIDS Relief), through its Supply Chain Management System project, saved more than $30 million between January and March 2007 by buying generic products.

Mehta Partners points out that social and economic pressures will lead to a fundamental shift in the pharmaceutical business model. In a three-volume report entitled Outlook 2009: Global Pharmaceutical and Biotechnology, Mehta Partners advocates a new approach that involves creating a balanced spread of revenues across geographies, including emerging markets and a business base propelled by off-patent products. "Innovation risks could be hedged by a presence in the OTC/generic/diagnostic and animal health segments," the report suggested.

RD Joshi, director of business processes at the Indian pharmaceutical and healthcare consultancy Interlink, is of a similar view. He argues that the generics market offers high-volume yields and is rich in cashflow; therefore it makes sense for innovators to include the generic option in their business models.

Traditionally, generic products, of both the plain vanilla and branded variety, accounted for less than 10% of the global pharmaceutical market. Back then innovator firms could afford to ignore the generics segment. No longer. Over the past five years, generics have gained market share and are growing at a much faster rate than the branded segment. In 2009, generics could account for as much as 23% of the total market, predicts Sanjiv Kaul, managing director of ChrysCapital, an India-focused investment firm. In the US market, generic penetration has grown from 47% of prescriptions written in 1999 to 63% in 2007. The figure has yet to peak.

Others claim that the lure of high-growth emerging markets, widely considered to be the engines of pharma's future growth, are pulling large innovator companies into the generics space more than the generic products themselves. Annual pharmaceutical sales in emerging markets are expected to exceed $400 billion by 2020, equivalent to current sales in the US, plus five major European markets, according to IMS Health. In addition, a report by Ernst & Young and the Organization of Pharmaceutical Producers of India (OPPI), a trade association representing multinational pharma in India, said that India's proximity to other emerging markets could augur well for the growth of the Indian industry.

In June 2009, GlaxoSmithKline and Dr Reddy's Laboratories entered into an alliance to develop and market a range of products across several emerging markets, excluding India. Under the terms of the agreement, GSK is expected to gain exclusive access to Dr Reddy's' portfolio and future pipeline of more than 100 branded pharmaceuticals in the cardiovascular, diabetes, oncology, gastroenterology and pain management segments. There has been some speculation over a possible expansion of the scope of the alliance, perhaps making it more acquisitive in structure for GSK. The UK-based multinational is said to be in talks to acquire about 5% of Dr Reddy's, in addition to a first-right-of-refusal should the Indian firm's founders want to divest or pare their holding. Both companies have declined to comment on the issue.

Separately, GSK acquired Bristol-Myers Squibb's branded generics business in Lebanon, Jordan, Syria, Libya and Yemen in July 2009.

new avatar

How easily will big pharma slip into its new "avatar", adjusting to what is perceived as a low-margin business?

Dr Ajit Dangi, president and CEO of Danssen Consulting and a former director general of the OPPI, believes that the trick lies in lowering the cost of manufacturing without compromising on quality. "Many Indian and Chinese companies have done this successfully. This is where partnerships [such as that between Pfizer and Aurobindo] come into the picture," Dr Dangi said.

India's recognised position as a cost-effective destination for activities ranging all the way from manufacturing to R&D offers promise in this respect. The Ernst & Young/OPPI study gave India the highest rating in terms of cost-efficiency attractiveness among six prominent manufacturing locations, including China, Singapore and Eastern Europe, mainly driven by its low manufacturing costs.

The study notes that the manufacturing costs of US FDA-approved plants in India are about 65% lower than those in the US and 50% below European levels. The cost of setting up such a facility in India is 30% cheaper than that in the US. With an estimated 119 US FDA-approved and 84 UK MHRA-approved plants in India, multinationals seeking partners in India are spoilt for choice.

Mr Shah argues that it is wrong to think of generics as not "attractively profitable". He explained that Indian generic companies, such as Sun Pharmaceutical Industries (which is also developing NCEs), can enjoy margins as attractive as the likes of Denmark's Lundbeck. "Sun earns its profits from India where the competition is intense, whereas Lundbeck gets 100% of its revenue from patent-protected markets. Still both have equal margins," Mr Shah claimed. He added that Lundbeck incurs certain R&D expenditure, usually for new compounds, which Sun does not. If a profit and loss account is drawn up for marketed products, Sun's operating margins are comparable to Lundbeck's.

Significantly, at the time of the Aurobindo deal, David Simmons, president and general manager of Pfizer's established-products business unit, was reported as saying that Pfizer was not "deteriorating" its margin standards by getting into the generics game.

price stability

There are varying viewpoints as to whether big pharma's entry into generics will lend some stability to, or even improve, generic drug prices. Dr Dangi believes that generic medicine prices will improve slightly due to the trust patients have in innovator companies; this effect could "rub off" on their generics.

Other experts, however, argue that generic pricing follows the laws of economics. "This is a different ball game. Prices in generics will be determined by a demand-supply model that governs commodities," said Mr Kaul.

As a rule of thumb, Sun says that generic drug prices are inversely and strongly linked to the intensity of competition of any type, be it from other generics companies or large pharma.

In addition, Mr Shah believes that an indirect effect could be more moderately priced NCEs from innovator companies. "Big pharma's entry into generics will teach them 'value-for-money' pricing," he claims, adding that Novartis's products are more "fairly priced" than those of other large innovator companies that do not have a presence in generics.

partnerships or standalone?

Indian companies now need to weigh up their options carefully. Should they reach out to partner with big pharma in key markets? Or are nimble, cost-conscious Indian companies ready to take on the giants themselves?

Mr Shah of Mehta Partners is brutally frank: he does not think that the likes of Sun, Zydus Cadila and Cipla should partner with "big elephants". Generics is a new game for big pharma and their decision-making processes can be expected to be "dead-slow", Mr Shah argues.

For its part, Sun's approach has been to grow its businesses on its own. However, the company says there needn't be a clear-cut decision between Indian firms remaining completely independent or fully embracing the partnership model. Depending on the markets in question, firms could go for a mixed strategy, Sun Pharma says.

Mr Joshi points out that companies such as Ranbaxy and Sun have recently been beset with quality issues (mainly concerning cGMP glitches and consequent FDA action), adversely affecting their aggressive marketing of generics. Thus partnerships may be the way forward. "Even in emerging markets, issues of safety and effectiveness will not be compromised and regulatory norms will get harmonised. In view of this, it should be a preferred business model where Indian companies partner with large globally-established companies for better synergy and scale-up. Global companies can expand [into new] markets without additional costs," he said.

Mr Kaul, formerly a member of Ranbaxy's senior management team, adds another dimension to the debate. He believes that Indian players have carved out a "dominant niche" for themselves in the world of generics and expects original research companies (ORCs) to reach out to Indian players that are looking for an exit. Because Indian generics players such as Zydus Cadila, Cipla, Lupin and Sun Pharma are more efficient at running generics businesses, they will remain key potential targets for innovators. "At the end of the day, it is the valuation that the ORC [is willing to] pay that will determine whether the deal will be consummated," Mr Kaul said.

The jury is still out as to the best way forward for Indian firms, but it is clear that the generics space will pose challenges for firms both large and small. There can be no business pariahs in this game.

Anju Ghangurde is Scrip's India Editor.