The pharmaceutical generics model is under threat

Executive Summary

The #generic pharmaceutical industry is at cross-roads.?Built on following the footsteps of originator companies, also known as big pharma, generics face a shift.?Over the last 20 years, big pharma has been changing its innovation effort away from diseases with large populations towards therapies targeting smaller populations. This shift threatens the generic model.

Dawn of modern pharmaceuticals

At the turn of the 20th century, infectious diseases (tuberculosis and influenza combined) were the leading cause of mortality in the United States (Figure 1).?By mid-century, major cardiovascular diseases had overtaken infectious diseases as a leading cause of mortality.?

Big pharma emerged with medicines targeting infectious and then non-communicable diseases, such as hypertension or diabetes.?This led to big gains in life expectancy.?In 1931, an average male in the UK could expect to live 59 years and an average female 63 years.?By 2011 it was 79 and 83 years respectively (Figure 2). Developing nations saw similar improvements, albeit with a delay (1).

These advances came at a cost to national budgets. The spend by G7 countries on pharmaceuticals, measured as a percentage of GDP, increased sharply (Figure 3). In 1970, the UK spent 0.6% of its GDP on pharmaceuticals, by 2020 this had grown to 1.4% (2).?In the United States, spend on pharmaceuticals increased from 0.9% of GDP in 1988 to 2.1% in 2020 (3).

Big Pharma and the Generics model

The sharp rise in spend led to action by payors.?In 1984, United States was the first country to take the lead with the passing of the Hatch-Waxman Act, establishing a framework for generic substitution of original drugs. (4) This framework became the foundation for the current generics model.?As original drugs lose patent protection, generic competition leads to lower prices generating savings which are ploughed back into new therapies.?When Lipitor, a leading cholesterol-lowering drug, went generic the price per tablet fell from more than $5 to about $0.30. (5)?In 2022, 91% of all prescriptions in the United States were generic drugs. (6)

Cardiovascular and diabetes diseases impact large populations. According to Johns Hopkins Medicine, more than 200 million people world-wide use statins, the cholesterol-lowering agent (7) (Lipitor is one medication in this group).?Large populations mean large production runs, which means high levels of standardization and low costs.?Generic companies mastered this model.?????

Better understanding of disease and shift by big pharma

With scientific advances, big pharma shifted its attention towards more intractable non-communicative diseases, such as cancer (see Figure 2).?Known as “the Emperor of all Maladies”, cancer is now known to be as varied as each patient affected.?New treatments are created for ever smaller populations and, in some cases, can be so effective that patients may expect the same life expectancy as the general population.?Introduced in 2001, Gleevec indicated for the treatment of chronic myelogenous leukemia (CML) helped triple survival rates between 1970s and 2022, with one study showing a 5-year survival rate of 90%. (8) In the United States, CML affected 8,860 people in 2022. (9)

The future pipeline of patent expiries best captures the shift by big pharma (Figure 4).?Between 2026-2030, 69% of all patent expiries will be products addressing small populations, as opposed to 32% for the period 2022-2025. At only 7% of the volumes, they are priced around 56 times higher than the older therapies. (10)

The new therapies have minimal volumes to absorb lower prices following generic competition. (11) When all costs are counted, including R&D, the new therapies may become unprofitable. The advantages of generic companies through high standardization and low costs become muted.

Budgets will be squeezed

This shift places a burden on budgets.?Figure 5 highlights the ten most expensive medicines in the United States for 2022. (12) For comparison, at launch Gleevec was priced at ~$39,000/year (13), while Lipitor cost about $905/year! (14)

Increasingly, healthcare providers are de-facto “rationing” access to new medicines to relieve the burden on budgets. But given the sensitive nature of “rationing” in what otherwise are life-saving treatments, governments will continue to search for savings.?And here they will inevitably look at generic companies for those savings.

What are the implications?

Despite the shift by big pharma, the future of the generic industry is not in doubt – there will always be copies, after all.?But individual companies will face hard choices. Should they continue as before??Or should they start to develop new strategies?

With the current business model there will be less demand on new capital expenditures.?But older medications will become even more commoditized. Scale and size will drive consolidation as cost becomes even more a driver for success.???

Following in the footsteps of big pharma will put a strain on generic companies.?The chemistry of new therapies is different from older medicines, which were mostly chemically synthesized molecules.?Newer therapies are biologic molecules with cultivated and synthesized cells. Biologic medications are more difficult and costly to create and approve.?

Some generic companies have started to diversify. (15) India’s Sun Pharma is building a “specialty” business in the United States with biologic products.?India’s Intas, operating as Accord in Europe and the US, has licensed an originator product in oncology from a small biotech for its European operations.?The German company Stada has three business units focused on consumer health products, specialty medicines and commodity generics.?The American company, Mylan, merged with the patent expired original products business unit of Pfizer to become Viatris.?It also sold its biologic business to Biocon, a pioneer in biologics.?And the world’s number 1 generic company in revenues, Israel’s Teva, is reportedly looking to focus more on specialty products.

As companies re-adjust their strategies, the path to follow will depend on each company’s strengths and weaknesses.?Managers and their boards have important decisions to make.?But so do governments.?So long as the number of generic suppliers is large, governments can push down prices with the expectation that there will always be a supplier.?But with consolidation the day may come that the number of suppliers may decline, and governments cannot rely on generics as the source of future savings.?It is then that the threat for generics will become a threat for all.

APPENDIX 1: Top Generic Companies by Revenue, 2021*

Sources?:

(1) For example, life expectancy in India improved from 35 years in 1950 to 70 years in 2022. Source:?https://www.macrotrends.net/countries/IND/india/life-expectancy?based on United Nations: World Population Prospects

(2) Source: World Bank: in today’s value UK’s GDP was US $131 billion in 1970 and US $2,705 billion in 2020.

(3) Ibid: in today’s value the GDP of the United States in1988 was $5.2 trillion and $21.0 trillion in 2020.

(4) The Hatch-Waxman act equalized originator and generic drugs through “bio equivalency”.?A generic drug is bioequivalent if it has the same safety and efficacy as the originator and, therefore can be substituted.???

(5)?https://hbr.org/2014/11/the-real-cost-of-high-priced-drugs

(6)?https://www.fda.gov/drugs/generic-drugs/office-generic-drugs-2022-annual-report, Office of Generic Drugs, Annual Report, 2022.

(7)?https://www.hopkinsmedicine.org/health/wellness-and-prevention/how-statin-drugs-protect-the-heart#:~:text=More%20than%20200%20million%20people,%E2%80%94or%20safe%E2%80%94for%20them.

(8)?https://www.cancer.net/cancer-types/leukemia-chronic-myeloid-cml/statistics, ASCO (American Society of Clinical Oncology), January 2022.

(9) Ibid.

(10) Author estimate based on IQVIA data.

(11) In essence, the new therapies make sense only in a patent created monopoly.

(12)?https://www.goodrx.com/healthcare-access/drug-cost-and-savings/most-expensive-drugs-period

(13)?https://www.washingtonpost.com/business/this-drug-is-defying-a-rare-form-of-leukemia--and-it-keeps-getting-pricier/2016/03/09/4fff8102-c571-11e5-a4aa-f25866ba0dc6_story.html

(14)?https://onlinelibrary.wiley.com/doi/full/10.1111/j.0197-3118.2005.04404.x

(15) For a ranking of top generic companies by revenue, see the appendix

#bigpharma #generics #pharmaceuticalindustry #accesstomedicines #lifeexpectancy

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