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Threats and Opportunities for the Generic Industry

Threats and Opportunities for the Generic Industry. KATE KUHRT JUNE 2006. AT FIRST GLANCE, MANY OPPORTUNITIES. Increasing demand for low-cost therapies Aging population Consumers becoming more cost sensitive Increased generic substitution Government involvement

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Threats and Opportunities for the Generic Industry

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  1. Threats and Opportunities for the Generic Industry KATE KUHRT JUNE 2006

  2. AT FIRST GLANCE, MANY OPPORTUNITIES • Increasing demand for low-cost therapies • Aging population • Consumers becoming more cost sensitive • Increased generic substitution • Government involvement • US Medicare Drug reimbursement • Reference pricing in Europe Proportion of Population Aged 60 or Over Source: United Nations, DESA, Population Division

  3. GENERIC OPPORTUNITIES IN THE U.S. • Products with $100B in branded drug sales are coming off patent in the next 7 years • Patent challenges by generic companies Source: Newport Strategies’ Horizon Global system

  4. A CLOSER LOOK… • Rapid price erosion in the U.S. and UK • Diminishing margins on both dose and API sales • New regulations in Germany (AVWG) • Settlements between generics and brand companies are delaying generic entry in the U.S. • ANDA approval backlog in the U.S. • Fewer new launches by innovators over the past years will translate into fewer opportunities for generics down the road 5-10% of $100 billion over 7 years, divided among many players and products, does not necessarily translate into a lot of money for every generic company

  5. DOWNWARD PRESSURE ON DOSE PRICES • Demand • Purchasers focus on price • Past relationships matter less • Reverse auctions • Supply • Generic filings and approvals at all-time high • A number of new entrants, many from India, often with access to low- cost APIs • Overcapacity in manufacturing • Focus on market share rather than bottom line • Authorized generics in the U.S. U.S. ANDA Approvals Source: Newport Strategies’ Horizon Global system

  6. DOWNWARD PRESSURE ON API PRICES • Demand • Dose manufacturers focus on price • Past relationships matter less • Willingness to take the risk and go with less-known API sources • Supply • Overcapacity in manufacturing • Record number of DMF filings • Availability of low-cost APIs from India and China • (Too?) many plants FDA approved • Many companies hold COS Number of U.S. DMFs Source: Newport Strategies’ Horizon Global system

  7. COPING STRATEGIES • Consolidation • Geographic diversification • Backward integration into API • Sourcing from India, China, and other low-cost countries • Alliances with companies in low-cost countries • Moving manufacturing to low-cost countries • Focus on niche products

  8. COPING STRATEGIES: CONSOLIDATION

  9. COPING STRATEGIES: CONSOLIDATION • Likely to see a period of consolidation in pursuit of • Top-line growth • Opportunities in new markets • Synergies • Result: Industry will likely be dominated by a handful of global players plus many small players • Barr’s rumored $2.1B acquisition of Pliva • Biogenerics • 2005 deal to develop a generic version of Amgen Inc.'s Neupogen • New dose forms • Presence in emerging markets • API

  10. COPING STRATEGIES: GEOGRAPHIC DIVERSIFICATION • Opportunities in Europe • Counterweight to the U.S. generics market • DRL-Betapharm, Matrix-Docpharma, Ranbaxy-Terapia • Competition among Indian companies driving up prices of companies • Commoditization of German generic market? • Japan • Merck KgaA in Japan since 1998 • In November 2005, Ranbaxy increased equity stake in JV with Nippon from 10% to 50% • In March 2006, Teva applied for approval to sell drugs in the Japanese market • Dr. Reddy's considering setting up an office in Tokyo or Osaka by the end of next March

  11. COPING STRATEGIES: BACKWARD INTEGRATION INTO API • Recent example: Watson - Sekhsaria • Pros • More control over cost and access to API • Decreasing number of established API manufacturers still independent • Different parts of the value chain may make money in different products • Cons • No one plant can make all APIs required by a typical generic • Making just enough for captive use often not economical • Other dose companies wary of buying API from a competitor

  12. COPING STRATEGIES: MOVING MANUFACTURING AND R&D TO LOWER-COST COUNTRIES • Applies to both API and dose manufacturing • Recent example: Watson • Acquired from DRL a small solid oral dose plant in Goa • Increased investment in an FDA-approved Chinese/Taiwanese API manufacturer • Sandoz – multiple units in India • Teva – scientists in Faridabad, acquired Regent Drugs (JK) • Apotex – manufacturing and R&D facilities in Bangalore • Ratiopharm – R&D center in Goa • Stada • “Complementation of existing Group-owned production sites in GER, NL, and IRL by production sites in “Low Cost Countries” Russia, Vietnam (50:50 JV) and China (currently only local orientation)” (Stada Corporate Presentation 2006)

  13. COPING STRATEGIES: ALLIANCES WITH INDIAN COMPANIES • Zydus Cadila • Distribution agreement with Mallinckrodt • 50/50 JV with Mayne for cytotoxic dose and APIs • Glenmark • Development and supply agreement with KV for 8 ANDAs • Agreement with Invagen for 7 products • Deal with Konec for nitroglycerin and with Interpharm for naproxen • Lupin • Injectable ceph generics with Baxter • Oral ceph generics with Watson

  14. COPING STRATEGIES: SOURCING FROM INDIA & CHINA • Many highly qualified API sources in India and China • India • 68 FDA-inspected API manufacturing sites • 33 FDA inspections in FY2005 (20 API, 7 Dose, 3 API/Dose, 3 Labs) • 22 NAI (no action), 11 VAI (voluntary action), 0 OAI (official action) • China • 69 FDA-inspected API manufacturing sites • 15 FDA inspections in FY2005 (14 API, 1 repacker) • 6 NAI, 9 VAI, 0 OAI • Are FDA inspections in India and China less stringent?

  15. Generic companies’ willingness to use second- or third-tier API manufacturers is particularly damaging to Italian API manufacturers COPING STRATEGIES: SOURCING FROM INDIA & CHINA Source: Newport Strategies Horizon Global ™

  16. COPING STRATEGIES: FOCUS ON NICHE PRODUCTS • Products with small sales no longer count as “niche” • Even $20M products attracting a lot of interest • Margins in difficult formulations likely to remain higher • Inhaled products, certain injectables • Biogenerics • Teva, Sandoz, Pliva

  17. FUTURE • Will focus on price backfire? • Is the number of suppliers going to decrease enough to give the remaining players more negotiating power? • What will be the impact of generic entries from China?

  18. THANK YOU! • Kate Kuhrt • Director, Generics and API Intelligence • Thomson Reuters • 215 Commercial Street • Portland, Maine 04101 • USA • + 1 (207) 871-9700 x26 • kate.kuhrt@thomsonreuters.com

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