Global Generic Pharmaceutical Industry Review CORPORATE RESEARCH (NY) FEBRUARY 2016 Andreas J. Dirnagl TEL: (1) 212-782-5694 [email protected] Myrvet A. Cocoli TEL: (1) 212-782-4826 [email protected] Bank of Tokyo-Mitsubishi UFJ A member of MUFG, a global financial group Table of Contents I. II. Fundamentals & Background III. Major Global Generic Pharmaceutical Markets 1) Defining Generic Pharmaceuticals (p. 2) 1) Characteristics by Market (p. 17) 2) Overview & Drivers (p. 3) 2) 3) Top 10 Global Generic Companies (p. 4) An Overview of the US Generic Pharmaceutical Market (p. 18) 4) Top 10 Products (p. 5) 3) An Overview of the European Generic Pharmaceutical Market (p. 19) 5) Generic R&D: Hatch-Waxman (p. 6) 4) 6) Understanding Bioequivalency (p. 7) An Overview of the Japanese Generic Pharmaceutical Market (p. 20) 7) Generic Drug Research & Development Process (p. 8) 5) An Overview of the Indian Generic Pharmaceutical Market (p. 21) 6) An Overview of the Chinese Pharmaceutical Market (p. 22) Trends, Opportunities & Strategy 1) Generics Drive Global Pharma Growth (p. 9) 2) Market Exclusivity & Paragraph IV Challenges (p. 10) 3) Market Share & Price Erosion After Generic Entry (p. 11) 4) The Biosimilar Opportunity (p. 12) 5) Update on the Global Biosimilars Market (p. 13) 6) Competitive Strategies: Branded Pharma (p. 14) 7) Competitive Strategies: Generic Pharma (p. 15) IV. Strategic Summary Outlook for Global Pharmaceutical Players – Branded & Generics (p. 23) I. Fundamentals & Background 1) Defining Generic Pharmaceuticals Generic drugs are officially approved copies of originals and have the same active ingredients as the branded drug US Food and Drug Administration Definition Example: Branded, Branded Generic and Generic Labels “A drug product that is comparable to a reference listed [branded] drug product in dosage form, strength, route of administration, quality and performance characteristics and intended use.” Generics can only be produced after expiration of the branded drug’s patent (usually 20 years) The same company that makes the branded drug may also produce the generic Alternatively, a different company might produce it Source: Corporate Research Similarities and Differences Between Branded and Generic Pharmaceuticals Regulatory authorities have established standards for generic drugs that might seem complicated, but the differences between the two types of drugs are relatively simple to understand Source: US FDA and Corporate Research 2 I. Fundamentals & Background 2) Overview & Drivers The global pharma industry is large, driven by broad demographics, moderated by governments focusing on costs Size: Large and expected to achieve total global sales of $1 trillion in 2014 Global Pharma Market, 2010-2020 Global Population Aging, 1950-2050 While generics represent only 9% - 11% of the total value of global pharma sales – it represents the volume majority (est. 55%) Given a cost-savings focus, generic pharma spending growth is above the branded and overall industry average Branded Growth Est.: 4.8% Generic Growth Est.: 8.0% Broad demographic drivers Aging population Increasing prevalence of chronic diseases o Disease incidence increases with age. Gov’t focus on costs Increasing gov’t budget deficits and higher gov’t debt burdens mean there is an increased focus on reducing healthcare spending/pricing Source: IMS Health, EvaluatePharma and Corporate Research Global Chronic Disease Prevalence Source: UN World Population Prospects: The 2012 Revision Gov’t Debt as a % of GDP, 2008-2015 • Cardiovascular diseases (CVDs): #1 cause of death / 30% of all global deaths • Cancer: #2 cause of death / 13% of all global deaths • 347 million people worldwide have diabetes • Worldwide obesity has nearly doubled since 1980: 35% of all adults >20 year old were overweight in 2008 / 11% obese 70% - 80% of all deaths from chronic diseases occur in low- and middle-income countries Source: World Health Organization Source: OECD and Corporate Research 3 I. Fundamentals & Background 3) Top 10 Global Generic Pharmaceutical Companies Top 10 Generic Pharmaceutical Companies: large with a great deal of regional diversity Top 10 Global Generic Pharmaceutical Companies Large, with companies that rank among the Top 20 Global Pharmaceutical Companies o Teva: #9 o Allergan: #17 Top 10 Global Generic Pharmaceutical Companies, 2014 (US$bn) Excl: Branded Companies Incl: Generic Divisions of Branded Companies Regionally diverse o India: 5 o EMEA: 3 o US: 2 Adding divisions of branded companies that are major generic players: o EMEA: 3→5 (+2) o US: 2→3 (+1) o India: 5→2 (-3) Consolidation will be furthered by the announced acquisition of Allergan’s generic business to Teva Note: Rankings do not include announced sale of Allergan generics division to Teva Source: Company Reports and Corporate Research 4 I. Fundamentals & Background 4) Top 10 Products Cardiac drugs dominate the Top 10 Generic Products and represent some of the biggest branded blockbusters Given their relatively low price, generic drug ranking is generally not done on value, rather on the number of prescriptions written Top 10 Global Generic Pharma Products, 2013 Top 10 Products Relatively dominated by cardiovascular drugs (5 out of 10) o Anti-hypertensives and anticholinergics o Cardiovascular diseases are the #1 cause of death worldwide “Older” generics tend to be prescribed more o The longer a drug is generic, the more competition, the lower the price o Lower price drugs in the same therapeutic class are always preferred o For example, simvastatin over atorvastatin, lisinopril over amlodipine Note: represents US prescriptions as a proxy for global rankings Source: IMS Health and Corporate Research 5 I. Fundamentals & Background 5) Generic R&D: Hatch-Waxman The birth of the modern generic drug industry can be traced back to the US legislation known as the Hatch-Waxman Act Passed in 1984, HatchWaxman set the global standard for generic drug approval and some variation is used in most major jurisdictions Allowed a manufacturer to demonstrate only that its product does not differ significantly from the existing (reference) product and eliminated the need for duplicative and expensive clinical trials Post Hatch-Waxman Steps Involved in the Development of a Potential Generic Drug Source: USPharmacist and Corporate Research Hatch-Waxman and ANDA Routes for Sales and Marketing Approval Liberalized the research restriction as prior to HatchWaxman, even researching a drug before its patent had expired was itself an act of infringement The Abbreviated New Drug Approval (ANDA) process offers four routes to approve generics – differences revolve around the status of the underlying drug’s patent protections There is no “global” approvals process Source: FTC and Corporate Research 6 I. Fundamentals & Background 6) Understanding Bioequivalency Bioequivalency is the proof that pharmacokinetic parameters of a drug (rate & extent of absorption) are the same ANDAs must prove that generic drugs are bioequivalent to the branded version Pharmacokinetic Parameters or an Orally Administered Drug Bioequivalent products do not differ significantly in: the rate of absorption the extent of absorption at the site of action A pharmacokinetic study is based on the LADME model in which it is determined how long it takes the body to: Liberate or release the drug Absorb the drug Distribute the substance Metabolize the drug Excrete the drug In pharmacokinetic models the key parameters are peak drug concentration (Cmax) and the Area Under the Curve (AUC), which characterize absorption rate and absorption extent, respectively Source: Nature and Corporate Research 7 I. Fundamentals & Background 7) Generic Drug Research & Development Process While still complex, the generic R&D cycle is easier, shorter and cheaper relative to the branded R&D cycle The generic drug R&D timeline is significantly shorter than for branded Safety and efficacy are not being proved Steps are less “linear” and can often be undertaken simultaneously Pivotal Bioequivalence is where the drug is proven to be identical o Branded vs. Generic Research & Development Timeline Key reduction in timeline as bioequivalence studies require much smaller populations and can be done in a matter of weeks / months Generic manufacturers themselves estimate that the cost of successfully developing a commercializable generic drug ranges from $10m to $100m Branded Pharma R&D – Progression Probability The latest estimate for the cost of successfully commercializing a branded drug is approximately US$2.6bn • The risk of total failure in the R&D process for generic drugs is extremely low because the safety and efficacy of the active ingredient has already been established • The “relative simplicity” vs. the branded pharma R&D process is integral to the low-cost nature of generic drugs 8 Source: Nature and BTMU II. Trends, Opportunities & Strategy 1) Generics Drive Global Pharma Growth IMS predicts global pharma spending will increase by US$300bn through 2018 – half of which will be generics Generics are the largest driver of pharma spend everywhere but North America Geographic Distribution of Medicine Spending, 2014 – 2018E Generic Penetration in Selected Countries, 2011 (or nearest year) Almost all countries see the development of generics as a good opportunity to increase efficiency in pharma spending Beyond encouraging takeup, it is also important to promote the lowest possible price for generics if the purpose is to contain costs For example, the US with one of the highest generic penetration rates in the world also has one of the largest branded – generic price gaps Source: IMS Health and Corporate Research Note: May differ from locally collected data Source: OECD and Corporate Research Trend in Generic Penetration in Selected Countries, 2000 – 2011 Regardless of the methodologies chosen, governments can have a fairly quick and significant impact on generic penetration Note: May differ from locally collected data Source: OECD and Corporate Research 9 II. Trends, Opportunities & Strategy 2) Market Exclusivity & Paragraph IV Challenges Generic drug competition continues to intensify with market exclusivity shrinking and ParaIV challenges growing A branded drug is granted a Market Exclusivity Period (MEP) by the regulatory authorities, which is the timeframe in which the majority of branded productivity is generated Average MEP by Year of 1st Generic Entry (in months), 1995-2012 Average # of Generic Entrants within 1st year of 1st Generic Entry Generic manufacturers have been becoming increasingly aggressive and have successfully shortened MEPs Overall the industry is seeing a gradual decline in MEPs before generic competition This is even lower for higher sales drugs Better selling branded drugs attract more competition after the MEP ParaIV filing is one in which a generic manufacturer sues to invalidate a branded patent and therefore the drug’s MEP Source: IMS Health, Journal of Medical Economics and Corporate Research Source: IMS Health, Journal of Medical Economics and Corporate Research Paragraph IV Filing Frequency and Timing (3yr moving average) ParaIV filings are becoming more frequent and coming earlier Source: IMS Health, Journal of Medical Economics and Corporate Research 10 II. Trends, Opportunities & Strategy 3) Market Share & Price Erosion After Generic Entry Rule of thumb: generic competition will reduce pricing / market share of the branded drug by >80% in <12-18 months The erosion in brand-name drugs’ share (by volume) for the 12 months following first generic entry has increased dramatically The impacts of competition are bigger and coming faster On average branded share erodes to only 16% at 12 months (compared to 51% in 1999-2000) Average Monthly Brand Share (Volume) Following 1st Generic Entry Pfizer Lipitor Sales Following Loss of Patent Exclusivity, 3Q14 – 2Q15 For larger drugs share erodes even more to only 11% at 12 months Volume loss is driven by pricing reductions from generic competitors Lipitor is a perfect example of the dynamics of generic competition Almost 50% sales loss in the first 6 months 80% after 12-18 months of competition Sales dropped from ~US$10bn annually to <US$2bn a single year Source: IMS Health, Journal of Medical Economics and Corporate Research Source: Company reports and Corporate Research 11 II. Trends, Opportunities & Strategy 4) The Biosimilar Opportunity While we have an optimistic outlook on biosimilars, growth is likely to be slower than the most optimistic view Biologics are attractive for the global pharma industry given they: often provide benefit in therapeutic areas that are underserved are more difficult and costly to develop and manufacture providing differentiation and, therefore, higher pricing/ profitability The Biologics Manufacturing Process Given these complexities biologics are less exposed to generic (“biosimilar”) competition We view the biosimilar opportunity as significant (biologics are almost by definition high-cost products) but see growth as slower than the most optimistic outlook Not least of which, the largest biologics market in the world (US) does not have a current pathway towards a regulatory approval process and substitution regulations Source: buildingbiologics.com and Corporate Research 12 II. Trends, Opportunities & Strategy 5) Update on the Global Biosimilars Market There are a number of patent expiries on blockbuster biologics coming up Patents will expire on approximately $63bn in biologics sales between now and 2022 Patent Expiries of Key Branded Biologics Biologics now represent approximately 70% of the value of the global Top 10 Pharma Products Most analysts estimate biosimilars could grow to be a $35bn sector by 2020 We view this as “optimistic” Lack of a full competitive environment Lack of trust – biosimilar is not bioequivalent and physician prescribing of biosimilars has been slow To date biosimilar competition in Europe, Japan and the US has shown an overall brand share / price reduction of ~30% vs. ~80% for chemical drugs Source: BioPharm International and Corporate Research Major Countries with Approved Biosimilars, 2015 Source: BioPharm International and Corporate Research 13 II. Trends, Opportunities & Strategy 6) Competitive Strategies: Branded Pharma There are a number of branded strategies that generic pharma companies have to face in order to compete Divest: cutting all promotional and research expenses once a brand faces direct generic competition – maximizing remaining profitability Impact of Divest Strategy Impact of Innovate Strategy Innovate: launching new forms, doses and indications – offers additional and extended patent protection Evergreening: make small incremental changes to the underlying product and filing for extension of patent exclusivity Source: International Journal of Medical Marketing and Corporate Research Impact of Evergreening Strategy Source: International Journal of Medical Marketing and Corporate Research Impact of Flanking Strategy Flanking: calls for the branded company (either directly or in partnership with a generics firm) to allow early competition in the form of an “authorized generic” Source: International Journal of Medical Marketing and Corporate Research Source: International Journal of Medical Marketing and Corporate Research 14 II. Trends, Opportunities & Strategy 7) Competitive Strategies: Generic Pharma The Hallmarks of Success for generic pharma are identical to those of branded pharma Focus on areas of strength while striving for higher complexity portfolios and pipelines are the core strategies we have previously outlined for success in the branded pharmaceutical space For generic companies the strategies are similar – leverage R&D and manufacturing expertise to innovate and launch into more complex generics Hallmarks of a Successful Pharmaceutical Company Source: Corporate Research Hallmarks of a Successful Pharmaceutical Company For some of the larger companies these strategies have led into the SpecPharma sector Growing R&D at generics companies supports this thesis Source: R&D Taxsavers and Corporate Research 15 II. Trends, Opportunities & Strategy 7) Competitive Strategies: Generic Pharma Innovative strategies that reduce costs and increase efficiencies are crucial to maintaining generics profit margins Incremental Innovation – adjustments to off-patent, brand-name drugs Re-innovation – build upon a product’s branded success by improvement and innovation Safety and Performance Innovation • Process innovation is crucial to the generics industry • Safety remains a significant concern with a 2012 survey revealing 42% have misgivings when it comes to generics • Significant R&D investments will be necessary to fully analyze the risk profile of each generic product • Vital to consumer sentiment Incremental Innovation • Generic manufacturers’ understanding of patient and pharmacist needs have led to innovative solutions that help patients and reduce dispensing errors • Examples of incremental innovation include enhancing delivery systems, developing alternative dosages and finding solutions to patient compliance issues • Differentiation = higher pricing / profit Re-Innovation • “Super generics” or New Therapeutic Entities (NTEs) are enhanced versions of off-patent branded drugs increasing quality and efficiency with fewer risks, side effects and toxicity • Examples include drugs that: (i) can avoid previously verified hypersensitivity through the use of nanoparticles, (ii) offer more predictable clinical responses or (iii) oral version of previously injectable drugs Risk / Return in Pharma High Branded RISK / TIME / COST Safety and Performance Innovation – assuring products are safe and perform inline with expectations Generic Products from NTE process Low Low High RETURN Source: Teva and Corporate Research 16 III. Major Global Generic Pharmaceutical Markets 1) Characteristics by Market ** Source: IMS Health, various sources and BTMU * Estimates by IMS Health ** Includes Israel-based Teva 17 III. Major Global Generic Pharmaceutical Markets 2) An Overview of the US Generic Pharmaceutical Market Largest Pharma market in the world with high generic penetration. World’s only free-market based drug pricing system. US accounts for about 1/3rd of global pharma sales 4.5% branded projected top line growth through 2018 6.4% generic projected top line growth through 2018 US Pharma Spend/Growth , 2010-2018E US Generic Penetration, 2010-2018E US has one of the highest generic penetration rates in the world By volume: >80% (2015 estimate at over 88%) By value: ~12% reflecting low pricing of generics Generic substitution driven by commercial insurance and cost-savings benefits Source: IMS Health and Corporate Research US Generic Savings (US$bn) 2004-2013 Note: by # of prescriptions Source: IMS Health and Corporate Research US Generic Savings by Area, 2013 World’s only free-market based drug pricing system US subsidizes WW pharma consumption as low prices associated with non-US government price controls are inadequate to support R&D It is estimated that generics saved the US almost a quarter of a billion dollars in 2013 Note: “Anti-Inf” = Anti-Infective. “CNS” = Central Nervous System. “GU” = Genitourinary. “Musc” = musculoskeletal. “Resp” = Respiratory. Source: Generic Pharmaceutical Association and Corporate Research 18 III. Major Global Generic Pharmaceutical Markets 3) An Overview of the European Generic Pharmaceutical Market 2nd largest global pharma market. Cost-containment, value-based & reference pricing make it increasingly challenging. In 2014, generic drugs account for 55% of volume but only 21% of pharma value in Europe EU5 Generic Drug Market Share Global Biosimilar Sales by Region, 2012 The largest market for regulated biosimilars, occupying 44% of the 2012 global biosimilars market Differences in local healthcare systems have caused some inter-country variation in uptake of biosimilars across Europe France, Italy and Spain have the greatest scope to increase use of generic drugs. This is due to their current penetration rates of generics (by volume) being considerably lower than those in Germany and the UK. Source: OECD and Corporate Research EU5 Biosimilar Uptake, 2007-2013 Source: Frost & Sullivan and Corporate Research Example: Generics Promotion in France Announcement The French Ministry of Health presented the country's 'national plan to promote generic drugs' on March 24th 2015 Objectives • Increase generic prescribing by five percentage points in the three‐ year period 2015–17, with particular focus on increasing prescribing in hospitals and retirement homes • Deliver savings of €350m (US$393m) by 2017 Measures to be • Implement protocols to encourage the prescription of medicines taken within the 'Répertoire' (the French substitution list) • Deliver educational programme about safety, efficacy, and quality of generic medicines for doctors in training • A national advertising campaign targeted at the general public and health professionals will be launched at the end of 2015 to build confidence in generic medicines In March 2015, France launched a national plan to promote the use of generics as part of the country’s cost containment efforts Source: Corporate Research Source: Government reports and Corporate Research 19 III. Major Global Generic Pharmaceutical Markets 4) An Overview of the Japanese Generic Pharmaceutical Market 3rd largest pharma market expanding as volume growth offsets pricing declines. Profitability increasingly challenged. Japanese generic pharma industry has estimated revenues of $9bn, growing at a FY2009–FY2014E CAGR of 9.6% Japanese Generics Usage (US$bn) Japanese Generics Usage (Volume) Generic penetration is improving, having reached 32.6% of all prescriptions in FY2014 This growth is driven by government policy measures to promote the use of generics, as well as successive patent expirations of blockbuster drugs In order to contain healthcare spending, the national government has been implementing measures to promote the use of generics since 2002. Despite this, generic penetration (volume) in Japan at approximately 33% remains significantly lower than the US (88%) and Europe (UK: 75%) in 2014E Source: Japan Generic Medicines Association (JGA), Ministry of Health, Labour and Welfare (MHLW) and Corporate Research Gov’t Promoting Use of Generic Drugs Generic Pricing Methodology at Launch FY Dispensing Pattern Changes 2002 -Pharmacies awarded 2 points for reimbursement when dispensing generic drugs -Pharmacies awarded 4 points for additional reimbursement if generic drugs 2008 >30% to total drugs dispensed -Incentives which correspond to percentage of generic drugs dispensed were 2010 introduced for pharmacies (additional points awarded based on generic volumes: ≥20% / <25%, 6pts., ≥25% / <30%, 13pts., ≥30%, 17pts.) -Adjustment to generic volume points: ≥22% / <30%, 5pts., ≥30% / <35%, 15pts., ≥35%, 19pts. 2014 -Adjustment to generic volume points: ≥55% / 65%, 18pts., ≥65%, 22pts. 2012 Source: Motilal Oswal and Corporate Research Source: Bloomberg and Corporate Research 20 III. Major Global Generic Pharmaceutical Markets 5) An Overview of the Indian Generic Pharmaceutical Market Despite a small (but rapidly growing) domestic market – Indian Pharma companies are major players on the global stage The US generics business is now the largest segment for top Indian generics players and is expected to expand further Indian Pharma Revenue Breakdown (%) Indian Share of US Generics (US$bn) Opportunity from new patent expirations in the simplex generics segment lower in the next five years as compared to previous five years, resulting in lower growth outlook Indian companies continue to file ANDAs both in simplex and complex generics to participate in the longer term opportunity Source: ICRA Research and Corporate Research Cumulative ANDA Filings – Indian Cos. Source: IMS Health, broker reports and Corporate Research R&D Spend of Indian Pharma Cos. Like the rise of simplex generics in 2008, complex generics present equivalent opportunities as large patent expirations are expected through 2020 High R&D spend over the past 4–5 years, coupled with M&A improved positioning of Indian players in the complex products market Source: Motilal Oswal and Corporate Research Source: Bloomberg and Corporate Research 21 III. Major Global Generic Pharmaceutical Markets 6) An Overview of the Chinese Pharmaceutical Market Rising demand for healthcare and expanded supply of institutions has fueled development of the pharma market Sector revenue growth has decelerated due to prices pressures Pharma Market Size, 2013–1H15 (US$bn) Pharma Market Breakdown, 2014 Generic drugs constitute the majority of the total Chinese pharmaceutical market Expansion of the Essential Drugs List (EDL) is a benefit for generic drugs Stringent quality controls on generics implemented Policy changes have a mixed impact on the generic pharmaceutical industry in China We expect 7% – 9% industry growth for the Chinese pharma market over the next 5 years Generic drugs on the EDL will see the strongest growth, with forecasts of a 2013 – 2020 CAGR of 21% Branded generics not on the EDL will continue to post robust growth, driven by looming patent expirations Note: Includes western drugs: API, chemical drugs, biologics and TCM Source: CEIC and Corporate Research Chinese Pharma Growth, 2014-2020E Source: IBIS, BCG and Corporate Research Source: CEIC, China Healthcare Yearbook and Corporate Research “Western Drug” Growth, 2013-2020E Source: IBIS, BCG and Corporate Research 22 IV. Strategic Summary Outlook for Global Pharmaceutical Players – Branded & Generics ① Fundamentals & Drivers ② Issues & Trends Negative: ◊ Gov’t focus on cost ◊ Patent Cliffs ◊ R&D long & costly Positive: ◊ Aging population ◊ Growth of chronic diseases Global Pipeline: Focus on biologics, quality improving Pharmerging Markets: High growth to come in emerging markets Big Pharma’s Big Growth Gap: Declining share leads to M&A need ③ Opportunities & Strategies Risk Sharing / Collaboration “The dominance of the protected, product dependent, research‐based [pharma] company model in the Top 10 will be broken in the next 5‐10 yrs.” – IMS Health • Risk sharing R&D Outsourcing ● • Alliances and JVs • M&A to fill company pipeline gaps Expand Laterally Expand Vertically Large Molecules Theranostics • Differentiated as more difficult/costly to develop/manuf. leading to higher pricing • Targeting specific patient populations • Still nascent • Less exposed to “generic” competition Vaccines Pharmerging Markets • Proj. growth higher than overall market • Projected to double global share by ‘16 • High demand in Pharmerging Markets ④ Hallmarks of Success for Pharmaceutical Companies “EMBRACE CHANGE”: THE INDUSTRY IS CHANGING AND COMPANIES MUST CHANGE WITH IT Smaller Companies: Leveraging up the “Foodchain” ◊ Continue to follow larger players up in complexity ◊ Specialty Pharma → Branded, Generics → Specialty Pharma, etc. Larger Companies: Break the proprietary R&D model ◊ Leverage R&D & manuf. expertise into more complex drugs (biologics) ◊ Increase alliances and M&A ◊ Focus on fast‐growing Pharmerging 23 DISCLAIMER The information herein is provided for information purposes only, and is not to be used or considered as a proposal or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. 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