Branded generics: The emerging market opportunity
Pharma firms are betting that branded generics will become a powerful source of revenue, particularly in emerging markets. Angelo DePalma reports
By on Jul 5, 2011
When innovation fails, why not try commoditization?
That seems to have become the default strategy of top drug-makers vying to break into emerging markets through branded generics.
What exactly is a branded generic? It’s hard to say.
In his 2005 paper, “Branded Generics as a Strategy to Limit Cannibalization of Pharmaceutical Markets,” Michael Ward of the University of Texas, Austin, used the terms “branded generic” and “authorized generic” interchangeably.
Back then, these definitions applied when originator firms produced or authorized the manufacture and sale of generics before patent expiration.
Ward admits that the terminology at the time was confusing. “What we called branded generic, the industry now calls an authorized generic,” he says.
The bewilderment continues, even among US firms that manage prescription plans.
Brent Eberle, VP for clinical pharmacy services at Navitus, a top US pharmacy benefits provider, notes that “there have been lots of different definitions for ‘branded generic,’ and that has created confusion. You can’t always point to a drug and say, definitively, ‘That’s a branded generic.’”
IMS Health defines branded generics first as non-originator products.
Lipitor therefore always represents the original brand even if, after the patent on atorvastatin expires, Pfizer prices it as a generic, rebrands it, or sells it as atorvastatin.
In addition to no originator involvement, the new product must have new a brand name and—in US markets, at least—provide added value compared with the active pharmaceutical ingredient.
OxyContin™ (oxycodone) is an example of branding, while extended release or abuse-resistance, common lifecycle plays in the pain marketplace, represents differentiation tactics.
“In many respects, the distinctions between branded and unbranded generics are not terribly helpful,” says Michael Kleinrock, director of market insights at IMS.
Incentives to compete
Quirks in US drug patent law are partly responsible for the confusion in nomenclature.
For reasons fathomable perhaps only to lobbyists and legal experts, the first generics house to apply for generic licensure receives a six-month exclusivity period.
During this time, competitors other than the innovator firm are barred from entering the market.
The first generic typically discounts 20 percent to 30 percent off the brand price
But two can play this game. The originator is entitled, during these brief months, to produce or to license another firm to manufacture and/or market an unbranded generic that undercuts the first-to-file product.
This is the classic authorized generic scenario, dubbed a ‘post-patent contract strategy, which Pfizer is expected to launch for poor Lipitor on 30 November of this year.
When the exclusivity period ends, the party is over and the price drops 80 percent to 90 percent.
At this point, Eberle says, innovators have very little incentive to compete, at least in developed countries.
Contrary to intuition, the brand, offered at a slight premium or even at lower cost, has no independent value among pharmacy plans or outlets.
Everyone has been hearing for years that generics are just as good, so even at a minuscule premium plans will not use branded products.
The exceptions, says Eberle, are drugs with narrow therapeutic indices, for which slight changes in dose may have much larger therapeutic (or toxic) effects.
An example is Coumadin, the branded form of the blood-thinner warfarin.
Since dosing is carefully titrated up or down, prescribers often prefer to keep patients on one form or another once they reach therapeutic levels.
The OTC market
The OTC world differs significantly, particularly with respect to premium-priced medicines that compete directly with generics.
In the US, pharmacy chains capitalize on their own brands by packaging generics in their own image and likeness.
For example, Wallgreens sells its store-labeled “Wall-Itin” and “Wall-Zyr” knockoffs of Claritin and Zyrtec, respectively, for a slight discount to the OTC brand, but considerably more than competitors charge for generic loratidine and cetirizine.
In the US, where many former prescription drugs are available over-the-counter, the brand lives on for many products just a few feet from their unbranded generic competition.
It would make sense to call these products ‘branded generics’ since they compete directly with generics.
The same might be true for generically-priced Lipitor or re-branded “Pfizitor” or “Pfizostatin.”
Not so, according to IMS.
“I don’t consider any Pfizer activity with that molecule to constitute a branded generic,” says Michael Kleinrock, adding emphatically, “ever. Whatever they do with atorvastatin, it’s still their product, their brand.”
Sadly, the Pfizer reputation, the Lipitor brand, is not worth a plugged nickel within the maze of payers, providers, and reimbursers that comprise the US health system.
Pharmacy benefit management companies offer prescribers a fair degree of leeway with branded medications.
But once a drug goes generic, plans trim expensive medicines from their formularies while pharmacies stock only the least costly.
Therein lies the difference between formularies and pharmacy shelves. Consumers know better, yet they still pay a multiple of the generic-OTC price for premium-priced, originally-branded pain killers, allergy pills, skin creams, and other products.
This explains why branded generics have never really caught on in the US in the Rx trade except for a small percentage of prescriptions, and why ‘generic brands’ like Prilosec and Claritin live on.
Capturing market share
According to IMS data, 75% of the pharmaceutical revenues in the US derive from branded products, with the remainder split evenly between unbranded and branded generics.
But the numbers reverse for prescription numbers.
Brands capture just 23% while unbranded generics get 70%, and branded generics just 7% of the total.
“So while branded generics are relatively equal to their unbranded brethren in dollar volume, they enjoy much less volume,” Kleinrock explains.
Consumer choice also accounts, in part, for why branded generics are enjoying so much success in middle markets, the so-called “pharmerging” developing countries.
IMS holds that added value is a key entry ingredient for branded generic status.
Generics dominate the cholesterol-lowering marketplace, but branded generics are conspicuously absent because no one has identified an appropriate driver for added value in this class.
The opposite is true among narcotic analgesics and dermatology products.
OxyContin’s success has been attributed to its reduced abuse potential compared with oxycodone, although manufacturer Purdue Pharma has not had an easy time convincing regulators.
Similarly, dermatology creams may be comprised of several off-patent agents, formulated in a proprietary manner or supplemented with other ingredients to create essentially a new product.
The value-added requirement may differ somewhat for overseas pharmerging markets, where IP protection differs from the developed world.
But the basics, Kleinrock says, remain unchanged: no direct originator involvement and a distinct recognizable brand.
Consumer choice and brand loyalty
When Sanofi-Aventis acquired Brazilian generics house Medley of Brazil, it was not seeking an inexpensive location to manufacture generic versions of its own products for US markets.
Ditto for Pfizer’s stake in Teuto Brasileiro (also Brazil) and its $350-million deal with Indian biosimilars company Biocon, or GlaxoSmithKline’s arrangement with Aspen (South Africa) and its purchase of
Laboratorios Phoenix (Argentina), or Sanofi-Aventis’s 2009 takeovers of Zentiva (Czech Republic), Medley (Brazil), and Kendrick (Mexico).
Rather, big pharma is exploiting global purchasing dynamics, in emerging pharmaceutical countries that are strikingly similar to those driving OTC-branded markets in the US; namely; consumer choice and brand loyalty.
Most consumers in pharmerging markets pay for their own prescription medicines as well as OTC products.
Interestingly, brand loyalty arises not from the originator company but from reputable, recognizable local firms.
Even in markets where less-expensive generics exist, fear of counterfeit, low-potency, and adulterated medicines is such that consumers willingly pay a premium for high-quality products from trusted manufacturers.
In a 2010 report, IMS predicted that China, a “tier 1” pharmerging country, will become the world’s third-largest pharmaceutical market some time in 2011, up from eighth in 2006.
China’s pharmaceutical consumption growth, in dollar value, will rise by at least $40 billion by 2013, matching that of the United States.
Most Chinese growth will arise from branded generics, the report notes, despite a growing, increasingly affluent urban population that might under some circumstances prefer branded prescription medicines.
IMS assigned Brazil, Russia, and India as second-tier pharmerging nations.
Each is expected to add between $5 billion and $15 billion in sales by 2013, with the first two experiencing double-digit sales growth in recent years.
The “fast follower” group consists of thirteen countries: Venezuela, Poland, Argentina, Turkey, Mexico, Vietnam, South Africa, Thailand, Indonesia, Romania, Egypt, Pakistan and Ukraine, with projected growth of up to $5 billion in annual sales by 2013.
Study co-author David Campbell noted the existence of “new opportunities within each tier of the pharmerging markets [and] clear advantages … for the early movers”—companies moving in first and creating new business models around pharmerging markets.
Yet 2009 sales from these three tiers totaled 0.9%, 2.9%, and 5.6%, respectively, of revenues for the top fifteen global drug-makers, not an encouraging place to start.
The emerging market opportunity
Another study, Branded Generics: A Gateway to Emerging Markets(2010), by healthcare research firm FirstWorld, predicted that Brazil, Russia, India, China, Turkey, Mexico, and South Korea will provide 70% of the drug industry’s growth by 2013.
These numbers, if valid, predict dramatically lower overall growth during this time period: most of these deals will take months or years to get into full swing, unbranded generics already (overwhelmingly) dominate these markets, existing revenue shares from these countries are minuscule, and even under the best circumstances generics rarely generate profits that cause big pharma executives to salivate.
Analysis of Teva’s profitability over the last four years demonstrates that generics are a tough business indeed.
Between 2006 and 2010, Teva, the world’s largest generics house, increased its operating margin from 50 percent to about 60 percent, but profitability has trended downward, from about 30 percent to about 23 percent.
The reason? Teva was forced, in the face of unbranded generic competition, to triple its sales and marketing outlays.
The message to large innovators like Pfizer, Lilly, and Abbott is cautionary.
The brand value may be worth a few more rands, renminbis, or rupees, for a while, but the forces of information and economics may prove too much for the branded generic strategy in the long run, just as they did in first-world prescription markets.
These products will, after all, demand more effort to sell than unbranded products.
It is hard to see what will remain, above rather unremarkable generics income, after marketing, manufacturing, distribution, and regulatory have taken their cut.
Even more alarming, perhaps, is the ease with which branded generic strategies can be duplicated by homegrown firms.
For more on generics, see ‘Dr. Bates Talkback: How to mount an effective defense against generics’ and ‘Forecasting for generic erosion rates’.
For eyeforpharma’s emerging markets series, see ‘Making the most of the Mexican pharma market’, ‘Strategies for growth in South Korea’s pharma market’, ‘Transforming the Turkish pharma market’, ‘Getting into the Indian pharma market’, ‘The Middle East: A pharma market in the making’, ‘Reassessing Russia's pharma market’; ‘Breaking into the Brazilian pharma market’; ‘Cracking the Chinese pharma market’; and‘How to get ahead in 'pharmerging' markets’.
For all the latest business analysis and insight for the pharma industry, sign up to eyeforpharma’s newsletters.