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Pharma: ‘Authorized’ to kill! - Views on News from Equitymaster
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Pharma: ‘Authorized’ to kill!
Nov 25, 2005

The global generics industry is currently facing the heat as competition is hotting up and prices are spiraling downwards. To compound the problem, the top generic companies, which follow the strategy of challenging patents to win the ultimate exclusivity period, are faced with the prospect of competition during the 180-day exclusivity period as well! In this article, we take a look at the impact of ‘authorized generics’ on the generics industry as a whole. What are authorized generics?
Authorized generics are created when a pharmaceutical innovator licenses its branded drug to a selected generics maker (the generic partner) in anticipation of competition from another generics firm (the generic competitor). An authorized generic drug is a drug manufactured by the innovator and marketed as a generic by the generic partner under a private label. It has the same dosage, safety, strength and quality as that of the brand name drug. As a generic product, it contains the identical amounts of the same active ingredient as the branded product and unlike a generic product, it contains the same inactive ingredient as the brand as well. In certain unique cases, the innovator and the generic partner are one and the same company, like Novartis (innovator) and Sandoz (generic arm of Novartis).

Global pharma – Protecting their turf
Global innovator pharma companies are going through a tough and challenging phase. The golden 90s saw a plethora of new drugs being introduced by these companies heralding the arrival of ‘blockbuster drugs’ (drugs with annual sales above US$ 1 bn). However, a majority of these drugs are poised to lose patent protection over the next few years, which is likely to put pressure on the topline of these companies. Other problems include a thinner R&D pipeline, an increase in the time taken to launch new drugs and escalating R&D costs. Patent challenges to innovator drugs are also adding to the overall woes. As a result, innovator companies are fiercely holding on to their drugs by adopting various measures to combat competition including ‘authorized generics’.

The Hatch-Waxman Act
In 1984, the US government introduced the Hatch-Waxman to encourage generic versions of patent protected drugs. The rationale behind the same was to maintain inducements necessary for brand name companies to research and develop new drugs and at the same time enable lower cost generic products to reach the market. The idea of granting the 180-day exclusivity was to provide an incentive to generic companies to reap tangible as well as intangible benefits, considering the huge costs involved in litigation. The 180-day period is important to a generic company. Not only does it enable the company to generate substantial revenues, but it also provides it with a platform to gain significant market share, which it can enjoy even after the entry of more generic players. Also, it enables the company to strengthen its customer reach and brand value.

Generic companies – Any relief?
In recent times, generic companies have been expressing their discontent with authorized generics. An authorized generic by an innovator company eats into the market share of a generic competitor thus prohibiting the latter from enjoying the benefits of the exclusivity period. Also, it must be noted that an authorized generic stands to earn more revenues than the generic competitor as the product, though a generic, is associated with the ‘trusted’ brand of the innovator company. During the exclusivity period, with only one generic company, generally about 30% to 35% price erosion takes place. However, with the presence of an ‘authorized generic’, price erosion could be higher at about 50% to 60%.

A case in point to be noted here is that of Pfizer against the generic competitor Teva Pharmaceuticals. Teva had been awarded the 180-day exclusivity period for manufacturing and marketing ‘Gabapentin’, which is the generic version of Pfizer’s blockbuster CNS drug ‘Neurontin’. A court decision had found Teva’s product to be non-infringing on Pfizer’s patent. However during the exclusivity period, Pfizer launched a generic version of its own drug at a lower price, denting a hole in Teva’s exclusivity benefits. Teva’s litigation suit challenging the entry of the authorized generic did not go in favour of the company either. Which means that, as of now, ‘authorized generics’ will have to be accepted by generic companies as a fact of life.

While players like Teva and Mylan have been at the receiving end, others like Watson have actually chosen to partner innovator companies to market their branded products rather than challenge them, in a bid to reap benefits from the exclusivity period. The existence of authorized generics will have an impact on Indian generic companies like Ranbaxy and Dr. Reddy’s, as both these companies have been aggressively pursuing patent challenges.

Looking ahead…
In addition to a host of challenges faced by generic companies, they have no choice but to also accept the existence of authorized generics. While there is no doubt that the revenues generated are considerably lower when an authorized generic is present, prices are still higher than what they would generally tend to be in the event of more generic players in the fray, in which case the price erosion is as high as 90%. Unless there is a significant change in the regulations, ‘authorized generics’ are here to stay and the key to survival will depend upon how a company can level its product through the marketing and distribution network.

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