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Generics Business: An Introduction - Views on News from Equitymaster
 
 
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  • Dec 8, 2001

    Generics Business: An Introduction

    The sharp run in the domestic pharma stocks in the last few months was largely attributed to these companies lapping up on opportunities in the export market. You must have definitely heard about the hot generic opportunity, which these pharma companies are targeting. However, some of the regulatory terms may have left you confused?

    Let us understand what are generic drugs in the first place. Generic drugs are the chemical and therapeutic equivalents of brand-name drugs, typically sold under their generic chemical names at prices below those of their brand-name equivalents. These drugs are required to meet similar governmental standards as their brand-name equivalents and must receive regulatory approval prior to their sale in any given country. Generic drugs may be manufactured and marketed only if relevant patents on their brand-name equivalents (and any additional government-mandated market exclusivity periods) have expired, been challenged and invalidated, or otherwise validly circumvented.

    By 2005, 15 of the leading 35 blockbuster molecules in the world are expected to go off patent, which makes the opportunity highly lucrative for generic companies. Besides this, rising healthcare costs and an ageing US population that requires larger medical attention is intensifying pressure on the government and legislators to reduce healthcare related expenses. Thus there is pressure on the government to enable a faster generic entry to put a cap on the healthcare cost. This could be justified by the fact that mean approval time for a generic drug has come down to around 18 months from an average of more than 26 months in 1995.

    However, one should understand the fact that above figures are not representative of the figures that would translate into sales numbers for generic companies. This is due to the fact that once the drug goes off patent, the generic one is sold at a heavy discount to the branded one. Let us consider a recent case of Dr. Reddy’s in case of fluoxetine generic sale. After the patent expiry, there was a heavy price erosion of more than 60-70% in the price of the drug, compared to the branded one. The discount however, is dependent on a case-to-case basis.

    In the US, Drug Price Competition and Patent Restoration Act (Hatch-Waxman Act) introduced in 1984, permits manufacturers to file ANDA’s (Abbreviated New Drug Application) for generic versions of all post-1962 approved pharma products. This application is abbreviated in the sense that the generic drug is not required to go through rigorous new drug development procedures but is only required to prove that the generic version is bio-equivalent to the original drug.

    Let us now understand how a pharma company enters the generics market. First, the company files an ANDA and applies to market its drug as soon as the patent period expires. This is called the Para III certification. On the other hand, a Para IV certification is one in which the generic manufacturer challenges that the existing patent on which the innovator is currently selling the drug as invalid, unenforceable or that the patent would not be infringed by the manufacture or sale of the generic drug. The Act also provides a 180 days marketing exclusivity for the first company to file Para IV ANDA. Another way to enter the generic market is to enter to raw material supply arrangement with ANDA filers.

    While on one hand, these players devise their game plan to ensure fastest entry of their generic drug to the market; brand name manufacturers on the other hand devise numerous strategies to delay competition from lower cost generic versions of their products.

    One of the most effective of these strategies is the development of an optically pure version of a drug or the development of its metabolite just prior to the expiration of its patents. A shift in market preference to the “new” product protects the branded market. Hence, considerable resources expended by generic manufacturers in drug development, application submission and approval of the original generic versions may produce reduced revenues for generic drug companies.

    Apart from the company’s capability, what matters most in the generic business is timing, patience, regulatory and litigation skills and financial muscle to fight legal battles. This is particularly true in case of Para IV application, which requires huge investments as the whole process begins with challenging an existing patent in a court of law. Obviously, this invariably follows by a counter claim from the innovator to protect his patent. It is estimated that if a Para IV application disappoints a generic company, the loss on account of litigation and procedural costs is in the range of US$ 2-3 m. For example, recently Dr. Reddy’s lost a tentative Para IV approval for Omeprazole after several months of litigation. Apart from the opportunity lost, the company had incurred US $ 2.3 m, which now has to be written off.

     

     

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