Investment Banking

US generics - continuing evolution

April 2021

Read Time: 6 minutes

A mere glance at the evolution of the generic drugs market in the US over the last two decades underlines the metamorphosis of an almost blue ocean’esque and research led business model into a hyper competitive, almost industrial state. While many commercial rearrangements (large M&A, buyer consolidation, etc.) have taken place during this period, one could, arguably, identify two major events that have radically changed the generic drug landscape.

First, the groundbreaking Hatch-Waxman Act (1984) ensured that the patent-expired generic drugs be developed at a fraction of the cost vs. their branded predecessors, primarily by avoiding expensive clinical trials. The magnitude of change was immense, as it spurred both scale and entrepreneurship for generic drug players and democratized the opportunity for anyone keen on developing the generic versions of drugs across dosage forms in a compliant way. The Big 3 distribution consolidators (AmerisourceBergen, Cardinal Health and McKesson) were a major catalyst in solving the uninterrupted last mile reach to the pharmacies. As a result, several pharma technocrats and commercially astute leaders with a vision for future, turned pharma entrepreneurs across the world. They created a nucleus of R&D setups, filed products from inhouse or third-party manufacturing facilities and contracted with one of more of the distributors. To illustrate, the annual ANDA approvals in the US grew almost 8x in 2 decades between 1990 and 2010 to 450. The key success factors revolved around product R&D, product pipeline, regulatory compliance and a strong SCM. This was in contrast to the innovation led business in regulated markets, or business in branded generics markets like India or Russia where promotional strategy, doctor engagement models and brand creation largely differentiated between the winners and the not so successful ones. 

But there was a stagnancy brewing by late 2000’s and early 2010’s as the number of ANDAs filed far outweighed the approvals. This created a significant backlog, stretching USFDA’s operational capacity. By 2012-2013, almost 900 to 1000 ANDAs were filed annually while the approvals, for ANDAs typically filed in prior years, were around 450 – 550 annually. 

The regulator led Generic Drug User Fee Amendments of 2012 or GDUFA, the second game changing event, was designed to alter this imbalance as it extracted a meaningful USFDA user fee per filing. The additional revenues generated allowed USFDA’s OGD or Office of Generic Drugs to expand review teams. The target was to ensure that 90% of the filings are reviewed within 10 months from the date of filing with a suitable response mechanism. As the process matured, the impact on the industry dynamic was radical with a ramp in pace of approvals, which currently matches or even surpasses the ANDA filing rate. Case in point - in 2020, there were 865 filings and 900+ approvals. 

(Source: USFDA database, Avendus research) (Note: FY refers to Oct- Sep for each year)

GDUFA radically impacted the commercials of generic drug makers, as, the number of approvals per drug significantly went up, often in high single or early double digits and usually above 6 for extended-release oral solids and c. 4 for regular injectables. This significantly reduced market share and economic benefit on launch and with the buyer consolidation putting additional pricing pressure, the net outcome typically is deteriorating product revenues and gross margins. A 5% to 10% reduction in the base business revenues has become a norm and the onus has shifted to new launches to cover reduction as well as generate growth. 

However, for new product launches, the prevalent First-to-File or FTF programs have lost attraction due to multiple day 1 ANDA filers jostling for a piece of the pie. It is common place to see 10-25 filers FTF on such drugs, thereby making the commercial outcome unattractive. Players around the world are trying to create R&D pipelines towards complex generics, which have a better shot at market longevity. CGT or complex generic therapy products are a better alternative to FTFs with 180 days market exclusivity and likely low competition beyond exclusivity as well. However, the list of CGT products is limited (so far 80 drugs have been approved with 45 given exclusivity) and drug development failure risk is high and expensive, often requiring upfront investment anywhere from USD 2mn to over USD 10mn per product. Chinese firms making inroads into formulations is another significant threat, particularly to major US, EU and Indian formulation players. Increased cost of development along with the GDUFA fee, in addition to competition and pricing pressure, is a strong deterrent for large ANDA programs and most players are taking informed bets. Thus, it is not a surprise that the USFDA has witnessed a large number of ANDA withdrawals in the recent past, amounting to c.1750 in last 5 years which is more than a third of ANDAs filed in the similar period. 

To summarize, generic players across the world are scrambling to sharpen their portfolio development strategy and capital allocation programs. Some of the players have adopted a very objective IRR approach and stress testing of each product in selection phase, others have dedicated R&D units for products significantly ahead of the average complexity curve; some have chosen a virtual and asset light model driving speed with superior project management skills while a select few have focused on creating a specialty pipeline. Is one or combination of some or all of the strategies right? The answer is unique to each player and probably lies in how the players visualize themselves, market, competition and, equally important, the regulatory dynamics in the next 5 – 7 years. But clearly some changes have percolated and will stay for good. Portfolio throughput and stringent review of the R&D pipeline has become a norm. Staying ahead of the ‘complex technology curve’ is a major R&D KRA, though the curve itself remains significantly dynamic and the new entrants without any baggage are better informed and suited to create their complex generics strategy rather than their predecessors, who have to reform and recreate the inertia. The patent protected specialty segment is no more a superfluous board room thought and has found its way in the definitive R&D plans for select Indian and global majors. M&A opportunities are scrutinized to what they add to the capabilities and expanse of the company, as the obvious pure scale enhancing rationale is gradually fading. Without doubt, survivors must reinvent the dynamics of strategy and thought process just as much as the inventions in the R&D lab, as they grapple for global success.

Author: Shomil Pant, Director, Healthcare Investment Banking, Avendus Capital

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