Copy cats

The biggest threat faced by global pharmaceutical companies which rely on blockbuster drugs for profit lies in the generic pharmaceutical companies. These firms produce bio-equivalent copycat drugs when blockbuster drugs' patents expire - or even before they expire - and are crowding into the global pharma scene in ever increasing numbers.

The growth rate of generic firms has been very fast. Having commanded just short of 20 per cent of the US prescription market back in 1984, this share has now grown to almost half of the total figure.

Generic drug manufacturers can be found worldwide. Teva Pharmaceutical Industries works out of Israel, while Ranbaxy Laboratories operates in India. In the US, generic companies include Barr Laboratories, Andrx Corporation and Impax Laboratories.

There for the taking
Generic companies have a rich harvest of blockbuster drugs coming to the end of their patent lives to play with. Blockbuster drugs with patents expiring over the next two years include Pfizer's hypertension treatment, Norvasc, which enjoyed sales of $4.3bn in 2003; Pfizer's anti-depressant Zoloft, which commanded sales of $3bn in 2003; and Merck's cholesterol-lowering drugs Zocor and Pravachol, which had sales of $5bn and $2.8bn respectively in 2003.

Andy Smith, director at Schroeders, the City investment bank, and manager of the 3i BioScience Investment Trust, does not think it will all be plain-sailing for generic companies: Generic companies had a good run-up in their share prices last year, but now things are getting tougher, he says.

When I attend generic presentations, I am told of the many products in the pipeline which will replace branded pharma drugs and the many millions of US dollars they will earn. What they don't say is, as soon as the drugs 'go generic' there are major price cuts, and the millions of dollars of revenue will dwindle.

The other hurdle generic companies face is the constant search to find new branded medicines to bring to the market, he adds.

Learning from experience
Past examples of what generic companies can do to big pharma companies provides guidance for the future.

One notable casualty was GlaxoSmithKline's (GSK) antidepressant, Paxil. Once Paxil's patent ran out, generic copycat drugs doing the same job as Paxil cascaded onto the market, captured over half of all Paxil prescriptions and caused GSK's sales to plummet by 40 per cent. However, GSK's controlled-release version of the product, Paxil CR, is maintaining its market share, with sales up to £102m in the third quarter of 2004 despite a sharp drop in sales of the original product.

GSK's ploy to release a new version of its ageing product is a popular tactic used by pharma companies to protect their patents. Andy Smith explains: Big pharma companies are becoming increasingly ingenious at launching reformulated or better versions of their drugs to lengthen patent protection. A favourite route is to develop an extended or controlled-release version of the drug - for example Paxil CR and Adderall XR, both of which have been introduced as extended-release versions.

Alternatively, they can reformulate their drug. Shire Pharmaceuticals had launched Adderall which treats attention deficit disorder in children. It had to be taken several times each day, which created problems as frequent dosage can so easily slip a child's memory.

Shire developed an improved Adderall to ensure only one pill a day could be taken, putting control over the dosage back in the hands of parents and away from the danger of being forgotten during the busy school day.

A further example is that of AstraZeneca's blockbuster stomach ulcer treatment, Prilosec. Generic companies moved in early last year and, by April, Prilosec sales had been cut by nearly two thirds due to generic copycat drugs being sold to drug buyers.

Pharma fights back
Generic firms are challenging patents before they expire because of expediency. In the US, the first generic product to hit the market gets exclusivity on the marketing front for six months and therefore most of the generic company's profits are made during that period.

This, Smith says, may not be a good thing: The 180-day exclusivity period in the US does give some protection to a generic company introducing a copycat drug, but then other companies crowd in and down goes the price. Many companies are looking to keep market share in perpetuity which creates a constant pressure on prices.

There is, therefore, a great pressure on generic companies to rush their products to market even before the patent runs out - and risk a legal challenge.

Generic companies are victims of their own success. As their profits are eyed with envy, and there is no barrier to entry, more companies are crowding into the generics sector. High profits flowing from generic companies will inevitably swell the number of generic firms on the scene as new entrants want their share of the lucrative market. Profit margins are falling and will continue to fall as numbers grow.

One force which may slow down generic competitors coming to milk the pharma sector's blockbuster drugs lies in government policy. On both sides of the Atlantic governments are worried by the high health costs thrown up by an ageing population.

The NHS's drugs bill is to be cut by up to £1.8bn over the next five years by forcing pharma companies to cut prices. In November 2004 the government clinched a deal with the Association of the British Pharmaceutical Industry for a 7 per cent cut in prescription drug prices.

Generic companies will no doubt continue to cater for the global copycat drug demand market, but life is not going to be as easy as it has been. The big pharmaceutical companies are ready to fight back.

The Author
Malcolm Craig is one of the country's leading commentators on the investment sectors and the author of 12 books on successful investment.