Winner takes all

By Marie Shields, Editor

The competition between branded drugs and generic copies has been going on for years, but as generics threaten to take the lead, how will their rivals fight back?

“We must have more competition and less red tape in pharmaceuticals”
-Neelie Kroes, European Commissioner for Competition

Heavy hitters all over the world are throwing their weight behind the cost-reducing potential of generics. In the US, President Obama has recommended smoothing the pathway to their introduction, as a way of bringing down the cost of treatments for consumers. Governments of EU countries are also keen to ease the way for generic products – understandably, given that in Europe, generic medicines enter the market at a price that is, on average, 25 percent lower than that of their branded equivalents.

What effect will this generic focus have on research-based pharmaceutical companies, which have argued for years that extended patents on their products are necessary in order for them to recoup the millions they invest in research and development?

Add to that the fact that big pharma companies are facing a host of other pressures at the moment: problematic pipelines, a dearth of new blockbusters, patent expiries – not to mention the global financial crisis – and you have a potentially explosive situation for the industry.

According to Barath Shankar, Senior Industry Analyst, Pharmaceuticals and Biotechnology, for Frost & Sullivan, big pharma is facing an almost unprecedented amount of competitive pressure. “They’re losing their pipelines and losing out on their big drugs to generic versions that are flooding the market, especially in areas like cardiovascular.”

Shankar points out that in many European countries, generics already account for a significant number of the prescriptions being written, whereas in the US, branded drugs still drive price and revenue growth.

Worldwide, the encroachment from generics is forcing big pharma companies to change their business models. Rather than focusing on finding blockbuster drugs, they are increasingly developing their pipelines for the long term, becoming more flexible, focusing on core specialties, and even producing their own generics.

Big investment
Producers of branded products point out that they put a lot of money into developing their drugs, and if the money that comes from patent exclusivity is withdrawn, the development process will come to a halt. For example, Robert Spiegel, Chief Medical Officer at Schering-Plough, argues that, “If we say that generics are good enough, that the current medicines you have today in 2009 are probably good enough and we don’t really need any new medicines, 20 years from now we’re going to have major issues with an aging population and many diseases that still have major unmet medical needs.”

Barath Shankar, at least, doesn’t buy it. “I think that argument held true back in the 1990s and probably even the early 2000s,” he stresses. “But if you look at the way innovation is being driven in the current scenario, it’s a global market. Companies need to drive down costs. There’s a lot of outsourcing happening with regard to clinical trials and contract manufacturing, so companies have to re-look at their business models and understand what their core competency is and then look at areas they should invest in.

“Overall, the idea that profits from branded products are needed to invest in new research is tapering off. Having a comprehensive business model that works in the current situation is more important.”

No matter which argument you believe, producers of branded pharmaceuticals are not about to take the onslaught of generics lying down. In the US, ‘copycat’ drugs are often launched on the market before the patents on the original drugs expire, with generics companies depending on the slowness of the American legal process to hold up any resulting litigation. Some drug developers have responded by launching generic copies of their own branded products before the patents have expired.

Making inquiries
The branded vs generics battle is also hotting up here in Europe. Late last year, the EC launched a sector inquiry into EU pharma markets under EC competition rules. According to the Commission’s website, the inquiry was launched for two reasons: because of a decline in novel medicines reaching the market (average 27 per year in the 2000s compared to 40 per year between 1995 and 1999), and delays in generic market entry, leading to potential extra costs for consumers.

The Commission’s preliminary report, released last November, was viewed by many as a full-on attack on the European pharmaceutical industry. John Cassels, a competition lawyer at Field Fisher Waterhouse, believes that the preliminary report was too harsh, and indicated that the Commission did not truly understand the patent law system and how the pharmaceutical industry operates. “Part of the Commission’s problem is that it was trying to use the wrong tool. There are problems in the pharmaceutical sector, but they’re not necessarily problems that you can address via the competition rules. It’s widely recognised, for example, that the way patents are registered could be improved, but using the competition rules is not the way to get at them.”

Another angle to the situation is provided by what are known as ‘settlement agreements’: agreements between branded pharmaceutical manufacturers and generic manufacturers aimed at ending ongoing litigation in a patent dispute. In some cases, a ‘reverse payment’ is agreed, where the generic supplier agrees not to enter the market for a certain number of years in exchange for a sum of money .

Such payments can be regarded as a way for big pharma companies to prevent generic copies of their products from entering the market, thereby keeping the price of drugs unnecessarily high. According to data from the European Commission, more than 10 percent of settlements in pharmaceutical litigation cases were reverse payment settlements, amounting to €200 million.

Just how widespread is the practice of reverse payments? The European Commission said in its initial report that it had identified 200 cases that it intended to investigate. However, as Cassels points out, unlike their US counterparts, European companies do not have to register settlement agreements, making them extremely hard to track.

The Commission’s final report, released in early July, although less aggressive in its condemnation of the industry, still highlighted several what it called “delaying strategies” used by manufacturers of branded drugs in an attempt to block generics from entering the market.

As a result of its inquiry, the EC says it will apply increased scrutiny to companies under EC Treaty antitrust law, as well as keeping a close eye on the use of specific instruments by originator companies to delay generic entry. Defensive patenting strategies that focus on excluding competitors without pursuing innovative efforts will also be discouraged.

The Commission recommends that member states be asked to provide an automatic/immediate pricing and reimbursement status for generic medicines that are equal to the original products, and to introduce legislation that facilitates generic uptake, such as prescription by substances rather than brands.

“We must have more competition and less red tape in pharmaceuticals,” said Neelie Kroes, European Commissioner for Competition, at the time the final report was released. “The sector is too important to the health and finances of Europe’s citizens and governments to accept anything less than the best. The inquiry has told us what is wrong with the sector, and now it is time to act. When it comes to generic entry, every week and month of delay costs money to patients and taxpayers. We will not hesitate to apply the antitrust rules where such delays result from anticompetitive practices. The first antitrust investigations are already under way, and regulatory adjustments are expected to follow, dealing with a range of problems in the sector.”

Time for change
If practices such as reverse payments are indeed taking place, they are a clear indication that manufacturers of branded products are taking the incursion of generics seriously.

Rather than trying to get rid of generic competition using questionable methods, in times like these, companies need to stick to their core business – designing the product – and ensure they have a solid supply chain. They may also need to look at other areas, such as vaccines and biologics, in order to provide a steady income flow.

Some companies have already been smart enough to move in this direction – the specialty areas where the returns and reimbursement rates are high. One company that has done this very successfully is UK-based Shire Pharmaceuticals. Its Human Genetic Therapies division, for example, focuses exclusively on the rare diseases known as ‘orphan diseases’.

As Sylvie Grégoire, President of the division, explains, “Our portfolio of products focuses on the very rare end of orphan diseases – the populations we treat are between 2000 and 3000 worldwide. We are able to gain sufficient revenues and profits even though there’s a rarity of patients by commanding a high price for these products. If they don’t receive these replacement therapies or the drugs that we develop, their quality of life declines and they suffer from a very high morbidity as well as often early mortality.”

It’s certainly been a worthwhile strategy for Shire, with six product launches in the past three years, and within Human Growth Therapy, 300 additional staff taken on in 2007, and another 275 in 2008.

In addition to focusing on specialty therapeutic areas, many big pharma companies are also investigating the potential of biologics. Europe was the first to introduce guidelines for the approval of biosimilars, through the European Medicines Agency n 2005. Since then, the region has emerged as a testing ground for how the process will work in the rest of the world. In the US, President Obama’s recent budget proposed the development of a faster pathway for generic biologics, and guidelines for their approval have also been issued in Japan. As competition within the industry increases and margins grow smaller, generics producers may also see biologics as their next big opportunity.

Despite understandable opposition from big pharma and biotech companies, it seems likely that the development process for generic biologics will be improved. However, there are still hurdles to be overcome. Frost & Sullivan’s Shankar sees the main problem as the lack of a clear idea as to how the regulatory pathway will work. “I believe the FDA will require a stronger proof of bioequivalency and potentially also require some small-scale clinical trials, because the way in which biologics work is completely different to the way small molecules or traditional pharmaceuticals work.

“That could create some complications. It could be a situation where companies are following a ‘wait and watch’ policy, but it is definitely something that will happen because in the current situation, with the way the pricing of biologics has been moving, this is a way to introduce a competitive marketplace and to encourage companies to compete more and create more opportunities.”

Proof required
As Shankar points out, one potential hurdle in the development of biosimilars may be the US Federal Drug Administration, and whether it decides to require proof that biosimilars are equivalent to their branded counterparts. Although the FDA’s rulings apply to drugs on the market in the US, it does tend to set the standard for the rest of the world. If the FDA decides to require proof of bioequivalency, it could make things much more complicated for generics manufacturers; and if it doesn’t, it could result in a situation where consumers don’t trust generic biologic drugs to provide the same benefits as the original versions.

Shankar explains that the first concern for the FDA is from the biotech lobbies. “The biotech lobbies are saying this is not going to work because it completely differs from traditional generics. When you’re working with proteins, if you make a small change to the process, you’ll end up with a completely different drug. Whereas with small molecules, it doesn’t matter what process you use, the end product will have the same chemical composition. That’s their argument. Then the generic manufacturers are saying that this is not something they can’t do. It’s been done before.”

Both parties have a fairly strong argument, and at some point a decision will need to be made. There is no doubt, however, that the approval timeframe and marketing process for biologics will be different. Generic companies could see this as an opportunity to make more money with less competition, by building core competencies in a particular set of biologics.

For companies whose major market is in the US, the generics vs branded products situation could be complicated even further by a bill that would allow US-licensed pharmacies to import cheaper FDA-approved medicines from outside the country. President Obama himself has proposed allocating US$5 million to the FDA to “develop policies to allow Americans to buy drugs approved in other countries.”

Barath Shankar says that one potential roadblock to these plans is the issue of oversight. “The problem is maintaining oversight over the FDA-approved manufacturing plants where these products come from,” he says. “The FDA ran into trouble with some overseas generic manufacturers in the recent past, with safety record and contamination issues.

“The lobby that is against importing drugs from other countries could then question whether the FDA has the capability to have oversight over these areas. However, I do know the FDA is moving in that direction, because they’ve established offices in India, which has the second-largest number of FDA-approved manufacturing locations outside of the US.”

It seems, in the long run, that companies that develop and manufacture branded products will need all their resources at the their disposal to fight off the generics challenge. They will need to collaborate more, which will enable them to play to their strengths and let their partners take on the work that isn’t essential to their core business.

With generics on the rise and the twin threats of dwindling blockbusters and upcoming patent expiries to cope with, the future looks challenging for pharmaceutical and biotech companies. But this is a powerful sector, with a lot of money and experience behind it. Chances are, most will find a way to come through unscathed.

Unfair tactics?
Methods used to block generics from entering the market, according to the European Commission’s inquiry into the pharmaceutical sector:

• Originator companies filing so-called ‘patent clusters’ – a large number of EU-wide patents and pending patent applications for a single medicine.
• Unnecessary patent litigation. According to the EC report, there were nearly 700 cases of reported patent litigation with generic companies, which on average lasted three years. The generic companies ultimately won more than 60 percent of these cases. 
• ‘Reverse payment’ settlement agreements. The EC report says that originator companies concluded more than 200 settlement agreements with generic companies in the EU. In approximately 50 percent of these, generic entry was restricted.
• Originator companies intervening in national procedures for the approval of generic medicines, which on average led to four months of delay for the generic medicine.