generics threats and opportunities: mounting an effective defense strategy (mini)

Generics Threats And Opportunities: Mounting an Effective Defense Strategy

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Summary

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Generics have emerged as

the primary challenger to

Pharmaceutical Industry

success, offering a public

hungry for medication and

reduced costs exactly what

they want and need


After years of relatively easy blockbuster profits, worldwide respect and investment, and loyal customer bases, branded pharmaceutical companies are in trouble, increasingly vulnerable to the threats posed by the competition. And who is that competition? It’s not other branded companies any more. Generics have emerged as the primary challenger to pharmaceutical industry success, offering a public hungry for medications and reduced costs exactly what they want and need. Generics have exploded in the last decades, and are poised for even bigger growth. The situation is grim. It can seem like pharmaceutical companies have no recourse in the face of the lower prices and operating costs of the generics industry, and fortunes will only continue to fade. But options do exist for pharmaceutical companies to mount an effective defense strategy against the threats posed by generics. In this report, we examine some of these defensive strategies. We analyze the environment for pharmaceuticals today, as well as the generic industry as a whole. We describe the pros and cons of legal defensive strategies, as well as opportunities to expand the revenue-generating product life cycle into reformulations and over-the-counter medications. We look at pricing strategies, as well as company organizational changes as part of an integrated defense strategy. And to help companies make tough decisions about the best defense, we examine powerful analytics techniques and case studies.

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Summary

After years of relatively easy blockbuster profits, worldwide respect and investment, and loyal customer bases, the Pharmaceutical realm has undergone a seismic shift

For the full report, please visit: www.eularis.com or email us at [email protected]


Background of the Generics Threat

4

Why is the Pharmaceutical

Industry suffering, and the

threat posed by the

booming Generic market

growing?


In the past, generics were seen as the bargain basement end of the greater pharmaceutical market, with reduced quality and a lack of trustworthiness to match. But in today’s environment, generics are growing, in quality and respect, and in market penetration, total sales, and company size. The generics industry captured 14% of the global healthcare market in 2004, with overall revenues of $58 billion. Since then, the numbers have only increased. And the rest of the pharmaceutical industry? The companies that once easily fulfilled the notion of Big Pharma in sales, profits, and reputation? Between 2001 to 2005, $400 billion of value vanished from the Pharma industry. Across the board, Pharma companies are getting squeezed, with growing expenses and diminishing returns. How did we get here? In Barrie G. James’ eviscerating report, “An Industry in Crisis: Desperately Seeking New Strategies,” he contends the industry is at a desperate crossroads and vulnerable to the growing threat of generics because of our own shortcomings and past failures.

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The current “blockbuster” business model evolved in the late 1960s and was a “magic bullet” guaranteeing superior results. But by the 1990s, the times were changing. New biotechnologies, the information age, globalization, and rising consumerism all acted as destabilizing forces on this business model. When new strategies became essential, Pharma was mired in what worked in the past, incapable of creating new solutions. The results are today’s status quo of reduced internal R&D productivity, empty pipelines, product delays, competitive copying, and excessive spend. Of course, there’s more. Pharma finds generics beating down their door due to bloated bureaucracy, but also other factors. Increased government focus on and favor for cheaper generics over branded drugs has hurt the industry. Patent expiration has been an especially troubling and powerful problem in the last decade, and analysts suggest total sales of drugs coming off patent will exceed US $160 billion by 2015. Industry reputation is swiftly eroding. Taken all together, and Pharma is in trouble.

Background of the Generics Threat

How did we get here? The reasons behind the Pharma Industry’s current crisis are many…



Generics: An Industry Snapshot

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How did Generic companies

come to be, how do they

function and what trends

are influencing their

growth?


Since 1998, the generics drug industry has doubled. By 2007 it was expected to be worth $60 billion. How did the generics industry come this far? In 1984, the U.S. Congress created the country’s generics industry to ensure brands were not given unfair or unnecessary patent protection. Legislation created a system of checks or balances through the limitation of patent monopolies, and the approval of generic products. In general, this and subsequent patent restrictions allowed new generics companies to compete directly with pharmaceutical companies, using information that was no longer protected by patents, and offering customers choice and competitive prices. In Europe, the generics industry is structured in similar ways, but has always been a bit more fragmented. Member states in the EU operate different periods of data protection, for example, ranging from six to ten years.

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Recent reforms balances this to ten years for all member states, but only it only applies to products approved after new regulations were implemented in 2005. Within each individual country, generics have a specific approval process, governments have cost containment policies, and companies have varying patent rights. In Japan, the basic policy for new drug approval emerged in 1967 and clearly differentiated between new drugs and generics. The Japanese healthcare system is one of universal health insurance. The National Health Insurance program began publishing drug prices and reimbursement schedules by brand name in 1978, which resulted in an environment that favored brand name drugs over generics. Since the industry’s inception, generics have penetrated markets worldwide, but in varying degrees and with widely different receptions.


How did the Generics Industry come this far?




United States

Generics penetration in the States is one of the highest in the world. More than 56 percent of all prescriptions filled in USA were generics by 2005. Europe

Generics penetration in Europe varies widely by country, due to highly divergent government policies and intellectual property rights. Three clusters exist:

Less than 10 percent market share by value: Austria, Belgium, Finland, France, Ireland, Italy, Portugal, Spain

Between 10 and 40 percent market share by value: Denmark, Estonia, Netherlands, Slovak Republic, Slovenia, Sweden, Turkey, UK

Greater than 40 percent market share by value: Croatia, Czech republic, Germany, Latvia, Lithuania, Hungary, Poland. Japan

In Japan, generics penetration is notoriously low. In terms of sales value, generics market share was estimated at 4.8 percent ($3 billion) in 2002. In terms of volume of sales, generics market share was 12.2 percent. The generics industry still has some hurdles, but has managed to post amazing marketing penetration. Combined with a receptive environment, generics are increasingly poised to build on their phenomenal success. Can Big Pharma compete?

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Defense Strategies: Legal

and Patent

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To understand how

effective patent defense

can theoretically work,

companies must first have

a thorough knowledge of

patents themselves


The first line of defense against the generics threat, for most branded pharmaceutical companies, is legal and patent strategies. To understand how effective patent defense can theoretically work, companies must first have a thorough knowledge of patents themselves. A patent is defined as a monopoly which provides the owner with the exclusive right to prevent any unlicensed manufacture, use, sale, offer for sale, storage or importation for the above purposes of the patented object. Generally, patents last for 20 years from the date of the patent application filing. After this time, the patented product or procedure enters the public domain and can be freely used by anyone. Pharmaceutical patents can be obtained for a wide variety of items in and around the product and its production process. In terms of drug discovery and marketing, patents can be created at any time throughout the research process, and after production. In each of the phases, the listed components can be patentable:

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Pre-development Process:

The isolated protein and methods of using the protein identified as playing a part in the biological development of a disease or condition

Crystals of the protein

Assays to test compounds interacting with the protein

Drug Development:

Chemical compounds, including generic groups, individual compounds, tightly defined subgroups, and more

Metabolites

Active isomers

Crystalline forms (polymorphs)

Manufacturing processes

Clinical Trials:

Novel therapeutic indications

Novel dosage regimens

Combination therapies with other drugs

Combinations of the drug compound with other active agents

After Launch:

New dosage forms

Line extensions

Defense Strategies: Legal and Patent

The first line of defense against the Generics threat, for most branded Pharmaceutical companies, is legal and patent strategies



Defense Strategies: Legal and Patent

So what options do branded pharmaceutical companies have for defending against generics in this legal environment? Following the letter of the law, companies do have recourse to defend their patents against challenges. But in reality, court battles usually do not bring much success. Generics companies are likely to win in about 70 percent of fully litigated patent challenges. Most patent challenge cases result in settlement. This usually takes the form of a generics company selling an authorized version of the branded drug, supplied by brand name manufacturers at a big discount to the market price. One method of effective defense using patents does exist. As described earlier, a profusion of patents can surround the creation and components of a pharmaceutical product. Plus, these patents can be applied for at any stage in the development and/or production timeline. By working closely with patent experts, scientists, marketing teams, and technicians, companies can create a network of secondary patents around the branded product. Companies may not be able to retain a basic patent for a brand drug, but perhaps the manufacture, storage and form can be patented. Without these methods of creation and distribution, a generics alternative would be much lower quality and less attractive to consumers. Generics can theoretically be produced, but the branded drug, with a significantly higher quality product, will be the better choice.

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Reformulation Strategies

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Reformulation is another

theoretical way that

companies can move from

the glow of patent

protection into the new

world


Patent expiration and the subsequent market share may be inevitable, according to some analysts. Savvy companies should do all they can to take the most advantage of the years of patent protection. But they should also view those years in a different way in this new era: as the first part of a much longer revenue-generating product life cycle. Reformulation is one way that companies can move from the glow of patent protection into the new world. Reformulation two key options to pharmaceutical companies: Line extensions: Line extensions are

transformations of the branded product into a new, protected, attractive alternative for consumers.

Next Generation Products: While line extensions stretch the original brand in new directions of dosage or audience, next-generation products create a new brand.

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Business leaders were once willing to invest much time and money into developing reformulation strategies, because they worked. But in recent years, the climate has shifted. Several landmark lawsuits have broken line extension patents, signaling a sea change for this approach. Another more attractive strategy companies can turn to in extending product life is incorporating revenue streams from over-the-counter medications. The OTC field is an inherently more crowded arena of products, and competitive wins come less through exclusivity and ownership, and more through innovation. But expanding into OTC medications can make the market unattractive to generics, meaning more opportunity for market share, and the ability for companies to keep more of revenue streams.


If companies know that patent expiration will come, they can effectively plan for a better future




One of the greatest advantages of switching to OTC medications is the public relations boost. Purposely offering lower-priced drugs to a public growing increasingly upset by rising drug and healthcare costs shows a company responsive to customers, willing to innovate and create new opportunities, and deserving of trust and loyalty. Done well, a company's switch to OTC medications harnesses this positive publicity. Successful examples include Imodium and Nizoral, which took franchises long beyond initial patent expiration dates and became global brands.

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Defensive Pricing Strategies

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Several defensive pricing

options are open to

manufacturers


To truly reduce damage from patent expiration and the rise of generics, companies must employ pricing changes in addition to other strategies. Several defensive pricing options are open to manufacturers:

Price Increase: The idea in increasing prices is that generic drug prices will then be established at higher levels after patent expiration. In practice, however, raising prices doesn't usually work. In all markets, competition from other brands is usually stiff enough to disallow a price increase.

Price Maintenance: In those markets where widespread use of generics is rare, maintaining price can actually be a viable option. In these markets, existing prescription brands will still be prescribed in the face of cheaper generic options. Keeping the price at the same level can encourage customers to stick with the drug, and even enhance the reputation of the drug for better brand equity.

Price Decrease: When staring down the stiff competition of generics with lower prices, companies often choose the price decrease as a sound pricing strategy. It's a rational and effective method: by making a move to be closer to the competition's selling price, the product can remain relevant and desired by cost-conscious prescribers, pharmacists, payers, and customers. Price reductions can occur with list price or terms and rebates.

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Defensive Pricing Strategies

To truly reduce damage from patent expiration and the rise of Generics, companies must employ pricing changes



Organizational & Integrated

Defense Strategies

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Part of defending against

the Generic threat may be

bigger organizational and

integrated defense

strategies


Without a close look at the way a company conducts business, how it works from day to day, and how it struggles and thrives, generics defense strategies won’t be successful. As mentioned previously, the very root of the problem the industry faces today may be in the insistence on sticking with an outdated business model. Part of defending against the generic threat, then, may be bigger organizational and integrated defense strategies. One organizational change considered as part of an effective defense against generics is a variant of the old adage: if you can’t beat ‘em, join ‘em. Companies are diversifying into generics, either with separate company units devoted to creating and selling generics, or through the technique of “authorized” generics. Authorized generics are defined as a pharmaceutical branded product relabeled and marketed under a generic name. Usually, this works by distributing through third party licensing arrangements, agreements with generics manufacturers, or through a company’s own generics subsidiary. In 2004, three out of the top ten best-selling generics in US were authorized. It’s an attractive option for many companies for clear reasons. The brand name manufacturer can create exclusive partnerships with chosen generic manufacturers before patent expiration, creating brand name loyalty for generic version while earning royalties on the product. Plus the use of authorized generics gives branded companies additional revenues, and erodes the potential economic value of generics. Perhaps the best means of mounting an effective defense against generics is through a combination of reactive and proactive measures. These include the methods we’ve discussed thus far, and a few more, focused on facilitating overall company growth.

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Organizational & Integrated Defense Strategies

Companies are diversifying into Generics, either with separate company units devoted to creating and selling Generics or through the technique of ‘authorized’ Generics



Organizational & Integrated Defense Strategies

Company Change: Some companies need radical change as the only truly effective means to stave off the generic threat. James contends companies must change their mindsets on spending strategies, and focus on how other successful companies think, not what they do. Companies must really consider the perspectives of patient and payer in all decision. And companies must kill the blockbuster structure, reprogramming their organizational DNA to mesh strategic needs with operating environments.

Growth into Biotech/Biological: Another avenue is expansion into an area generics have not totally infiltrated. Biopharmaceuticals are increasingly indicated for a staggering variety of conditions, and offer companies significant revenue streams unimpeded by generic competition. Additionally, the very specificity of biopharmaceuticals offers opportunities for an off-putting array of secondary patents.

Marketing Enhancement: Marketers are also looking at their methods, amping up launch periods, and refocusing on branding. The launch period is becoming more and more critical in the brand lifecycle. Companies are utilizing a variety of prelaunch approaches found to have major impact on launch success, including NPP programs and pre-launch analytics. Taken together, they can maximize financial impact and market share, making a splash and growing peak sales much faster than previously possible.

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Using Strategic Analysis to Assess

Generic Defense

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Analytics can be used to

determine what can be

done to defend a brand

being eroded by Generics


Generic companies are facing enormous competition from other generics companies, which is leading them into new forms of marketing rather than simply competing on price. This means that new opportunities are arising in generic marketing, but also new opportunities for combating generics are arising for branded Pharma. There is now the emergence of generics companies who brand their product and conduct advertising, as well as many of the traditional marketing activities that the big Pharma do. Branded generics are the key generics that really need to conduct analytics against Big Pharma branded competitors, and also against other competitor branded generics. A recent report by Medco found that …

"One quarter of the physicians surveyed stated that they do not believe generic medications to be chemically identical to their branded counterparts; more than eight percent said they were unsure.

This despite FDA rules that require generic versions of the drug to be bioequivalent to the brand medication”.

Nearly one in five physicians believes generic drugs are less safe than brand-name medications, and more than one in four doctors (27 percent) believe generic medications will cause more side effects than brands.

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Using Strategic Analysis to Assess Generic Defense

Branded Pharma must be aware of all that they can be to combat the Generic threat




The next figure highlights these results of the survey which surprisingly show that physicians are even less informed about generics than their patients! The pharmacists are the ones who display the best knowledge about the similarity between major patented brands and their generic competitors. This shows an imperative for generic brands to measure the traditional product attributes that influence prescribing, as well as pricing factors and any marketing factors (packaging? advertising?) as well as formulary issues and sentiment.

Source: Medco

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CASE STUDY: GENERICS DEFENSE ANALYTICS

BACKGROUND A well respected, large brand which accounted for significant revenue for the company found that, despite its high market share and popular status, it was being gradually, little by little, month by month, eroded by Generic competition. NEW APPROACH The marketing head employed the Eularis’ Analytics Approach, designed especially for this industry, which involved a five-step process:

Evaluate marketing elements & market environment Validate actual influencers for a therapy category Use Predictive Algorithm Analytics and Dynamic Modeling Analysis of findings implications Implement the recommendations throughout the sales and marketing

processes

These processes highlighted where the problem lay. The brand was well liked by physicians (hence, the high market share), the messages were strong, the sales force were skilled, the promotional activities were also strong and yet, Generics were stealing market share nibble by nibble. It would be easy to say “That’s just how it is – we will have to live with it” but the analytics uncovered three interesting areas.




Firstly, they showed that the reps were de-motivated because they had nothing new to say. The doctors loved the brand already and the reps had nothing new to say. The second finding was that cost was an issue, which was really the brand’s only weakness. To deal with this, the company was asked if they had Pharmaco-economic data, which they did. It was recommended that they take the Pharmaco-economic data and add it to their rep calls to give the reps something new to discuss hand-in-hand with the original product benefits. They could incentivize reps to compete region by region, as the analytics also showed performance by region, and use the Pharmaco-economic data to show the cost was actually a saving in the long term. The third aspect the analytics showed was that the market had three market share points in play, and it was clear that one of the stronger brands could take some of these vulnerable market share points if they were positioned correctly.

Figure - Results of the Brand Analytics in January 2006

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RESULTS Six months later, the analytics were re-employed. The recommendations had been followed and the brand had gained market share for the first time in a while. They did not take the full three market share points, but they did move the market share up from 68% to 69.1% in six months. The results six months later can be seen in Figure below.

Figure - Results of the Generic Competitor Analytics in January 2006

Figure below shows the Generic competitor brand picture in the same time period.

Figure - Results of the Brand Analytics in July 2006

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The generics market is growing at a significant rate and branded Pharma must be aware of all that they can be to combat the generic threat. Generic companies are also changing. As they face intensified competition from other generics companies they are finding they need to do more than merely compete on price but must incorporate other marketing activities also. In doing so they create a competitive edge with other generic rivals, but also create opportunities for branded Pharma to use analytics to analyze what areas other than price are influencing prescribing decisions, and how to maximize impact of these areas.

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Conclusions

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Pharma companies are

increasingly realizing the

need for exhaustive,

creative and integrative

defense strategies.... and

are volleying


The environment for Big Pharma today is tough. The threat from generics grows as Pharma companies feel the pain from an increasingly hostile public and government. But that’s not the end of the story. Pharma companies are also increasingly realizing the need for exhaustive, creative, and integrative defense strategies, and are volleying. Through tenacity and commitment, the battle goes on. What works in defending against generics? Realizing that what worked in the past may not succeed today. Knowing that straight patent defense, reformulation, and pricing changes don’t face a favorable environment today. Instead, companies are tweaking the old and diving into the new. Developing a secondary patent network, as well as OTC reformulations, may find greater success. Expanding into authorized generics and new biologic/antibody options. Focusing on honing the launch period, reworking branding, and proactively reworking key organizational tenets. In short, companies that are willing to move outside of the comfort zone are those primed to find success. What the future holds for Pharma companies is uncertain. But company leaders ready to act rather than simply react will find opportunities to boost sales and profits, and protect against any external threats.

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Conclusions

The environment for Big Pharma today is tough… But through tenacity and commitment, the battle goes on

For the full report, please visit:

www.eularis.com or email [email protected]

http://www.eularis.com/

mailto:[email protected]


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generics threats and opportunities: mounting an effective defense strategy (mini)

Health & Medicine

generics industry

pharmaceutical companies

generics threats

pharmaceutical realm

greater pharmaceutical

generic industry

branded companies

reduced costs