The Generic Pharmaceutical Opportunity: To Play Or Not To Play?

By Dinkar Saran, Madhur Rathaur, Maheshwar Singh

Today’s pharmaceutical industry is facing unprecedented times. A significant number of drugs will be coming off patent — more than US$200 billion worth between last year and 2014. That will translate into $70 billion in lost revenue for the companies that created the patents.

Pharmaceutical companies that, in the past, developed blockbuster drugs now have fewer promising candidates to fill their thinning pipelines. To make things even more challenging, the pressure is on from governments worldwide to reduce the cost of healthcare and to make needed medicines accessible to everyone.

As a result of these trends, generic biopharmaceuticals are poised to assume a more significant role than ever before in the global healthcare industry. According to PRTM’s estimates, generics could rack up an estimated CAGR of about 9% — three times that of patented branded products — creating a market of $200 billion by 2014.

As the landscape changes, pharmaceutical companies are assessing a number of options to sustain profitable growth. Companies that wish to seize the generics opportunity — biopharmaceutical entrants, biopharmaceutical companies already in the space, and existing generic players looking to grow — must move fast. The opportunity to compete in small molecule (chemical-based) generics will evaporate by 2014, when the wave of patent expirations ebbs. An aggressive M&A strategy may provide the requisite speed. Yet making M&A pay off won’t be easy. Executives will have to adapt their strategies depending on which generic market segments they decide to compete in (see Table 1). And, they will need to apply a disciplined process for entering those segments. To boost their chances of success, companies should address four questions:

• What is our generic strategy?
• What operational capabilities are required to execute our strategy?
• How will we close scale and operational capability gaps?
• Which global operating model will help us leverage our new capabilities?

Companies that take this rigorous approach will stand the best chance of extracting maximum business value from their generic strategies and of developing the next generation of high-quality, affordable drugs needed worldwide.

Deciding On A Generic Strategy
Of the many generic market segments out there, companies that choose to compete in this space must first determine which segments to target. Each segment requires a different operational strategy and has different implications for revenues and profit margins.

In addition, companies must determine which global markets to pursue — developed, emerging, or both. These markets vary in numerous respects, including pricing, exclusivity periods, and patent protection. For instance, Russia and Brazil have high-priced, branded generic markets, while India has some of the lowest-priced generics available. Other markets, the United States included, have laws allowing a provision of exclusivity for first-to-file generics.

Business leaders then need to identify which therapeutic areas to pursue. Examples include niche-based areas (such as oral steroids) and multispecialty coverage areas (such as cardiovascular drugs and antidiabetics).
For companies seeking to be counted among the top few players in generics, it will be critical to cover all the key markets and build a strong presence across multiple therapeutic segments.

Identifying Needed Operational Capabilities
Each generic segment requires a unique set of capabilities in R&D, manufacturing, and sales and marketing. The capabilities required to play in the branded and differentiated generic segments are similar to those needed for success in the big pharmaceutical arena. Thus, large pharmaceutical firms can leverage existing capabilities to enter these segments relatively quickly. On the other hand, the plain generic segments require capabilities that most big pharmaceutical firms do not have, such as an ability to develop many products quickly. Companies that decide to compete in these segments will need to ask whether they have the required capabilities and, if not, whether to acquire them through M&A or other means.

Closing Scale And Capability Gaps
For companies that decide to enter or expand their presence in the generic segments, M&A offers an especially swift route to building required capabilities as well as scale. PRTM’s analysis indicates that it takes just 109 days, on average, to finalize the acquisition of a generic company with a median deal value of $2.3 billion. To achieve these revenues through organic growth instead, a company would need more than 10 years — not a viable option.

Choosing The Best Global Operating Model
However a company acquires or strengthens the capabilities and scale needed to compete in one or more generic market segments, it must construct the right operating model to leverage them. Operating model decisions center on questions such as where specific operations will be handled and who will manage them. For instance, to win at the plain generics F2F (first-to-file) game, companies will need to keep R&D entirely in-house. That’s because being the first to file requires being first to develop an API through a nonpatent-infringing process. A company can do this only by having a robust in-house R&D function with strengths in process innovation.

By contrast, companies focusing on differentiated generics need not develop all technologies in-house. Here, differentiation matters far more than speed. Companies can combine technologies available through other players with their in-house capabilities to produce a product. For instance, one company could provide the API and production facilities to develop a new drug, while another supplies the novel dosage formulation technology. Meanwhile, clinical trials could be outsourced to external vendors who specialize in this aspect of R&D.

Regarding manufacturing, companies that have acquired new capabilities to enter or to expand into the generic space will need to decide which markets to serve from which manufacturing facilities. For example, for a plain generic product over which multiple players are competing for market share, a firm may decide to serve global markets through plants located in low-cost countries.

Companies that consider generics a viable path to growth will not realize their goals without a carefully developed approach. They need to consider which generic market segments to enter or expand into and what capabilities will be required to succeed in those segments. And, they must determine how to acquire the needed capabilities and scale as well as which operating model will best enable them to deploy these assets. The flurry of M&A, licensing, and asset divestiture in today’s pharmaceutical industry will only intensify over the next several years. Companies that explore the right questions now stand the best chance of making smart choices — and reaping the benefits of success — in the years to come.

About The Authors
Dinkar Saran ( dsaran@prtm.com) is a principal, Maheshwar Singh ( msingh@prtm.com) is a director, and Madhur Rathaur ( mrathaur@prtm.com) is a manager, all in the healthcare practice at the global management consulting firm PRTM.