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Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved.

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Presentation on theme: "Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved."— Presentation transcript:

1 Jean Hoffman, President Q Street Advisors, Inc. APIs for Regulated Market Generics: Whither Europe? ©2006 Q Street Advisors, Inc. All rights reserved. Rome, 23 January, 2006

2 Agenda Global Pharma Sector Trends Future Growth and Competition in the US and EU Performance of Indian and Chinese Companies Key Success Factors for Generic Companies Where do APIs Fit? Trends and Impact on EU Based API Companies Conclusions

3 Global Opportunity: Macro Factors *Source: Mark Lachovsky, Intellipharm Demographics & economic growth Aging populations in advanced countries Economic & population growth + aging in developing countries Political pressure for health care cost containment leading gradually to more favorable legislation & policies supporting generics, plus increased utilization Top generic companies consolidating: now huge, global players inspiring confidence in generic drugs API market projected to grow 5-7% in volume over the next 5-10 years, but only 1-2% in value due to increased competition*

4 Global Pharma Sector is Cyclical 2005 was a lean year for loss of exclusivity many large selling products losing exclusivity in major markets Consolidation amongst global & regional US & EU generic companies + major customers in the US EU customers remain fragmented and mostly national, with differing packs, rules, brands supporting national companies…but not forever Growing competition from established and emerging Indian companies for a share of this next cycle, China coming

5 Growth Projections for 2006 Vary by Region US market forecast by IMS to grow 8-9% in 2006, up from the 6-7% in Totals 43% of world market. EU top 5 expected to grow 4-5%, down by.5% from 2005 China expected to grow 17-18% to $13-14 billion Indian domestic market growing at 8-9%/year in volume Indias total pharma market, including exports, projected by Indian officials to double by 2010 Sources: IMS for US, EU, China projections, G S Sandhu, Joint Secretary, Indian Dept of Chemicals and Petrochemicals, reported in Pharmabiz 5/31/2005 for Indian projections

6 Performance: Generics Outpace Big Pharma Global generics market grew at 17% CAGR in the 5 years prior to 2004, greater than growth rate for branded pharma products Big pharmas top line growth anemic (Bear Stearns), with TRxs declining 3.9% in Oct 2005, excluding generics and older products Generics outpacing big pharma earnings performance Pressure to increase development productivity while reducing time to market & to reduce costs at big pharma Sources: IMS, Lehman Brothers, Bear Stearns

7 Generics Outperforming Big Pharma Source: Lehman Brothers 7/2005 Diluted EPS Growth from Continuing Operations 3 Yr. CAGR 5 Yr. CAGR US Generic Performance 25.5%39.2% US Brand Performance -12.1%-6.0% European Brand Performance 6.3%13.6% US Generic Outperformance vs. US Brand 37.7%45.3% US Generic Outperformance vs. Euro Brand19.3%25.7%

8 Now, Lets Look Further at the Issues

9 Pharma Sector Cycle Long Term: Fewer New Launches, Slower Growth Slowing US and global market growth US market growth +6% a year vs. +10% a year global market growth +6.5% a year vs. +10% a year % fewer new products New product launches estimated to average 45 a year vs. 54 a year from Fewer products available to generics Less API capacity needed by big pharma Further consolidation Continued API capacity shift to generics Source: Lehman PharmaPipelines : 2004, IMS 10 Year+ Forecast

10 Source: Lehman PharmaPipelines TM 2004 US Cycle: Growing $ Losing Exclusivity , Modest Slowdown

11 Growth in Indian Industry Ranbaxy now 9th largest generic, the 1 st Indian based truly global company Indian drug production US$7.5 billion, representing 8% of world production by volume & 1.5% by value in 2004 Indias exports US$ 3bb in 2004, 22.9% CAGR Indian API business ~US$1bb in 2005, with over 400 APIs claimed to be manufactured E&Y ranks Indias pharma market 4 th in volume & 13 th in domestic consumption value Source: Ranbaxy corporate presentation, G S Sandhu, Joint Secretary, Indian Dept of Chemicals and Petrochemicals, reported in Pharmabiz 5/31/2005, Pharmabiz China, India Emerge…. 12/22/2005

12 Growing Competition to Supply EU, US Indian companies targeting US and EU China often in the Indian supply chain Few private Chinese companies ~3-5 yrs behind Growing numbers of new Indian companies attempting to sell lower cost APIs and FDF products to US customers US customers are using offers to negotiate better prices, mostly from their major generic suppliers of FDF, & must seek lower API prices to stay competitive Margins pressured thruout supply chain New entrants gain little FDF market share Increasing FDF outsourcing Result

13 Big Pharma Response to Generics: Increased Outsourcing & CRAMS Indian & Chinese API/intermediate mfrs beneficiaries Traditional US/EU contract mfrs at risk Greater long term threat to traditional contract mfrs from R&D collaborations in India Ranbaxy NCE/NME research collaboration - GSK DRL emphasis now on NCE/NME research Indian companies with NCE/NME efforts will manufacture any successful products Some of the Indian companies focusing on CRAMS may de-emphasize APIs for generics

14 US: Low Prices Expected but Do Not Win the Business Generic manufacturers needs to differentiate themselves to the drug retailers by consistency of product and supply, distribution and logistics, capabilities and the pipeline of future products. Price is not usually a significant negotiating tool, as most generics are multi-sourced and priced similarly. -Dennis ODell, SVP Pharmacy Services, Walgreen, comments on conference call hosted by Rich Silver and Meredith Alder, Lehman Brothers NY with George Barrett & Bill Marth of Teva. Dec. 9, 2004

15 Large increase in DMFs submitted & cited in ANDAs. Includes alliance products. No Indian companies other than Ranbaxy and to a lesser extent DRL and Sun/Caraco are yet getting meaningful direct FDF market share in the US FDF generics market Alliance products hard to measure: FDF market share under US partners name 72 Indians have active US DMFs Cipla, DRL, Ranbaxy, Matrix, Sun, Wockhardt, Lupin each have more than 25 active DMFs: the pressure is on APIs US: Increased Competition from India, Little Movement in FDF Market Share Trend

16 Reviewed DMFs Received by FDA: 45% from India 2004 vs <5% 1999 Source: Paul Schwartz, Ph.D., FDA OGD, GPhA API Conference 3/15/2005 Source: Source: Paul Schwartz, Ph.D., FDA OGD, GPhA API Conference 3/15/2005

17 More Indian DMFs Cited in ANDAs Source: FDA Office of Generic Drugs, 8/2005 Many DMFs cited multiple times in multiple ANDAs Some ANDAs citing Indian DMFs support FDF products via partnerships

18 More ANDAs Cite Indian DMFS, More Indian API Plants Inspected by FDA Source: presentation by D. G. Shaw, Secretary General, Indian Pharmaceutical Alliance, 3/2005 FDA only inspects if the DMF is cited in an ANDA Some ANDAs citing Indian DMFs support FDF products via partnerships

19 Dossier buying, lack of API quality oversight *Source: Matt Moran, President, APIC, quoted in SCRIP COS obtainable without an inspection by authorities Dossier buying prevalent. FDF buyers often do not inspect the FDF facility nor the API supplier Many local EU generics companies licensing dossiers do not have the capabilities to evaluate or audit API suppliers API suppliers can be changed easily ~70% of APIs in EU manufactured drugs imported from India and China, up from ~10% in the early 1980s* EU: Lower Standards, Less Oversight Issue

20 What Are the Key Success Factors in Generic Performance in the US? Pipeline Sales & Marketing API Breadth or Niches Speed and Low Costs

21 Generic Performance: Pipeline Strong, growing pipeline of products with competitive advantage Product selection: build pipeline that supports company strategy: blockbuster, niche, specialtyProduct selection: build pipeline that supports company strategy: blockbuster, niche, specialty Focused execution of R&D + BD&L to build pipeline to deliver on time approval and launchFocused execution of R&D + BD&L to build pipeline to deliver on time approval and launch No generic company can sustain major market leadership without high performing, internal R&D & high caliber sourcing of APIsNo generic company can sustain major market leadership without high performing, internal R&D & high caliber sourcing of APIs Attractive pipeline underpins sales of existing productsAttractive pipeline underpins sales of existing products New entrants, without attractive pipeline, have difficulty selling older products, irrespective of costNew entrants, without attractive pipeline, have difficulty selling older products, irrespective of cost

22 Teva Ivax Ranbaxy Par Dr. Reddys Mylan Watson Barr Andrx Sandoz/Eon APP Impax Alpharma 140* 57* ~30 27+? ANDAs Pending 89+* ? Value $Billion 37* 12* 10 Number FTF R&D R&D, Cipla, BD&L R&D BD&L, R&D-Kali R&D Cipla, BD&L R&D, BD&L R&D Cipla,BD&L,IndiaR&D R&D, BD&L BD&L Source Source: Company reports, Lehman Brothers estimates updated 9/05, Q Street assessments; *Teva & Ivax merger impact on respective pipelines unknown US Generic Pipelines

23 Indian Capabilities: Pipeline High quality Indian pharma companies have competitive advantages in R&D to build a pipelineHigh quality Indian pharma companies have competitive advantages in R&D to build a pipeline Speed and high technical skill, including:Speed and high technical skill, including: Development of non infringing processesDevelopment of non infringing processes Difficult formulationsDifficult formulations Lower cost for scientistsLower cost for scientists Generic company core competencies are well developed in leading Indian companiesGeneric company core competencies are well developed in leading Indian companies Rapid, non-infringing development & regulatory submissionRapid, non-infringing development & regulatory submission Low cost, equivalent productsLow cost, equivalent products On time for launch at patent loss of exclusivity (LOE)On time for launch at patent loss of exclusivity (LOE)

24 Issues with Outsourced Pipeline Are generic companies that license FDF products assured of quality, cGMP compliant, FDA inspected API supplies to their FDF supplier?Are generic companies that license FDF products assured of quality, cGMP compliant, FDA inspected API supplies to their FDF supplier? Are generic companies that lack a pipeline auditing their suppliers API suppliers? Are they technically competent to do so?Are generic companies that lack a pipeline auditing their suppliers API suppliers? Are they technically competent to do so? How secure is the supply chain?How secure is the supply chain? How secure is compliance?How secure is compliance? Can the API suppliers be relied on to use non-infringing processes? Are the generic FDF buyers checking?Can the API suppliers be relied on to use non-infringing processes? Are the generic FDF buyers checking?

25 Generic Performance: Sales and Marketing Strong relationships with local customers & deep understanding of and ability to serve customer needsStrong relationships with local customers & deep understanding of and ability to serve customer needs Flawless execution of launch & both inbound and outbound supply chain management in a pure generic marketFlawless execution of launch & both inbound and outbound supply chain management in a pure generic market Large US chainsLarge US chains Wholesalers who do not buy from boutiquesWholesalers who do not buy from boutiques Experience in consistently serving the sophisticated, complex needs of large customers is essentialExperience in consistently serving the sophisticated, complex needs of large customers is essential Delays / misses / API issues are unacceptableDelays / misses / API issues are unacceptable

26 Indian Capabilities: Sales and Marketing Indian companies are still learning what Western generic companies and customers require, except Ranbaxy Experience with major products necessary to supply the big US chains Supports a partnership or API supply model Partnerships have higher costs and less ability to compete against R&D based companies and increased regulatory and quality risk if not done properly Puts further pressure on EU based API suppliers to help their generic customers compete

27 Generic Performance: API Either internal API or strong sourcing partnershipsEither internal API or strong sourcing partnerships Non-infringing of both innovator and IP intensive generics such as Teva, RanbaxyNon-infringing of both innovator and IP intensive generics such as Teva, Ranbaxy Ready early, 7-10 years prior to LOEReady early, 7-10 years prior to LOE Perfect technical package & support for regulatory filings, responses to any deficiency letters in multiple marketsPerfect technical package & support for regulatory filings, responses to any deficiency letters in multiple markets High performing, internal API is a competitive advantage in circumventing or challenging patents, being first to file/first to launch, solving complex technical problemsHigh performing, internal API is a competitive advantage in circumventing or challenging patents, being first to file/first to launch, solving complex technical problems Internal API lowers costsInternal API lowers costs If you need milk, you do not have to buy the cow. If you need a lot of milk, you can buy a cow, but a professional farmer must manage it, not a pharmacistIf you need milk, you do not have to buy the cow. If you need a lot of milk, you can buy a cow, but a professional farmer must manage it, not a pharmacist

28 Indian Capabilities: API Indian companies entering the regulated markets all have internal API manufacturing and development capabilities Experienced Indian companies such as Cipla, Ranbaxy, DRL have sophisticated sourcing and supply chain management for APIs, including China and are world class in quality and API supply chain management US or EU generic companies without API capabilities almost have to source from India, and understand the cow, in order to compete

29 Chinese Capabilities: API China is 3-7 years behind India in dose form readiness to enter regulated markets but has fast growing API capabilities and is increasing API sales rapidly Indian generic companies forward integration into FDF pushes API demand to China China is a supplier of intermediates to India, helping India to compete by cutting costs China is an emerging force in API direct sales to regulated markets, especially in simpler, older molecules + fermentation

30 EU Capabilities: API Traditional EU API manufacturers have relationships, regulatory experience and market understanding Track record of non infringement Companies with sophisticated sourcing and supply chain management for intermediates, including sourcing from China or India, have an advantage in costs Need to lower costs, including rapid development of non- infringing processes very early, which supports business combinations involving EU and Indian / Chinese companies

31 Generic Performance: Low Costs Assumed part of the generic business modelAssumed part of the generic business model Less important and overrated as a competitive advantageLess important and overrated as a competitive advantage Companies with high costs cannot compete but companies with lower costs cannot compete on lower costs aloneCompanies with high costs cannot compete but companies with lower costs cannot compete on lower costs alone

32 Chinese Capabilities: Low Costs China is usually cheaper than India so where capabilities exist or regulatory not essential, China is often the lowest cost producer for 3 rd parties China has low cost and high caliber scientific and technical personnel but much less experience than India in regulatory compliance and business/supply chain mgmt Communications with China are more of an issue and having an experienced person who speaks Chinese is still important China is moving up the value chain and will increase cost base as it follows India in investing in infrastructure and software related to compliance

33 Generics: Speed is Essential Within 4 weeks, GSK had lost 65% of total Paxil scripts Generic price at 40-50% for the 1 st 40 weeks At generic entry, Paxil was $2.3 billion (US) Even after deep discounts, a MASSIVE upside for generics Its Better to be First than it is to be Better Rapid generic price erosion +180 daysRapid generic price erosion +180 days May lead to sourcing shortcuts in rush to be FTF; requires fixing prior to launchMay lead to sourcing shortcuts in rush to be FTF; requires fixing prior to launch Slide elements courtesy of Mike Kopp, CardinalHealth

34 Typical Generic Development Cycle: SOD Brand Produc t File DMF FileANDA FilePatentCert Valida tion & Appro val Prep ANDAApproval Pate nt Revi ew Sou rcing Pre- Form For m & Pilo t Bio Stab ility PK Study PortfolioReview 9 mo. 2 mo mo. 12 mo. 5 mo mo. Outside Counsel API Suppliers Business Dev KeyInfluences API Suppliers API suppliers wield significant power…Early API selection 5-7 years before loss of exclusivity API supplier critical to potential FTF/Para IV Sufficient quantities for development API Suppliers CRO Slide courtesy of Mike Kopp, CardinalHealth

35 Increased Partnership, Especially with India Maximizes competitive advantage of US/EU companys sales, supply chain management & distributionMaximizes competitive advantage of US/EU companys sales, supply chain management & distribution Maximizes Indian competitive advantage in API R&D, non-infringing process development and lost cost manufacturingMaximizes Indian competitive advantage in API R&D, non-infringing process development and lost cost manufacturing Are western generic companies with poor R&D licensing FDF from India adding value for their customers?Are western generic companies with poor R&D licensing FDF from India adding value for their customers? Are they increasing regulatory risk?Are they increasing regulatory risk?

36 In Generic Pharma, Size Matters Large, sophisticated companies with R&D and API have advantages in delivering the pipelines and serving large chains and wholesalers Increasing M&A by leading Indian and other overseas companies positioning themselves for the US and EU markets Licensing and M&A in attempt to compete with Teva Broad product line and sophisticated supply chain management and a track record required to sell to major chains and wholesalers in the US: mandates performance on all KSFs More M&A, but new entrants more likely to take their places in the supply chain Tide Shifting

37 Target blockbusters at patent-expiry Large volume SODs, easy to source Internal R&D Slow brand market/profit erosion over mo Most API sourced from Europe Spain, Italy, Hungary, Germany Indian & Chinese API considered low cost / dubious quality Most generic launches at patent-exp Old Model Brand & Generic Business Models Changing Differentiated product strategies Increased focus on niche specialties Trend for BD&L to fill in/expand pipeline short term, especially with FDF Very rapid brand market & profit erosion Generic expansion into brands via NCE/NME development & licensing Consolidation and dominance by largest companies increasing US: Teva, Mylan, Watson, Sandoz API space dominated by Indian/Chinese Significant % of Paragraph IV filings Todays Model Sources: Q Street Advisors

38 Changes Impacting API Initiatives Both brand and generic sectors changing API sourcing Increasing sourcing from India & moves into China by companies that are new to global sourcing and may or may not have regulatory and quality capabilities to insure compliance and quality Many new API manufactures lack a track record of cGMP compliance More APIs from India, China. More FDF imports, especially from India. Customers exploring going direct. Where are the opportunities for EU mfrs? Response

39 EU API Manufacturer Opportunities Alliances with generics companies that lack internal API Become their R&D pipeline developer Position for future acquisition by a generic partner Independent partner of choice APIs may become trickier to source as quality Indian companies forward integrate, while still early for China Become an independent alternative to Teva & Sandoz APIs for their generic competitors Niche products for major generics with internal API who cannot make 100% of their needs Alliance with Indian manufacturer with high caliber, lower cost scientific talent & development capabilities

40 Generic Sector Predictions Long term growth prospects vary among Western & Indian generic companies, based on R&D pipelinesLong term growth prospects vary among Western & Indian generic companies, based on R&D pipelines Companies with fewer capabilities for building pipelineCompanies with fewer capabilities for building pipeline More likely to need M&A, including acquisitions of high caliber API mfrs with pipelines, low cost scientific talent, strong regulatory capabilities & non infringing process developmentMore likely to need M&A, including acquisitions of high caliber API mfrs with pipelines, low cost scientific talent, strong regulatory capabilities & non infringing process development Companies lacking internal API must form alliances with strong API mfrs or license in FDF/dossiersCompanies lacking internal API must form alliances with strong API mfrs or license in FDF/dossiers Alliances must be based on information sharing and trust and provide access to early, low cost development capabilitiesAlliances must be based on information sharing and trust and provide access to early, low cost development capabilities API manufacturers without both tight customer and India/China supply alliances, attractive forward pipelines and access to low cost scientific talent will not thriveAPI manufacturers without both tight customer and India/China supply alliances, attractive forward pipelines and access to low cost scientific talent will not thrive

41 Thank you. Jean Hoffman President Q Street Advisors, Inc. 120 Exchange Street Portland, ME USA tel.: Fax:


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