Threats and Opportunities for the Generic IndustryKATE KUHRT

JUNE 2006

AT FIRST GLANCE, MANY OPPORTUNITIES

• Increasing demand for low-cost therapies

– Aging population

– Consumers becoming more cost sensitive

– Increased generic substitution

– Government involvement• US Medicare Drug

reimbursement

• Reference pricing in Europe

Less

Dev

Wor

ldM

ore

Dev

1950 1975 2000 2025 2050

0

10

20

30

40

Perc

ent

of

Popula

tion o

ver

60

Source: United Nations, DESA, Population Division

Proportion of Population Aged 60 or Over

GENERIC OPPORTUNITIES IN THE U.S.

• Products with $100B in branded drug sales are coming off patent in the next 7 years

• Patent challenges by generic companies

Top 5Sales

2006 2007 2008 2009 2010 2011 2012

20.1

12.4

15.2

10.5

18.4

10.0

12.3

0

5

10

15

20

25

Sal

es B

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US

D

0

10

20

30

40

Num

ber

of

dru

gs

com

ing o

ffpat

ent

(New

por

t C

onst

rain

t D

ate)

Source: Newport Strategies’ Horizon Global system

A CLOSER LOOK…

• Rapid price erosion in the U.S. and UK

• Diminishing margins on both dose and API sales

• New regulations in Germany (AVWG)

• Settlements between generics and brand companies are delaying generic entry in the U.S.

• ANDA approval backlog in the U.S.

• Fewer new launches by innovators over the past years will translate into fewer opportunities for generics down the road

5-10% of $100 billion over 7 years, divided among many players and products, does not necessarily translate into a lot of money for

every generic company

DOWNWARD PRESSURE ON DOSE PRICES

• Demand– Purchasers focus on price

– Past relationships matter less

– Reverse auctions

• Supply– Generic filings and approvals at all-

time high

– A number of new entrants, many from India, often with access to low- cost APIs

– Overcapacity in manufacturing

– Focus on market share rather than bottom line

– Authorized generics in the U.S.

Indianapprovals

2000 2001 2002 2003 2004 2005

232 241

296 284

320

361

0

100

200

300

400

Offi

ce o

f G

ener

icD

rugs

(OG

D)

appro

vals

Source: Newport Strategies’ Horizon Global system

U.S. ANDA Approvals

DOWNWARD PRESSURE ON API PRICES

• Demand– Dose manufacturers focus on price

– Past relationships matter less

– Willingness to take the risk and go with less-known API sources

• Supply– Overcapacity in manufacturing

– Record number of DMF filings

– Availability of low-cost APIs from India and China

• (Too?) many plants FDA approved

• Many companies hold COSSource: Newport Strategies’ Horizon Global system

Number of U.S. DMFs

Indian DMF's

2001 2002 2003 2004 2005

580639

772

900

992

0

200

400

600

800

1,000

Num

ber

of

DM

Fs

COPING STRATEGIES

• Consolidation

• Geographic diversification

• Backward integration into API

• Sourcing from India, China, and other low-cost countries

• Alliances with companies in low-cost countries

• Moving manufacturing to low-cost countries

• Focus on niche products

COPING STRATEGIES: CONSOLIDATION

• Likely to see a period of consolidation in pursuit of

– Top-line growth

– Opportunities in new markets

– Synergies

• Result: Industry will likely be dominated by a handful of global players plus many small players

• Barr’s rumored $2.1B acquisition of Pliva

– Biogenerics

• 2005 deal to develop a generic version of Amgen Inc.'s Neupogen

– New dose forms

– Presence in emerging markets

– API

COPING STRATEGIES: CONSOLIDATION

COPING STRATEGIES: GEOGRAPHIC DIVERSIFICATION• Opportunities in Europe

– Counterweight to the U.S. generics market

• DRL-Betapharm, Matrix-Docpharma, Ranbaxy-Terapia

– Competition among Indian companies driving up prices of companies

– Commoditization of German generic market?

• Japan

– Merck KgaA in Japan since 1998

– In November 2005, Ranbaxy increased equity stake in JV with Nippon from 10% to 50%

– In March 2006, Teva applied for approval to sell drugs in the Japanese market

– Dr. Reddy's considering setting up an office in Tokyo or Osaka by the end of next March

COPING STRATEGIES: BACKWARD INTEGRATION INTO API• Recent example: Watson - Sekhsaria

• Pros

– More control over cost and access to API

• Decreasing number of established API manufacturers still independent

– Different parts of the value chain may make money in different products

• Cons

– No one plant can make all APIs required by a typical generic

– Making just enough for captive use often not economical

– Other dose companies wary of buying API from a competitor

COPING STRATEGIES: MOVING MANUFACTURING AND R&D TO LOWER-COST COUNTRIES• Applies to both API and dose manufacturing

• Recent example: Watson– Acquired from DRL a small solid oral dose plant in Goa

– Increased investment in an FDA-approved Chinese/Taiwanese API manufacturer

• Sandoz – multiple units in India

• Teva – scientists in Faridabad, acquired Regent Drugs (JK)

• Apotex – manufacturing and R&D facilities in Bangalore

• Ratiopharm – R&D center in Goa

• Stada– “Complementation of existing Group-owned production sites in GER, NL,

and IRL by production sites in “Low Cost Countries” Russia, Vietnam (50:50 JV) and China (currently only local orientation)” (Stada Corporate Presentation 2006)

COPING STRATEGIES: ALLIANCES WITH INDIAN COMPANIES

• Zydus Cadila– Distribution agreement with Mallinckrodt

– 50/50 JV with Mayne for cytotoxic dose and APIs

• Glenmark– Development and supply agreement with KV for 8 ANDAs

– Agreement with Invagen for 7 products

– Deal with Konec for nitroglycerin and with Interpharm for naproxen

• Lupin– Injectable ceph generics with Baxter

– Oral ceph generics with Watson

COPING STRATEGIES: SOURCING FROM INDIA & CHINA• Many highly qualified API sources in India and China

• India– 68 FDA-inspected API manufacturing sites

– 33 FDA inspections in FY2005 (20 API, 7 Dose, 3 API/Dose, 3 Labs)

• 22 NAI (no action), 11 VAI (voluntary action), 0 OAI (official action)

• China– 69 FDA-inspected API manufacturing sites

– 15 FDA inspections in FY2005 (14 API, 1 repacker)

• 6 NAI, 9 VAI, 0 OAI

• Are FDA inspections in India and China less stringent?

• Generic companies’ willingness to use second- or third-tier API manufacturers is particularly damaging to Italian API manufacturers

COPING STRATEGIES: SOURCING FROM INDIA & CHINA

Source: Newport Strategies Horizon Global ™

ROW

Italy

China

India

Established Less Established Potential Future Local

157 182 195 1,059

0

20

40

60

80

100%

# o

f A

PI m

anufa

cture

rs

COPING STRATEGIES: FOCUS ON NICHE PRODUCTS

• Products with small sales no longer count as “niche”– Even $20M products attracting a lot of interest

• Margins in difficult formulations likely to remain higher– Inhaled products, certain injectables

• Biogenerics– Teva, Sandoz, Pliva

FUTURE

• Will focus on price backfire?

• Is the number of suppliers going to decrease enough to give the remaining players more negotiating power?

• What will be the impact of generic entries from China?

THANK YOU!

Kate Kuhrt

Director, Generics and API Intelligence

Thomson Reuters

215 Commercial Street

Portland, Maine 04101

USA

+ 1 (207) 871-9700 x26

kate.kuhrt@thomsonreuters.com