Tuesday, November 6, 2012

How 2012, the year of patent cliff has transformed the pharma industry

2012 was a bonanza for the patients and generic pharma industry as many innovation driven pharma companies went through the pain of losing the largest of their blockbusters to generic competition.

This patent cliff of 2012 has transformed the pharma companies and the way they are looking to build their business going forward. Both Innovators and generic companies are realizing the pressures. Innovators are under the pressure of sustaining the current revenue base, while the generic companies are facing a pressure of how to sustain growth beyond the patent cliff.

For the large pharma innovators limited success from R&D, and pricing pressures  have made them realize the  need of building a  business model that will sustain the pricing and innovations pressures.  

Efficiency and risk averse approach which used to be the mantra of Generic companies is now the mantra of innovators

Traditionally, whether it is operational or capital efficiencies, generic companies have been the champions, while innovator business model had loads of inefficiencies. 

In order to make up for the diminishing returns on R&D, besides operational efficiencies (cutting R&D spend), large pharma is also looking to build capital efficiency. They are adding more debt to their capital structure and looking at leveraged acquisitions to drive shareholder value. Until 2007, Innovator pharma companies,  used to have loads of cash lying idle on their balance sheet. But if you look at them now, they are all in net debt. They now look at debt as a permanent part of their capital structure. With a geared balance sheet, innovators are not ready to take up more business risks. A case in point is Amylin acquisition, wherein BMY and AZN paired up for the buyout, with a view to cut the downside risk in case of failure and also reduce the potential incremental investment that would have been required to scale the business

On the other hand  generic companies which used to be traditionally  debt laden are now cash rich, and this is especially true with the Indian generic companies. These companies have reaped a harvest out of the patent cliff and are now looking for further growth. Sun Pharma has net cash in excess of  $1billion  on its balance sheet. Biocon another Indian generic company has close to $200million in cash (about 5% of its M. cap). With financial risk significantly out of their business, they now have an appetite for taking more of innovation risk. Biocon is trying its hand on developing novel molecules including oral insulin.

Innovators are looking at the branded generic market for growth, while Generic companies are looking to move up the value chain for further growth
Innovators who used to shy away from generic business, have started finding them attractive and see them as an essential component of their overall business. They understand that they need to have a large portfolio with moderately priced products that serves the need of a larger patient population versus premium priced products indicated for use in smaller markets. They understand that Innovation risk has to be  hedged by presence in Generics.  
As a result large pharmas are acquiring and forming alliances with generic companies to make inroads in the growing emerging markets. Abbott acquired Piramal at a whooping 9x sales and approximately 30x EBITDA for getting a foothold in the Indian generic market growing at mid to high teens.  AstraZeneca made an alliance with Torrent, Pfizer with Strides for supply of generic products to build a branded generic business in emerging markets. 

Generic companies are looking to take some innovation risk
The growth opportunities seem to be drying for generic companies.The US market which was traditional growth driver for generic companies is expected to slow down for the next couple of years, as value of brands losing exclusivity will decline over the next few year.  Also with the implementation of TRIPS, the pharma product basket for generic companies is limited to molecules approved prior to 2005 and we are seeing increased competition chasing the same product basket.  Even Multinational pharma innovator companies have also set up their generic divisions and are launching branded generic version, adding to the competition. 

It would be interesting to see how this transformation and evolution would unfold value for the end user - the patients.

Enter your email address:

Delivered by FeedBurner

No comments:

Post a Comment