'Old guard' generics players yield U.S. lead to Indian up-and-comers

The U.S. generics world has changed.

Starting from around late 2018 to early 2019, traditional generics bigwigs Teva, Mylan, Novartis' Sandoz, Amneal and Endo have lost out to a group of six competitors that include Indian drugmakers Aurobindo Pharma, Lupin, Dr. Reddy’s, Sun Pharma, Cipla and Canada’s Apotex in terms of weekly total prescriptions, Evercore ISI analyst Umer Raffat recently noted.

Within two years, what used to be a 12 million prescription advantage the "old guard" held has been overturned, and the "next six" now boast a lead of about 2 million as of the end of March.

"Of course, this is just aggregate TRx—it doesn’t reflect the high-value and complex launches, which is effectively where all the ‘old guard’ are positioning themselves for," Raffat wrote in a recent note to clients.

Indeed, amid increased pricing pressure and competition in the generic arena, higher-margin complex generics and biosimilars have lately been put at the top of the growth agenda at Teva, Mylan and Sandoz, the top 3 U.S. generics players by total prescriptions in 2017.

"The old idea of ‘first in, last out’ or just waiting out lower-priced competitors until they give up and exit has died," Wells Fargo analyst David Maris observed in an email interview with FiercePharma. "Companies are no longer trying to drive as much volume as possible, but rather are focused on the margin of those sales."

Heavy investments in the development of complex generics may have happened earlier, but the three companies started publicly—and repeatedly—talking about it around 2018 when they realized that the U.S. pricing clampdown wasn’t going away anytime soon.

In contrast to Teva CEO Kåre Schultz’s recent comment that the "classical negative death spiral of pricing" in the U.S. generics market has ended, Maris said the negative generic drug pricing environment might have not bottomed out yet.

"While the pricing environment appears to be getting slightly better—from horrible to simply bad—it is still not back to what it was a few years earlier. That is, declines of 10% to 12% are the norm now, vs. the 5% to 7% declines seen historically," he said. As a possible indication, after some other analysts upgraded Teva's shares in February, the company’s stock has actually slid by about 25%.

Schultz took over struggling Teva in late 2017. Within that year, Teva’s total generics prescriptions didn’t really change much, according to Evercore’s data, and the segment’s revenues of $12.3 billion was 10% higher in local currencies compared with 2016. Profit, however, dropped 15% "mainly due to price erosion in the U.S. generics market," the Israeli company said at the time.

In its 2017 annual report presented in February 2018, the company said its focus was "on developing complex formulations with complex technologies, which have higher barriers to entry."

Mylan CEO Heather Bresch also used an investor day in April 2018 to tout the company’s efforts in hard-to-copy drugs. And in the company’s annual report for that year, Mylan said its allocation of R&D investment has "shifted away from commodity products, such as conventional oral solid dosage forms, to more complex or difficult-to-formulate products, such as biosimilars."

Just as its U.S. generics prescriptions gradually declined—from the weekly amount of around 6 million in March 2017 to half of that in 2019—Mylan launched its generic version of Teva’s Copaxone in October 2017, and in January, it received FDA approval of Wixela Inhub, the first generic of GlaxoSmithKline’s inhaler Advair Diskus, a hard-to-copy drug-device combo that hadn’t seen any knockoff for a long time after patent expiration.

"Teva and Mylan have stated that they want to focus on profitability right now, and market share at the expense of margin is no longer a sound strategy," said Maris, who covers both companies.

Novartis’ Sandoz embarked on a similar journey after Vas Narasimhan took over the CEO job in early 2018. Later that year, the company sold its declining U.S. dermatology and oral solids businesses to Aurobindo in a deal worth up to $1 billion. And it just recently rolled out Symjepi, an epinephrine injection that could challenge Mylan’s authorized generic EpiPen and Teva’s copycat.

Maris said the shift in the U.S. generics market has also to do with those companies that "are coming into established markets and some with lower cost structures or a greater comfort with lower margins and are simply winning business."

But that doesn’t mean Indian companies are content with simple chemicals—there’s a clear trend that Indian pharmas are also moving to high-end products.

"Generally speaking, we have long said that the evolution of the market would be for traditional low-cost manufacturers to move up the value chain and take share, forcing the old guard to re-evaluate their business models," Maris said.

Aurobindo, in its annual report for the 2017–18 fiscal year that ended last March, said one of its key priorities in the coming years is "building a robust pipeline of complex molecules," and that its R&D initiatives range from conventional orals to injectable products and to more complex and advanced dosage forms as well. Aurobindo is currently the second-largest generics supplier by prescriptions, and it’s quickly catching up with Teva.

Lupin, which took over the No. 3 spot in terms of weekly U.S. generics prescriptions, has also suffered from sharp profit declines lately. And its plan to channel the pricing pressure? Complex generics and specialty pharma, CEO Vinita Gupta told FiercePharma in an interview last year.

While maintaining its presence in low-cost generics, the company is also investing heavily in high-barrier drugs. Last June, Lupin formed a partnership with Mylan on a biosimilar to Amgen's Enbrel. And just a few weeks ago, that product was cleared by Japanese authorities.

Overall, Maris said the "old guard" firms are filing as many U.S. generic applications as before, but they're being more careful about which ones they launch. Evercore’s Raffat echoed that point, saying that companies these days don’t always choose to launch generics even though they are receiving approvals at a similar or greater pace.

Generics have hit "a natural ceiling of penetration," as they now account for about 90% of all U.S. prescriptions, Maris said. Still, the prescription decline seen among the "old guard" didn’t quite account for the increase in those "next six" identified by Raffat. Maris attributed that to a more fragmented market. And while Sandoz, Teva and Mylan are not yet replaceable, others are coming up strong and capturing growth often at lower prices, he said.

"[I]t is a brave new world for drug companies—branded and generics alike—facing new challenges to pricing and competition," Maris said.

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