The recent news that Novartis is closing its Colorado-based generics manufacturing facility brought back a few memories.
A company spokesperson blamed “above-average pricing pressure“. The products were described as “oral…for a variety of conditions…expensive to make…and no longer competitive.
Medicare Part D studies clearly show generic price deflation is quite real, even when some generic products experiencing massive price increases. According to the GAO,
Overall, prices declined by 59 percent…from the first quarter of 2010 through the second quarter of 2015.
Novartis/Sandoz is not the only company experiencing such pressures.
Earlier this year. Teva announced the sale or closure of 15 manufacturing plants around the world, resulting in thousands of lost jobs.
Ten to fifteen years ago, acquiring and building generics businesses were the business models du jour for some big pharma companies.
For example, Pfizer acquired Greenstone through its 2003 acquisition of Pharmacia.
In 1996, Ciba-Geigy merged with Sandoz, resulting in Novartis. Then, in 2003, Novartis consolidated all of its generics business under a revived Sandoz corporate brand.
And so on.
Yet, the pressure on physicians and patients to use generics has never been greater…anything to avoid expensive brands, some with minimal incremental therapeutic benefit.
So, what happened?
Pharmacy chains, wholesalers, and PBMs have been merging and/or forming massive buying groups with incredible buying power. For example, Express Scripts is part of the Walgreens Boots Alliance, a group purchasing organization. Other examples include the CVS partnership with Cardinal Health, and the Walmart / McKesson partnership.
Plain Ol’ Economics
Increased buyer power pressures suppliers to compete against each other on price for commodity products. That’s classic Porterian Five Forces at work here.
The FDA is taking steps to accelerate the processing of filed ANDAs. For 2018, we could be looking at ANDA review times of 10 months, and 8 months for priority reviews, and amazing improvement for a process which used to take 2 years.
This is not a business for the feint of heart. It requires operational excellence and efficiency, a global presence, scale, and ruthless willingness to add and remove products in response to ever-changing market dynamics.
In a sense, the generics industry has always been this way. But changing customer and regulatory dynamics have definitely caused a shift in who survives in this industry. The move by some generic companies towards higher-margin products, especially biosimilars, makes complete sense in light of these dynamics.
Where Do We Go From Here?
It seems to us that the generic industry is bifurcating.
Traditional players with the scale and operational / manufacturing excellence will continue to success by competing on price, customer service, and continuous portfolio evaluation and re-evaluation.
Others have tried (with mixed success) to evolve and develop a branded generics / branded business, in an attempt to capture greater margins.
Pursuing biosimilars is essentially the same idea, but with a whole host of development and manufacturing complexities, which will inherently limit the number of companies who pursue this product model.