Global Generics

In terms of pricing, I think the most relevant point that we can discuss right now is the situation in the US market. So since 2019, during the Trump mandate, there started to be some pressure on pricing for some generics in the United States. This process has been moving forward over the last year, and right now, there is a complicated situation for many companies because they were used to having a certain level of profitability with the products, which is not happening anymore. So what before was a profitable market with certain generics, they are not anymore, and we see companies trying to find differentiated assets.

Then we will talk a little bit more regarding differentiation and how we can access differentiated registrations in the United States and Europe. This is regarding price in the United States. In Europe, the prices have been much more stable. The regulation, it’s harder in Europe than in the United States, so the prices are staying in the same direction. The only problem that we have now regarding the prices is the cost. Cost of transportation has increased, the cost of raw materials, the cost of energy. So all these things are putting pressure on reducing the cap for profitability in the European market, not only in the European market, but I think for Europe, this is the most relevant point.

In terms of supply chain, we also need to go back some years ago when the COVID situation started. And the COVID proved how weak the overall international supply of products is, how dependent of certain regions, the whole pharmaceutical industry, maybe not for finished form only, but mostly for APIs (active pharmaceutical ingredients), for intermediates, some of which can only be produced in certain areas where the overall cost structure is much lower. Underdeveloped and developing countries have been the main engine for the generic industry the last 30 years. But when the COVID happened, then we realised how we got our supply structure, and how the robustness much depended on the importation from third-world countries.

Since that point, things are changing and shifting. There is the process of relocalisation of the production of the pharmaceutical industry. It’s easier to do this in the single-dosage form because the single-dosage form, it doesn’t generate as many residues as the API, but for the API, this is much more problematic because not everything can be brought back to Europe or United States.

There are, in my opinion, two main factors that we need to think about when we’re talking about returning the production of API to Europe or United States. The first one is the environmental. There are many products that the residues and the level of contamination, of pollution that this generates are not acceptable anymore. This means that if we want to bring back these products, we need to bring them with an added technology, something that will make the production process less aggressive in terms of pollution, less residues, but when you do this you are increasing the cost of the product.

So if we’re in a situation where everything is increasing, then maybe this process that I’m saying, which is including more technology for the return of certain production, is not going to be that easy to do. In this field, I would say that a good example to look at is called a continuous laminar flow. This means a circular API production doing 24 hours in a closed circuit for certain molecules, mostly molecules related to big volumes. And this is interesting. I think, here, there is room, and I know already several companies in Europe that are starting this project.

There are not that many projects, so there’s still a lot of things to validate in order to understand if this is feasible or not, but theoretically, well, theoretically, it looks like some companies are moving forward in this direction. This is the first issue that we have when we want to bring back the production to Europe for APIs, which is the environmental reason.

The second one is pure pricing. Not all the APIs can accept the cost of a European structure. So things here are more expensive, so everything is a bit more expensive. So there will be some products that they can accept this increase from the cost of the API. Other ones, they cannot. We also have to think that the pressure on the overall industry of generics in the last 25 years has been extreme. It’s to a point where for nearly 20% to 30% of the total pharmaceutical products, especially generics, the cost of API is so little that it could be negligible. So we know there is API because it’s part of the final formulation or it is the main active ingredient, but for the overall cost in the final product it’s so little that it can be negligible.

In these kinds of products, we do have room to bring them back with a local production, which can be in Europe, in United States. So, this is the current situation where we are shifting to a relocalisation, but not everything is going to be possible. The same story for the American market. The American market, until the last year since this price pressure started, it was very easy to make business there because you just needed to multiply the price several times and you would sell it because this was the acceptable level of profitability. Everybody had a huge profitability. Now, this is not happening anymore.

It doesn’t mean that the American market is not an attractive market for generics because we’re speaking about the biggest market in the world, pharmaceutical and health market, but it is true that we need to be much sharper when it comes to deciding which products are we going to work with. There’s still a varied market and not all products are suffering from the same level of competitivity. And this is the effort that international and American companies need from now on. It’s not that the American market is not a good market, but you need to be much sharper when it comes to deciding which product is going to be interesting for the market.

The first effect that happened in the United States, and this I would like to relate to the regulatory strategy, was a shift from the regular generic registrations to a special type of registration for differentiated generics, which is called 505(b)(2) procedure. This procedure allows a developer of a generic product that has implemented an improvement, that can be in the formulation, it can be different dosage, so there are different elements that you can take into consideration in order to apply for a 505(b)(2) registration.

And this procedure, what it does, by the way, the average cost for these fees, they are not the typical one for a generic, they are nearly around $1.5 million to register a 505(b)(2). But the necessity of the market has been so strong to start working with different safety products that, the last year, nearly 60% of the overall registration at the FDA were based on 505(b)(2) regulatory procedures, which I think can give an idea of where the market is going. But now, what’s happening is that there is an overcrowding of 505(b)(2) registration. This means that now everything in the United States seems to be differentiated. And of course, this is also impacting the profitability of these kind of products because everybody’s trying to bring something different.

Then another thing that I think is relevant to understand how the future looks for this kind of product, is there going to be a flexibility on the pricing, especially in Europe. In United States, some prices can be a little bit more flexible thanks to the 505(b)(2). But in Europe we do not have this process. So initially when I started making assumptions from years ago on what could happen in the future regarding the approvals and the market, then I thought that maybe the European regulatory agency would start implementing some kind of a price flexibility. Like for example, the German AOK tenders, they have already approved that to increase the level of sourcing from Europe in order to make it, I think at least 50% should come from Europe.

But this is only for the AOK. Okay, it is a very, very big tender market. But the rest of the regulation, I don’t think it’s going to change. And that’s why I wanted to start this point, because I think that now that we have the outgrowth of the biosimilar market, which is already growing, I don’t think the European agency or any other agency will have any interest on centralising prices for generics, when actually what they’re looking for is to generate the size, the biosimilars in order to generate this structure of companies competing with each other.

The prices for the biosimilars can be reduced as much as possible. So I don’t see a double situation when from one side they try to flex the prices for generic products and at the same time they’re generating more restrictions for the biosimilars. This could be a contradiction. So I don’t think anything is going to happen. Maybe at a local scale tender like the AOK, so this is something that is already happening and could be replicated, but we don’t know this 100%.

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Well, in general, anything that has relevant sales around the world is sensitive, any pharmaceutical entity is sensitive to having a generic competitor. So most of the time I see very few cases where there is not a generic entity for a certain molecule. But I think this is the main work to be done. In Europe, this work has already been very efficient. When we talk about how many companies are competing and the level of pricing, if we look at certain sales areas in Europe, like for example the German tenders, Dutch tenders, Italian hospital tenders, they have extremely low prices. We are already very, very competitive. But these KPIs need to start being implemented in United States because they are the ones, this is the market that has been changing the most the last year. So we have the reduction of the prices for the generics.

We have an overcrowding of 505(b)(2) expressions in the market. One thing that wasn’t common before, and I think it’s very relevant and why 505(b)(2) is so interesting in terms of pricing. And the reason is because when you register a product like a generic in the United States, you have a limited price. You get into the reimbursement price list and you are given a maximum price that you can offer to your customer, and from there you need to negotiate. But when you register a 505(b)(2), because it’s a differentiated asset, and the idea of the FDA is to say, “Look, so this company has invested money in order to deliver a better product for the patient.” Maybe it’s cost free, maybe it’s not injectable, it’s intranasal. So things like this have an advantage and the FDA is happy to bring this new technology or these new applications or this kind of improvement to the market.

So in return for this investment and in return of the huge licenses, either huge regulatory fees, remember $1.5 million, in return, you do not have a cap for your price. So you can attain the market and position your product according to the value that you are offering to the market. You don’t have a price restriction, but you can compete openly in the market. This means that you can, if your product is very, very good, you can get a better price. The problem is that during the last month, it seems like it’s much more difficult to be successful in this area. You really need to make something very differentiated because the hospitals or practitioners, they may choose one product or the other regarding the price difference. So if you’re offering an advantage, but your price is so much higher there will be some resilience in order to take your product.

Another thing is that the pressure on the pricing on generics is also making this gap between the generic and the differentiated generic much higher. So really now your value proposal in order to sell your much more expensive product, needs to be very strong, much stronger in order to be successful in the American market.

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I think it’s interesting that at this point when we talk about the global impact of these pricing policies and this price reduction, I think one of the most important effects is regarding the Chinese companies. I also want to take this time to explain how bad the situation is that Sandoz wanted to divest their whole generic division biosimilars to Aurobindo. This was in 2019 I think. And at the end, the antitrust American organisation, they decided that Aurobindo, if they would take over the assets from Sandoz, they would have a dominant position in the market. And this was not interesting for the FDA. So at the end this was cancelled, but Sandoz was already willing to escape from the market. And then regarding the Chinese companies the last 10 years, the Chinese companies had their market protected and with non-real prices for generics.

One of the reasons why the Chinese generic market has been expanding at the international level is because they had some high prices on basic generics in China. These capitalised the companies and the companies decided to attend the biggest market in the world with the United States. In order to attend this market, they had to do two things. The first was to generate production facilities that would have the FDA GMPs (good manufacturing practice). And the second phase was to start developing, maybe at the same time nearly, to start developing products that would be useful for the Chinese market and then take advantage of their price competitivity and sell it into United States.

With the reduction of the prices, all these plants have stopped. And we see a lot of Chinese companies which are giving up on the American market, divesting their marketing authorisations without supply chain commitment. This means that you can go to Chinese companies and buy directly a marketing authorisation already approved and then you can produce it yourself. So even sometimes this is happening, especially the ones that are focused on plain generics.

These companies are really suffering from two different directions. One for the problem that is happening in the United States, the huge investments they have to make in order to abandon the American market. And the third point, which was the start of local tenders in China. These local tenders in China have also disrupted the pricing system and made some products much more cheaper than they used to be before. So now the Chinese producers, they have two problems. They don’t have their biggest market and they don’t have their national market. And 50% of the pharmaceutical industry in China is based in generics. And the other one is in traditional Chinese medicine of herbs. There is an important point here. Indians, they will suffer less because they have been in the market for a longer time. So I think the big companies, what they are doing is they’re refocusing their strategy.

For example, we have Amneal Pharmaceuticals who is the biggest American generic player, which merged with Impax I think, which is another Indian company. But that was more specialised into innovative medicine, different assets, et cetera, because they already saw that the market was going to be very difficult for them. And this is in general what I see from the American companies that they are trying to escape from the generics moving into different assets. But it’s not going to be that easy because there are a lot of differentiated products in the market. And now nobody knows what is the real price to pay. This doesn’t mean that United States is not the market, it’s the biggest market in the world and there’s a lot of opportunities. The only thing is that now we need to be much more careful when we select which product we are going to attend, how we’re going to attend, do much more benchmarking, and understand what the competition is.

So now it’s not only about you having the dossier, submitting it, and getting an approval. Now you want to know that you can be competitive in the market. And in order to do this, you need to understand at a micro economical level your level of costing, internal costing, supply chain structure, robustness, et cetera. But on the other side, we need to make an economic analysis for the competition. How many companies are producing the API? Are these companies going to use these API, these active ingredients for themselves or are they going to start selling it to different companies? So you can have maybe two companies producing the API, and the initial assumption will be that you have only two competitors for this market. But the reality is that one of these companies can start selling the API to many more different companies.

Then you have a whole bunch of competition created with only one supplier, and this can happen. This is the message that I want to bring about the American market. That it is not as easy as before, but it’s still a very interesting market, and a market to be attended. And if the decision is to go with the differentiated asset, it’s important to have a clear vision of the selling price and not to make assumptions that would have been made earlier, because they’re probably not going to work out anymore.

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I am not an expert in GMPs, but what I can say about this is that there has been news of companies, mostly located in India, that have done, let’s just say, non-respectful activities regarding their GMP authorisations and they are losing their GMPs. They are losing the marketing authorisations because they lied on the value-equivalence results. So there’s a lot of issues, and I think this is part of this distance that people don’t want to have anymore. I mean, again, I think the companies now, what they want to do is they want to have the problems closer to home, not that far away. When things work out well, it doesn’t matter how much distance, but when you do have a problem, you want to have somebody answering to you.

And sometimes this geographical distance doesn’t allow for a fluent communication. And we also have to think that there are some cultural points to take into consideration because it is true that maybe we’re using English, everybody has the same language, but this doesn’t mean that we are not sending the message from the others. So cultural differences are still present and they are still a factor to take into consideration.

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There is a current challenge with contract manufacturing, and I think it’s because we are in an in-between. If we look at a lot of reports from CMO companies, we see that there is a decrease in the level of activity. But in my opinion, I think the restructuring of everything that is happening, trying to relocalise the production to their areas, in this case Europe and United States, but not everything is going at the same speed. So what we see sometimes is that we’re missing capacity for contract manufacturing activities in some areas, and in other areas there’s plenty of capacity and nobody knows what to do and how to sell new projects.

In my opinion, the contract manufacturing organisations, they need to start generating a more advanced message of robustness to their partners. For example, to have a vertically integrated structure, meaning that I like to work with contract manufacturing organisations that are producing the API and the finished dosage form. I think this has a lot of value because it gives a lot of robustness. And this, I can talk about this because I worked for Medichem, which is a small-medium-sized company in Spain, which has been growing a lot the last years. And when I say a lot is like, I think in five years, they move from 70 million to 120 million because they are able to supply active ingredients and the finished dosage form at the same time. And this not only helps you with your supply chain strengths, but also your teams understand better the essence of the product.

So when you are going to work with somebody and you need to buy the APIs from one side and the finished dosage form from the other side, then this can be complicated. You need to work with two different organisations. But if you can do it with a vertically integrated organisation, then here things get a little bit easier. And this is one thing that I like from CMOs, I like that they have a whole bunch of technologies, that they are flexible so we can attend different geographies. And this is related to your comment regarding the GMPs.

The fact that you have different approvals in your facilities, United States, Japanese, American FDA, this gives a lot of robustness and sends the message that you understand the market. And if I am a multinational company and I want to expand my business, I don’t want to talk with 10 different contract manufacturers to produce the same product for different locations. I want one to work with everything if possible. It is true that when you start scaling up, then you also start losing flexibility. For example, companies like STADA from Europe, they are very agile when it comes to segmenting the contract manufacturing organisations. And I think, for example, these are very good points when it comes to talking about differentiation.

Companies, even with the mention of STADA, I think it’s around more than 3 billion euros turnover. When you have this kind of situation, they decide that taking two sources is a good strategy for them. And I think it’s been working very well because as far as I know, they are not missing any of the launches of generic products right after the patent is expired, which is not the case for Sandoz, for example. Sandoz is on the other side, a very inflexible company because it comes from Novartis and everything made it much more complicated.

But STADA, especially the CEO, Peter Goldschmidt, he has managed to develop a very horizontal structure that now I use that to comment that they take two sources for each product. But this attitude or horizontal structure, it’s working very well in the company. And I think the results are impressive for such a big company, how they are growing, how they are building up new areas. Especially in consumer healthcare, which is also risky because in terms of crisis or when basic things get more expensive, like living and electricity and food, then the sales for consumer health products tend to decrease. But in general, I think the example of STADA, of how to drive through these situations, being a big entity as they are, I think it’s very interesting.

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I think it’s a critical, critical point in order to optimize these big generic companies. Sandoz’ B2B division was a bridge up to 800 million euros turnover because Sandoz is the last vertically integrated antimicrobial producer in Europe, so the only producer that is vertically integrated. So this was very easy to decide that because there was an excess of production and the prices were not competitive, that in order to continue producing the same quantity some resources would need to be sold to a third party, so in terms of production. And then we have other cases, like for example, the Teva B2B, which is also a little bit successful in my opinion. But the bigger a structure grows, the more inefficient it is. And a well-conducted B2B organisation inside the company, I think can make an improvement of that 2, 3, 4% optimization that a company needs. The larger they grow, there’s several percentages that can be improved through an internal B2B division, but it needs to have a very clear rule.

It needs to be well aligned with the internal company to have a structure for the external customers. So you don’t relate internal production with external – so production for internal use or production for third parties, but in general it’s the right way to go. Any organisation above a certain size should be working independently. If they have, and depending on the market, they should have a B2B division in order to optimize a little bit their catalogue, their production. For example, maybe you have an excess of production and now you can sell this product to somebody else, but maybe you have an internal development.

Imagine you are Sandoz and you’ll have an internal development and you want to attend 25 markets. But from these 25 markets, you only have 14 markets that you have your own promotional teams for this specific indication. Instead of failing in the launch of this product, which is exactly what has happened, I can tell you this, and this has happened, because not all the companies, not all the different branches of a big company are the same. Not all the markets are the same. So this is a very, very important point. B2B divisions need to be very necessary in order to optimise production and to make sure that you can be successful in all markets, even if you don’t have your own promotional teams internally.

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Me, and I will talk in general, I think it’s a very disruptive industry because I relate it to something, for example, like new dosages or intranasal devices. Intranasal devices seem to be very, very interesting because you can shift from injectable to nasal device, and nasal has a very good absorption, so new dosage forms are disruptive. I think 10 years ago we had the same situation with inhalers. There were a lot of companies promoting this kind of products internally, and then we moved to the intranasals. But another disruptive area we have is biosimilars. Biosimilars are changing and will change the market, how we see it, because more and more products are being replicated by biosimilars. Every time regulatory agencies like the FDA are being much more relaxed, not only approving new molecules, but also approving new indications and direct substitution, which means that you can use any other substitutable biosimilar and you don’t need to look at the brand.

So you just need to check that it can be substituted with one another. It went so far that they even had to go back a little bit with the FDA because the FDA wanted to approve a label where it could state specifically how many brands that biosimilar could substitute. But at the end there has been some turmoil in the industry, and they’re not going to move forward. But with the biosimilar, the size of the market, the double growth digit, which some are expecting more than 20% per year, I think this is going to speed up a little bit too. And not only are we going to have a growth in the market, we’ll have many more players that will start competing with themselves in the market. And we’ll see the genericisation of the biosimilars and turn more into generic dynamics. So now the price for the four biosimilars are very high if you compare it to normal generics, but during the next few years we’ll see a lot of price pressure. That’s why I also made that comment initially that I don’t see just change and flexible prices. Because right now the biggest market, the biggest growing market is biosimilars.

They can give a huge reduction on the total health budget from the national entities, which at the end is going to be taken by the new treatments available by the innovative pharmaceutical companies.

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To stay competitive in the market, you need to understand the market. I mean, it’s not only internally, again, it’s double analysis, micro and macro. So you want to have a macro analysis internally. Do you have a good synthesis or do you have a good sourcing of your product? Do you have a competitive product? But on the other hand you need to be very careful with benchmarking, understanding the market, the competitors. Are they bringing differentiated products that can have an effect? Do we have new indications that maybe can be disrupted? And I can put a very good example about this. Let’s imagine that from the last four or five years you’ve been working in developing anti-migraine treatment or migraine treatments catalogue. So you have four or five different products and then a new entity comes in order to prevent migraines.

So here you have a problem because you’ve been investing largely in order to develop a catalogue of products and now you have only one product that can replace everything you have done. And not only will it minimise the effect of the migraine in the patient, but it’s to really erase it. So we’re actually curing, it’s like the products that can cure instead of treating. In here, I think also if I would have to put money somewhere, I would be careful into CNS (Central Nervous System) companies because I think that the new technologies, for example, psychedelics, are also going to impact in the CNS market and they’re going to change it a little bit.

So companies that have specialised in CNS, they’ll have to be very careful with their portfolio. I would move more into an innovative portfolio and forget the current pharmaceutical entities that are generics that are based in order to quantify mental issues because they’re going to change a lot during the next year. Thanks to artificial intelligence and machine learning, we’re able to penetrate much deeper into the brain and understand it better by becoming able to work with huge quantities of data, which is one of the main problems of the brain.

The brain is very complex. So in order to study how the neurons are interacting, how many different kinds of neurons we have in the system, and how they behave, we really needed technology that we didn’t have before. Now with artificial intelligence and machine learning, we’re able to do this. So CNS is also something that I will be a little bit careful to see which direction we’ll go during the next five years.

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In my opinion, companies need to be very careful what selecting their portfolio, making a much more thorough analysis of the competition, of what’s possible and the supply chain. Making sure there is a strong supply chain. Sometimes it’s not only about the price, if you don’t have the product to sell then you have a big problem. So a lot of companies that have been suffering the last two, three years with huge shortages, especially the ones related to governmental tenders, this means a lot of penalties. So it has not been easy. And now, not only are we worried about our supply chain resilience, but we also have to face an increased cost. There will not be flexibility in terms of pricing in many regulated areas. So companies need to be just a little bit more careful.

Market is there, business is there, there’s a lot of things that can be done. The only thing is that you need to make a much more in-depth analysis and take into consideration things that you wouldn’t have before. Like for example, how far is your CMO? Where are you producing the product from? Where are you sourcing the API? How many sources of API do you have? What is going to be your regulatory strategy? Are you able to launch on day one after the patent? So all these things now are not only related to price, but you have a whole bunch of things that you need to take into consideration before deciding if you want to develop a product. And it’s better to make the right decision in the middle of the situation than to move forward until the end with something that is not going to work out and lose time and resources.

And that’s where I would ask any company if they really know how to make it, which markets to attend, how to do this, your IP strategy also. So that adds a lot to take into consideration and I think that you need to be a little bit more refined. But the business is there, and if we look at the results of many, many companies, this is a very good year for them. For others, not so much. We see Sanofi, for example, that is selling all their assets. Sanofi being a pure disaster, a pure disaster. So we started with divestment of Zentiva in 2018, then divestment of EuroAPI in 2022 and now all the issues that they are having and now selling their facilities. So not an easy thing to move. And I’m surprised at how far they have managed to take decisions even to divest.

They divested Zentiva five years ago and it took them longer to divest EuroAPI. It’s very complicated, at least for them. But for many of the companies, I look at the business results of Recordati and everything looks very good. Companies are making profits. Yes, consumer healthcare is going to be a little bit more sensitive because people have to pay this from their own pocket. So there is not that much money. Sometimes they tend to reduce this kind of expenditure, but the market is healthy, the market is changing.

We have to look at the biosimilars, maybe not at the blockbusters, but a lot of different other indications, maybe not a little bit more niche. We have to have less competition to establish niche ways of distributing and promoting the products. So there’s a lot to do in the market still. And the turmoil in United States I think can be an advantage for many companies, because they will start escaping from the generics and the analysis then will have to ask, okay, who’s escaping, who’s not supplying anymore?

Maybe before it was five competitors, now there are two. Maybe now we can do something about it. Maybe we can retake all those years from all molecules and bring it back to life. So this is more based to the generic business. So there’s a lot of actions too that can be done in order to be successful.

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