What’s ahead for generics? More pricing woes, analysts say, but execs see better times

By Arlene Weintraub Dec 21, 2017 9:27am

The FDA approved 765 generic drugs as of mid-December—surpassing the 630 inexpensive copycats approved last year and making 2017 the industry’s most productive of the last five years by far. Those numbers, from Credit Suisse, reflect pharma's continuing enthusiasm for generics, despite the pervasive and downward pricing pressure that has dogged the industry since February 2016.

So what does 2018 have in store for companies working in the generics sector? Analysts are warning of more pricing woes ahead. And some companies in the sector are already showing the strain. But executives of companies making generic drugs remain largely optimistic, as they point to regulatory and market trends that they believe portend a healthy outlook for the industry.

“You think about an aging population and these health systems around the world that are under increasing pressure, and there's a clear role to play for a pharmaceutical company to have a set of lower-cost but very high-quality generics,” said outgoing Novartis CEO Joe Jimenez during that company’s third-quarter earnings conference call in October.

During the quarter, however, the company’s generics unit, Sandoz, reported only a 1% increase in sales, as the company acknowledged that it is relying on growth outside of the U.S. to offset pricing pressures—and may well sell off its so-called simple generics in the States.

First, a deep look at overall trends in the generics industry is in order. According to the recent Credit Suisse report, the average price of a generic drug fell 5.4% in November, after having dropped 7% the month before. Prices have been declining all year at a rate that ranges from the high single digits to the low double digits, the firm reports, and the best that can be said about November’s decline is that “the trend is stabilizing or at least not incrementally worse.”

Obviously, pricing declines for generics have still taken their toll on some of the industry’s biggest players, as demonstrated by Novartis. In October, it disclosed that Sandoz would close its manufacturing plant in Broomfield, Colorado, which currently employs about 450 people. And now it's looking at carving up its operations.

"Novartis is currently experiencing above-average pricing pressure in our U.S. portfolio,” a spokesman told FiercePharma by email at the time. “With several products no longer competitive in saturated markets, we have made the decision to discontinue or divest these limited growth products to optimize our product portfolio."

Endo International, which is also suffering, blames much of the pricing decline in the U.S. on large consortiums. CEO Paul Campanelli told investors last quarter that such groups control 91% of the market. In February, Endo took a $3.5 billion writedown in anticipation of a 30% decline in its generics business this year.

Consortiums, said Campanelli during the recent earnings call, are “controlling tens of thousands of pharmacies. So whenever you have multiple players in a product and somebody is willing to lower price, you have to decide whether you want to stay in a product and compete.

"In our particular case," he said, "we've made certain decisions on commodity products where we've decided we can't compete or we don't want to compete."

Write-downs and plant closings make it tough to envision a light at the end of the generics tunnel, but some major players are trying to find reasons to be optimistic. Peter Goldschmidt, president of Sandoz U.S., told Leerink analysts in November that biosimilars could potentially pull the unit out of its slump. The company’s generic version of Amgen’s blockbuster Neupogen, which it calls Zarxio, could eventually grab 40% of the market, Sandoz is predicting. Why? Financial pressures will encourage physicians and hospitals to switch to biosimilars, Goldschmidt predicts.

The world’s largest generics maker, Teva, is also predicting an end to the pain for the overall market, even if the company itself is in for a series of deep and difficult cutbacks. The Israeli drugmaker, which had to drastically lower its forecasts for 2017 earlier in the year, told analysts after its most recent earnings report that price erosion in Europe has stabilized “at low single digits” the last few years.

Dipankar Bhattacharjee, who was then CEO of Teva’s Global Generic Medicines Group, also said price erosion in Japan is in the “mid single digits,” and that in the rest of the countries where the company does business, “we do see stabilization of prices. … And in some markets, we even see small price increases.”

Bhattacharjee left in a management shake-up last month but at the time noted that FDA approvals of generic drugs are on the rise. That’s good for budget-strapped healthcare providers but not necessarily for generics makers. The FDA is approving many products “for which already generics players exist in the market,” Bhattacharjee said. “So the new players try and drive some gains in market share based on volumes—based on lower prices.”

If there’s one thing the generics industry probably doesn’t have to worry about, it’s the ongoing discussions in Washington about taking control of rising drug prices. Trump famously blasted the pharma industry for “getting away with murder” on pricing, but generics have always been cited as part of the solution, not the problem. And many analysts are predicting that the ideas most often bandied about—like allowing Medicare to negotiate prices—aren’t likely to come to fruition.

"I wouldn't expect any major changes out of the Trump administration in pricing," said Mike Bailey, an analyst with FBB Capital Partners, in a recent interview with Investors Business Daily. "I think mechanically and politically it's difficult to get pricing law through the system. It's politically more acceptable to just get more generic drug approvals. It's a win-win."