Battle in the US Generics Market: What Lies Ahead?

By Patricia Van Arnum - DCAT Editorial Director

September 12, 2018

Novartis’ Sandoz, Teva, Perrigo and Mylan are among the companies reporting lower revenues in their generics businesses, principally due to performance in the US market. With these companies revamping their strategies to address changing market conditions, what may lie ahead?

Always a cost-competitive market, the generics market, particularly the US market, is posing margin and pricing pressures on generic companies. DCAT Value Chain Insights takes an inside look.

Major generic-drug companies revamp strategies

Continued pricing pressure and underperformance in the US generics market has led several of the major generic-drug companies to re-evaluate their businesses and seek strategic alternatives. The most recent move occurred this month (September 2018), when Novartis agreed to sell select portions of its Sandoz US portfolio, specifically the Sandoz US dermatology business and generic US oral solids portfolio, to Aurobindo Pharma USA for $1 billion, consisting of $900 million in cash plus $100 million of potential earn-outs. Novartis says the transaction supports the Sandoz strategy of focusing on complex generics, value-added medicines, and biosimilars in order to achieve sustainable and profitable growth in the US over the long-term.

In an investors’ meeting earlier this year (May 2018), Vas Narasimhan, Chief Executive Officer of Novartis, portended of a move with Sandoz, Novartis’ generics and biosimilars division, when he discussed US pricing pressure for Sandoz and the need in the US to enhance the Sandoz portfolio through targeted divestment of low-margin products. “Clearly in the US we’re going to need to evaluate what is the best way to maximize our position in the United States,” Narasimhan said on a May 16, 2018 investors call.

Sandoz reported first-half net sales of $5 billion, up 2% in local currencies and down 3% in constant currencies as 8 percentage points of price erosion, mainly in the US, were partly offset by 5 percentage points of volume growth. Sandoz’s downward performance in the US market in 2018 continued from 2017, when increased price competition in the US more than offset growth in the rest of the world. In 2017, Sandoz had sales of $10.1 billion, down 1% in local currencies and down 2% in constant currencies. Retail generics, which accounted for 84% of Sandoz’s sales in 2017, had sales of $8.4 billion, down 3% in constant currencies. Sales in the US declined 14%, which more than offset increased sales in the rest of the word, which increased 3% on a constant currency basis. The other pieces of Sandoz are biopharmaceuticals, which includes biosimilars, which had 2017 sales of $1.135 billion (11% of Sandoz’s 2017 sales) and, anti-infectives, which had sales of $516 million, or 5% of Sandoz’s net sales. Overall, the US accounted for 33%, or $3.278 billion, of Sandoz’s net sales to third parties in 2017, and Europe accounted for 46%, or $4.633 billion. Asia, Africa, and Australasia accounted for 14%, or $1.391 billion, and Canada and Latin America 7%, or $758 million. In 2018, Sandoz accounted for 21%, of Novartis’ net sales, and for $1.4 billion, or 15%, of Novartis’ operating income (excluding corporate income and expense, net).

The Sandoz US portfolios to be sold to Aurobindo include approximately 300 products as well as additional development projects. The sale includes the Sandoz US generic and branded dermatology businesses as well as its dermatology development center. As part of the transaction, Aurobindo will acquire the manufacturing facilities in Wilson, North Carolina, as well as Hicksville and Melville, New York. The business had net sales of $600 million in the first half of 2018.

"Sharpening our portfolio focus in the US allows us to devote more time and resources toward our strategy of bringing complex generics, value-added medicines and biosimilars to patients in the US, creating higher value and opening up access to important medicines where alternatives are truly needed," says Richard Francis, CEO Sandoz and Member of the Novartis Executive Committee, in a September 6, 2018 company statement.

Following the transaction, the Sandoz US portfolio will include biosimilars, value-added medicines and complex generics such as injectables, respiratory and ophthalmics. Novartis says Sandoz will continue to focus its clinical development, business development and investment efforts on these areas. The transaction is expected to close in 2019 following the completion of customary closing conditions.

Mylan re-evaluates generics strategy

Mylan also is evaluating its position in the US generics market. In August 2018, the company formed a strategic review committee to evaluate alternatives for its businesses following weak second-quarter performance in its North American segment. Mylan says the profile of the company has changed over the last several years by shifting its core from a US-centric operation to an international presence.

“Our international business, in which we expect continued growth, now represents more than 60% of the company's global sales,” Mylan said in an August 8, 2018 company statement. “These global growth expectations are in contrast to the negative trends and dynamics playing out in the US marketplace, which we believe are unsustainable for the healthcare system over the long-term but which we believe Mylan is uniquely well positioned to successfully weather and navigate.”

“The formation of this strategic review committee follows the release of Mylan’s second-quarter 2018 results, in which the company reported revenues of $2.81 billion, down 5% compared to the prior year period. The company reported North America segment net sales of $1 billion, down 22% compared to the year-ago period. The company reported Europe segment net sales of $990.6 million, up 4% and rest of world segment net sales of $764.1 million, up 10%.

“Our Europe and Rest of World segments continue to deliver growth in line with our expectations. However, our efforts to serve patients in the US have been shaped by the industry's transformation there, and our results and guidance for 2018 are directly correlated with the ongoing rebasing of the US healthcare environment,” said Mylan CEO Heather Bresch, in the company’s August 8, 2019 earnings statement.

“Mylan says the profile of the company has changed over the last several years by shifting its core from a US-centric operation to an international presence. “…[W]e believe that the US public markets continue to underappreciate and undervalue the durability, differentiation and strengths of Mylan's global diversified business, especially when compared to our peers around the globe,” Mylan said in its statement. “Therefore, while we will continue to execute on our best-in-class, long-term focused sustainable strategy, the Board has formed a strategic review committee and is actively evaluating a wide range of alternatives to unlock the true value of our one-of-a-kind platform.” Mylan noted the board has not set a timetable for its evaluation of alternatives and there can be no assurance that any alternative will be implemented.

Teva’s restructuring due to performance in generics

Price erosion and increased product competition in the US generics market was a key factor behind a two-year restructuring plan, announced by Teva in December 2017, which included a reduction of 25% of its workforce or 14,000 positions globally, closures or divestments of research and development facilities and offices, and a $3-billion reduction in its annual costs. This news followed an announcement by Teva in November 2017 of a new organizational structure and executive management team, which followed the appointment of a new president and chief executive officer (CEO), Kåre Schultz, who took over on November 1, 2017. Teva had earlier announced a restructuring plan in August 2017, which included the closing or divestment of 15 manufacturing plants.

In 2017, Teva, which holds the number one position in the US generics market on a volume basis, said it was impacted by significant deterioration in the US generics market and economic environment and reported goodwill impairments of $17.1 billion in 2017, mainly with respect to its US generics reporting unit. It also faced substantial debt, which was $32.5 billion as of December 31, 2017, in large part to its $40.5-billion acquisition of Allergan’s generic business in 2016. Increased generic competition for its lead specialty medicine, Copaxone (glatiramer acetate) for treating multiple sclerosis, also contributed negatively to its performance in 2017. In addition to its restructuring plan, Teva announced that the company is conducting a “substantial optimization” of its generics portfolio globally, and most specifically in the US, through a more tailored approach to the portfolio with increased focus on profitability with a focus on complex generics and other high-barrier products.

In 2017, Teva led the US generic market in total prescriptions and new prescriptions, with approximately 583 million total prescriptions, representing 15.2% of total US generic prescriptions, according to IQVIA data, a reported by Teva. In 2017, Teva’s generic medicines segment generated revenues of $12.3 billion and profit of $2.8 billion. Revenues increased 2%, or 10% in local currency terms compared to 2016. Profit decreased 15% compared to 2016. It higher revenues in 2017 were mainly due to the inclusion of revenues from the acquisition of Allergan’s generic business for the full year of 2017 compared to five months in 2016, partially offset by the adverse market dynamics in the US. The company said its lower profit in 2017 was mainly due to price erosion in the US generics market resulting from customer consolidation into larger buying groups and accelerated FDA approvals for additional generic versions of competing off-patent medicines. The market pressures in the US generics market continued in 2018. Generic products revenues in the company’s North America segment in the second quarter of 2018 decreased by 29% to $947 million, compared to the second quarter of 2017, mainly due to continued price erosion in its US generics business, additional competition to methylphenidate extended-release tablets (Concerta, an authorized generic), and portfolio optimization.

Other company moves in generics in 2018

Other companies are making moves in the generics market. In August 2018, Perrigo announced plans to separate the company's prescription pharmaceuticals business, which consists primarily of generics, following a strategic portfolio review. The move follows continuing weak performance in the company’s Rx business, which accounted for approximately 20% of the company’s net sales in 2017. A separation of its Rx business would leave the company’s primary focus on consumer healthcare or over-the-counter (OTC) products. Perrigo’s prescription pharmaceutical business develops, manufactures, and markets a portfolio of generic prescription drugs primarily in the US. The company said it consider all value-enhancing options, including a possible tax-efficient separation to shareholders, a sale or merger.

In May 2018, Amneal Pharmaceuticals, a Bridgewater, New Jersey generic-drug manufacturer and Impax Laboratories, a Hayward, California-based specialty pharmaceutical company, closed on their merger to create what the companies say is the fifth largest generic-drug business in the US. The combined company has a generics portfolio with more than 200 differentiated product families marketed in multiple dosage forms. The generic-product portfolio of the combined company includes approximately 149 abbreviated new drug applications (ANDAs) with the US Food and Drug Administration and 135 projects in active stages of development, with nearly half of all pipeline products exclusive first-to-file, first-to-market, or other which have three or fewer competitors estimated at the time of launch, according to the company. In 2018, Amneal says it is targeting to file more than 30 ANDAs.

Public policy and generic competition in the US

Reauthorization of the Generic Drug User Fee Amendments (GDUFA II), which provides user fees to augment FDA resources for generic-drug reviews, and the FDA’s Drug Competition Action Plan, which seeks to remove further barriers in generic-drug development and review, were two key developments in 2017 to spur generic-drug approvals, which has created both upside for increasing generic-drug approvals and downside for increasing generic-drug competition.

The US has seen a large increase in generic-drug approvals. In 2017, the FDA approved the most generic-drug applications ever, 1,027 ANDAs, with 843 fully approved applications and 184 tentatively approved applications, according to information from the FDA. The number of approvals in 2017 broke the previous record high set in 2016 by 214 approvals when the FDA approved 813 ANDAs: 630 full approvals and 183 tentative approvals. The 2017 approvals included 80 “first generic” drugs, which are the first generic alternatives to a brand-name product. In 2017, the FDA updated its policy to prioritize the review of generic applications up to the third generic approval of a drug as a means to further encourage increase drug competition.

The FDA has put forth several measures to improve the generic-drug development and approval process. Noteworthy in 2017 was the first reauthorization of the Generic Drug User Fee Amendments (known as GDUFA II), which authorized the continued collection of user fees from generic-drug manufacturers to provide additional resources to the FDA for generic-drug reviews. GDUFA I was first enacted in 2012 and was authorized through fiscal year 2017, and GDUFA II now runs fiscal year 2018 through fiscal year 2022.

FDA Commissioner Scott Gottlieb has made generic drugs and drug pricing an agency priority and introduced the Drug Competition Action Plan (DCAP) in June 2017 to propose ways in which the agency would seek to improve the process for generic-drug development, review, and approval. One measure to increase competition by the FDA’s Office of Generic Drugs (OGD) was the publication of a list of off-patent, off-exclusivity branded drugs without approved generics. It first published this list in June 2017 and is updating and maintaining this list to improve transparency and encourage the development and submission of ANDAs in markets with limited competition. OGD also implemented policies to expedite the review of greater numbers of generic-drug applications when competition is limited.