Between 2007 to 2014, billions of dollars worth of brand-name drug patents, have expired or will, including Pfizer’s best-selling prescription drug Lipitor, Bristol-Myers Squibb’s anti-clotting agent Plavix as well as Eli Lilly’s antipsychotic Zyprexa. Unprecedented business opportunities have appeared in the global generic drug market. However, in front of this attractive “cake”, pharmaceutical companies in China, which mainly produce generic drugs, seem to fall short of their aspirations.
At present, a large number of Chinese pharmaceutical companies still depend on the production of generic drugs, and their research is always focused on low-end drugs with simple patents. There is a big gap between the prices of domestic and import generic drugs.
“Most Chinese pharmaceutical companies are rather good at vicious price competition in the field of low-end generic drugs. Compared to the 40%-60% profit margin of the foreign generic drug companies, the profits of China’s generic drug are less than 10%.” Intellectual Property Chief of Taiji Group Chen Kang told this reporter.
In contrast, business opportunities brought by patent expiration, generic pharmaceutical companies in the United States are eager to have a shot. Some high-end generic drug companies are even trying to carve up the “wheels” of brand-name drug patents.
In the 1980s, the United States, as the most mature country in the development of patent drugs, also achieved success in patent application for generic drugs.
Hatch-Waxman Act
The average price of generic drugs is only 20% -40% of that for patent drugs. In the aging U.S. population, generic drugs may save USD 14 billion every year for the 40 million people with Medicare. At present, sales of generic drugs equals approximately 64% in the United States, the world’s largest generic drug market.
The development of generic drugs threatens the profits of patent drugs. In order to encourage R&D investment in patent drug technology and to stimulate the low-cost generic drug at the same time, the United States adopted the Hatch-Waxman Act (Drug Price Competition and Patent Restoration Act) in 1984. In 2003 the Act was amended to balance the interests of generic drugs and patent medicines. It was considered to be “the most popular act in 25 years in the United States.” Since then, the American generic drug industry has experienced a revolution and generic drugs began to rid itself of various obstacles and broaden its market. The competition between patent medicines and generic drugs ultimately achieved the goal of lowering drug prices.
According to Jeffery M. Duncan, Chairman of the Biotechnology and Pharmaceutical Department of Brinks Hofer Gilson & Lione Law Firm, before the Act was passed in 1984, generic drug companies in the United States had to conduct new safety and effectiveness tests in order to prove that the generic drug contains the same substance as brand-name drugs, that is, patent medicine must pass the clinical trials before FDA’s approval. High experimental cost not only cut the profit margins of generic drugs, but also extended the patent protection period for brand-name drugs defacto. “Before 1984, the patents of 150 kinds of medicines expired, which led to the emergence of ‘orphan drugs’, because no one was willing to develop new drugs.” Jeffery said.
After it was passed, Hatch-Waxman Act first proposed to simplify the application procedures through Abbreviated New Drug Application (ANDA). A Generic drug could simply prove that its biological activity was equivalent to that of brand-name drugs and could detour the clinical trials. Jeffery further explained that: “The first step for generic drug companies is to submit an ANDA application to the FDA before the expiration of a brand-name drug. If Chinese generic drug companies wish to enter the United States, they must take the first step.”
Also, the Act has a compelling term which encourages generic drug companies to challenge patents on the condition that they do not infringe patent rights. For the first company that challenges a patent via the fourth paragraph certificate and succeeds in proving its invalidity, the Hatch-Waxman Act provides a 180 day market exclusion period, which thus becomes an important way for high-end generic drug companies to make profits. Many companies are trying to challenge the patent drugs in the “Orange Book” (Lists of Approved Drugs) to gain high profits.
It was introduced that 10,072 patent drugs out of the 12,751 listed in the FDA “Orange Book” have generic drug rivals. “In these 180 days, with its low cost, generic drug companies would quickly make very large profits and establish their own market.” Jeffery said. The world’s largest generic drug manufacturer Teva, is the one with highest outcome from patent demurral.
“With regard to patent input, China’s pharmaceutical companies are ‘separated’ rather than ‘collective’. A Patent application is still considered to be a technical and legal issue instead of business issue.” Chen Kang said. This misunderstanding is the cause of malicious competition among domestic pharmaceutical companies in the low-end drug market.
Jeffery said that when doing business in the United States, companies should carefully choose generic drugs and pick the exact patent to challenge. “There are several approaches. The first is to assess sales. Regardless of the patent effectiveness, only drugs with high sales are worth challenging. Once the company wins the case, sales of this drug will determine the amount of profits. The second is analysis of patentability. With weak patentability, it is more likely that the company would win the lawsuit so that it is more worth challenging to some extent. If the patentability is strong, it would be quite difficult to win the lawsuit and beat the patent successfully.” Jeffery further explained.
This way of thinking is also enlightening for generic drug companies in China. Domestic experts have begun to urge: “Chinese generic drug companies to shift from low-end generic drugs to the R&D of new formulas, new processes and new technologies. Companies should choose the brand-name drugs with better market prospects, fewer patent disputes and more difficult patent technologies so as to avoid vicious competition in the domestic market.”
Innovation of generic drugs
The great business opportunities of generic drug make a number of patent drug manufacturers have a shot in this field. For example, brand-name drug companies choose to sell generic drugs, which they have obtained patent authorization, earlier than other generic drug companies, which thus leads to new competition and challenges.
“On this occasion, the profits of generic drug companies are encroached. However, compared with brand-name drug companies, generic drug companies still have an advantage in price.” Jeffery said, “While generic drug companies, in addition to challenging patents, also began to apply for patents.”
Most of the large generic drug companies in the United States, such as Mylan and Watson, have mainly produced brand generic drugs in the past. But now they are also engaged in research and innovation to extend their product lines and value chains. Take the world’s largest generic pharmaceutical company Teva for example; its PCT applications have added up to 1,600.
At present, some of the major pharmaceutical companies in China have also consciously made efforts to develop in this direction.
Besides compound patents, a lot of patent drug companies further extend the patent protection period by means of applying for composition patents and crystal patents. According to Chen Kang, domestic drug companies nowadays started to improve processing technology and modify structure so as to break through the blockade of other patents. The bio-medical drug companies are doing particularly well in this field. Biopharmaceutical drug is also considered as the frontrunners of medical innovation.
“At first, companies could completely rely on the production of generic drugs. Then, they should make initial innovation and combine the manufacturing of generic drugs with patent drugs. Finally, it would become possible to produce their own brand-name drugs. This is the exact route Chinese pharmaceutical companies should follow.” Chen Kang said.
In addition to research and innovation, generic drug companies in the United States have also developed a number of generic drugs with technical barriers. Take sustained/controlled release for example. This technology is known as an important means to gain a competitive advantage for generic pharmaceutical companies. The United States has been very mature in sustained and controlled release technology, which may also give inspiration to China’s research into compound preparation and application as well as the development of pharmaceutical industry.
M&A of drug companies
In 2006, the United States generic drug maker Mylan purchased the controlling interest of the Indian pharmaceutical ingredient manufacturer Matrix with USD 736 million in cash. Matrix is also the leading generic drug distributor in the markets of Belgium, Holland and Luxembourg.
In 2008, Teva acquired Barr with USD 7.5 billion. Barr was the world’s 4th largest generic drug company; headquartered in New Jersey, in the United States.
Though Pfizer’s acquisition of Wyeth aroused great attention in patent drug companies, generic drug companies have never stopped their M&A process. Large pharmaceutical companies join hands via mergers and acquisitions, which on one hand consolidates their unshakable position in the global market and on the other hand causes chain reaction in the generic drug industry. In order to find space in the increasingly competitive market, a number of small and medium-sized generic drug companies have also started to merge or acquire. To certain extent, M&A is conductive to phase-out and integration, which thus helps form a stable market distribution structure.
In China’s generic drug industry, the number of small and medium-sized enterprises (SMEs) takes the majority. Data analysis shows that China has nearly 5,000 pharmaceutical manufacturers, most of which sell less than 100 million Yuan every year; there are also 7,000 pharmaceutical commercial enterprises and most of them are small companies.
The M&A boom also rose among China’s pharmaceutical companies in 2009, which was named by the media as “M&A Year for China Pharmaceutical Companies”. In January 2009, Mingyuan Medicare purchased a 75% stake of Shanghai Kangpei Group with 310 million Yuan. In February, Renhe Group spent 616 million Yuan in acquiring Jiangxi Kangmei Medicine & Health Products Co., Ltd and Jiangxi Yaodu Renhe Pharmaceutical Co., Ltd. On March 6, Fosun Pharma bought 5,388,346 shares of Tongjitang ADS with USD 16.9331 million. On March 9, Sinopharm spent 70 million Yuan in the acquisition of an 88.24% stake in Holley Pharmaceutical...
It is generally commented that in the face of competition from multinational pharmaceutical companies, M&A and integration is the best option for Chinese pharmaceutical industry. M&A will help integrate a number of small but promising drug companies, and eliminate the low-end and less competitive SMEs, and thus enhance the overall industrial strength by fostering backbone enterprises.
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