Novartis bucks the trend

Novartis is expanding its generic drugs capacity. Novartis

Novartis has bucked the industry trend by expanding its generic drugs business through its takeover of Slovenian generics leader, Lek.

The Swiss pharmaceutical firm says its prime motivation is to ensure a foothold in the fast-growing markets in eastern and central Europe.

On Thursday, Novartis said it had finalised its deal to take control of Lek after acquiring over 99 per cent of the Slovenian company’s shares.

But with many of its rivals selling off their generics units – which produce cheap versions of drugs that have lost patent protection – some analysts are questioning the merits of the acquisition.

While the generics market represents big business as governments look for ways to get hold of cheaper drugs in the face of rising healthcare costs, many pharmaceutical firms are now steering clear.

In the mid-1980s, pharmaceutical companies saw the generics market as an opportunity because they believed it was a way to maintain sales after patent expiry on important products.

But they soon realised that “going generic” did little to boost their bottom line, according to Francis Cloud, pharma analyst at Nomura bank in London.

“What we’ve seen over the past few years is a steady trend towards big pharma companies selling their generics assets,” he said.

“They realised fairly quickly that it was so hard to make money because the returns are so low in generics mostly, and it did not fit at all well with their mainstream business of discovering and marketing new drugs.”

Bucking the trend

Cloud fears that while Novartis may now be swimming against the tide, they may wind up rethinking their strategy in the face of economic reality.

This argument is firmly rejected by Novartis which insists that the Lek acquisition is a timely and strategic move, consolidating the firm’s share of the global generic drugs pie that spans South America and Europe.

“Pharmaceuticals will remain our core business, but generics does play an important part in our portfolio particularly because of the demographic developments we’re seeing,” Novartis spokesman Mark Hill told swissinfo.

“As the population ages and as healthcare costs increase, there is an increasing demand for generic products,” he explained.

But rising healthcare costs and ageing populations are not the only factors feeding Novartis’s desire to expand in the generics sector.

Difficult times

Pharma powerhouses like Novartis, Roche, GlaxoSmithKline and Pfizer face losing large percentages of sales as patents on blockbuster drugs expire, effectively handing them over to the generics market.

Patrick Burgermeister, pharma analyst at Zurich Cantonal Bank, says AstraZeneca and GlaxoSmithKline are in particularly bad shape.

“AstraZeneca has about a third of its sales at risk of patent expiry. GlaxoSmithKline has a bigger risk if you include the drug Paxil but this patent could be upheld,” said Burgermeister.

Twenty per cent of last year sales of Novartis’s own so-called “ethical” drugs are due to expire by 2006, opening up their drugs under patent to be copied and sold cheaper.

One way companies can continue protection of their drugs even after they have “gone generic” is to retain the rights to manufacture the generic form of a drug for the first six months after patent expiration.

Patent profits

While not as profitable as traditional pharmaceutical sales, Burgermeister says firms often use short-term patents to increase margins and profits on cut-price drugs.

“If you’re the first company to launch a generic copy of an ethical drug, you get six months’ exclusivity in the United States which is the most important and profitable market,” Burgermeister explained.

“This is a place where firms are alone in the market and so don’t have a big incentive to cut prices. They can sell them at maybe 90 per cent of the original price as Novartis did with its generic version of Augmentin,” Burgermeister says.

According to Francis Cloud at Nomura bank, Novartis is a shining example of a pharmaceutical firm which has successfully managed to operate a generics division that is truly global.

A clash of cultures is carefully avoided: Novartis Generics has its headquarters in Austria, a fair distance from the pharmaceutical HQ in Basel, Switzerland.

“Novartis is one of the few companies that can drive a double strategy of being an innovation leader in ethical drugs and at the same time being a price leader in generics. They have stated that they want to copy all blockbuster drugs,” he said.

Feeling the heat

The loss of patent control means pharmaceuticals are under pressure to develop new drugs – which bring in the real money – in order to stay ahead of the game.

But many are having difficulty keeping up the pace. Novartis scored an industry best for 2000 and 2001 by releasing nine new drugs onto the market.

“There are a number of exciting drugs in the pipeline. Novartis has over 60 projects and we are going to see those coming to market hopefully,” Hill said.

However, pipelines stuffed with good ideas do not translate into ringing tills and soaring profits. It costs roughly SFr800 million to develop a new medication, and then only one in 10,000 wins regulatory approval.

In or outside the generic drugs market, pharmaceutical companies are currently in a tight spot. Hopes are being pinned on the bio and genetic industries to come up with new cures and treatments.

But despite heavy investment in research and development, little in the way of profitable results is expected over the next eight to ten years.

swissinfo, Samantha Tonkin

Key facts

Novartis has finalised a deal to take control of the Slovenian generics leader, Lek.
The acquisition price for the company amounts to SFr1.2 billion.
As many rivals of Novartis sell off their generics units, some analysts are questioning the merits of the acquisition.