Apotex deal shows impact of generics on Pharma

Bristol-Myers Squibb and Sanofi-Aventis troubled deal with Apotex highlights the tactics that traditional large pharmaceutical companies are being forced to adopt as they struggle to adjust to intensifying international competition from generic medicines.

From friendly deals with, or even takeovers of, their generic rivals, through to bitter litigation or price cutting to fight against them, they are under heavy pressure to adapt to a more hostile commercial environment. While pharmaceuticals remain highly profitable, the escalating value of drug sales – more than $600bn globally last year – is creating an ever heavier burden on health systems.

Although drugs represent a small proportion of total health expenditures, they are an easier target than many others – such as doctors' salaries, hospital overheads and older more expensive forms of care.

n the period 2005-2010, Datamonitor, the market research company, estimates that the pharmaceutical industry is threatened by the loss of $105bn in revenues from medicines that are coming off patent.

However, the pace of scientific research and drug development is failing to keep pace, with the number of new patented medicines well below past levels.

Companies are experimenting with new management techniques to boost efficiency in innovation as they seek to generate the next generation of drugs.

In the US, legislation encourages generic companies to challenge drug company patents, with the incentive of exclusivity for the first six months after launch. Health reforms introduced last year that indirectly make the federal government the purchaser of the majority of drugs are bringing fresh pressures for efficiency.

In Europe, no such rules exist, but some countries such as Germany strongly favour the generic industry, and all of the state-funded health systems are seeking ways to cut their drug bills.

Novartis, the research-based Swiss-based group, went as far as to buy the German business Hexal last year, becoming one of the world's largest generic companies as a result.

But competition is not limited to the patented drug companies. "The volume of our business is increasing, but the pricing is not," says Greg Perry, head of the European Generics Association, a trade body.

With low-cost generic companies in the developing world – such as Ranbaxy in India – expanding into Europe and the US, there is a wave of consolidation within the generic industry too.

This is why drug companies need revenue to discover and market next generation medicines.

Bristol-Myers Squibb trades on the New York Stock Exchange under the symbol BMY and was down 0.13 cents/share. Aventis-Sanofi trades on the NYSE under SNY and lost 0.47 cents to 43.38.