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Generics companies step into the unknown…

Posted on: 29 Jul 04


Although generics have an important role to play in healthcare there remains a high demand for innovative medicines. Consequently, a number of generics companies have become interested in extending their R&D programmes to make their products appear more than simple copies of their branded competitors.

The economic argument for generics:

As healthcare costs rise, governments around the world have looked to generics as one means of slowing expenditure. A commonly cited study, by those supporting the increased use of generics, is one by the US Congressional Budget Office (CBO) which estimated that in 1994, purchasers saved between US$8 billion and US$10 billion by substituting generic drugs in place of brand name products (1). In a recent presentation to the US Department of Health and Human Services (HHS), Kathleen D. Jaeger, President and CEO of the Generic Pharmaceutical Association suggested that for every 1% increase in the utilisation of generics, there would be a 1% increase in savings for those paying for prescriptions (2).

Becoming innovative:

Although generics have an important role to play in healthcare there remains a high demand for innovative medicines. The development of novel medicines is necessary to tackle areas of unmet medical need and chronic disorders for which current treatments are inadequate. In fact, one of the criticisms commonly levelled at the pharmaceutical industry is that it has become less innovative over time. For example, in 2002 only 28 new molecular entities (NMEs) were launched onto the world market, whereas in 1982 around 48 NMEs were launched globally (3, 4).

As this demand for new innovative drugs has grown, a number of generics companies have become interested in extending their R&D programmes to make their products appear more than simple copies of their branded competitors. A number of generics companies have developed so-called super generics, which offer consumers added value through special formulations and delivery systems. However, other generics companies are running innovative R&D programmes alongside their generics production and are looking to take advantage of the sales opportunities in the brand name pharmaceuticals market.

Shifting focus:

Only a few generics companies can manage this shift in focus as the expenditure required for innovative R&D is high and the risks are considerable. Generics companies aspiring to become innovative R&D-based organisations need to be proactive in learning about the challenges they will face, particularly during clinical trials as innovative R&D is very different to that for generics. As they are already viable businesses they should have a commercial advantage over academic biotech start-ups that have often been overambitious in taking their discoveries into clinical development. According to one study by DataMonitor, some generics companies are enjoying profit margins, which are at least comparable with those of the mainstream pharmaceutical industry. The differences in R&D spending as a proportion of sales for the top 18 generics companies were compared with those for the top 15 R&D-based pharmaceutical companies (5). According to this study, whilst generics companies spent a lower proportion of their sales on R&D compared to the R&D-based pharmaceutical companies, their average operating margin was 21.3%, only slightly below the figure of 23.6% for the R&D-based pharmaceutical companies cohort (5).

Confounding the doubters:

Many observers are sceptical that generics companies can make the transformation to becoming innovative drug development organisations, but examples of success in this area do exist.

Pliva is one organisation that has successfully combined its work in generics with innovative R&D. It was responsible for the discovery of the highly successful antibiotic azithromycin, which was eventually marketed by Pfizer as Zithromax. In 2002, Zithromax was the most prescribed brand-name oral antibiotic in the USA and the second largest selling antibiotic worldwide (6). Pliva has used its growing revenue to create a balanced business with 72% of its research focused on generics and speciality chemicals and the remainder on R&D for new chemical entities (NCEs) (7).

Another generics company with a major NCE product is Teva. In the USA it markets approximately 140 generic products, but has been developing innovative drugs in the neurological and autoimmune therapeutic areas (8). Teva’s major success has been the innovative drug, Copaxone (glatiramer acetate) which represented the first nonsteroidal, non-interferon agent for relapsing-remitting multiple sclerosis (MS). It is sold in 42 countries and is now well established as one of the leading MS therapies (8). IVAX is well known for its strong generics pipeline, but it has a growing NCE pipeline in the respiratory, oncology, central nervous system, gastrointestinal, urology and endocrinology therapeutic areas. IVAX’s Uroflux, a new drug to treat benign prostatic hypertrophy (BPH) successfully completed phase II trials in early 2004 (9).

These are just examples of the innovative efforts by generics companies, but whether these organisations can go on and build on this initial success in the NCE field is yet to be seen. However, even smaller companies are now making steps in this direction. Yet there a number of additional market factors that these companies must consider as they develop their NCE R&D programmes. One of the ironic difficulties of becoming involved in NCE development is that these products will eventually themselves be subject to generic competition when their patents expire. Thus the longevity of the revenue stream gained through NCE sales could be uncertain. Furthermore, these companies will have to contend with the same economic, regulatory and political pressures as those organisations whose core activities are NCE development and commercialisation.

Nevertheless, if generics companies can balance both generics and NCE activities, they may be able to benefit from the advantages that both types of products can offer in the context of the global healthcare environment. With governments emphasising cost containment there will be a greater use of generics as alternatives to brand name drugs. Yet equally, if serious and chronic diseases are to be tackled effectively there will be a continuing demand for innovative, disease modifying drugs.


1.      How increased competition from generic drugs has affected prices and returns in the Pharmaceutical industry (1998). Congressional Budget Office

2.      Jaeger KD (2004). More Generic Pharmaceutical Utilization, Not Unregulated Drug Importation, Answers America’s Drug Cost Crisis. GPhA Testimony:  HHS Task Force on Drug Importation.

3.      Sculthorpe P. and Lowman D. (2003). New Medicine Launches 2002. CMR International.

4.      Kermani F and Findlay G (2000). The Pharmaceutical R&D Compendium. CMR International.

5.      Hansen N. and Tunnah P. (2003). The generics challenge: Seeking the elusive profit margin. Journal of Generic Medicines. Vol 1 (1): 6-12.

6.      Pfizer Inc 2003 Performance Report.

7.      Vuksic Z (2004). Pliva corporate presentation of 2003 annual results. London, 25th February 2004.

8.      Teva Reports Record Sales And Net Income For Q4 2003. Teva Press Release. February 17, 2004.

9.      R&D Overview. IVAX.


Dr Faiz Kermani

Last updated on: 27/08/2010 11:40:18

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