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It seems not a day goes by without talk of an innovation crisis in the pharmaceutical industry. On, October 25, the German consultancy, Roland Berger, released an article titled “Fight of Flight” stating 65% of companies surveyed believe that the pharmaceutical industry is facing a strategic crisis. As the patent cliff nears, it appears the majority of Big Pharmas have taken to the “flight” path. At the top of the list of priorities for Big Pharma, diversifying into generics ranked as number one.

There appears to be a bit of a herd mentality, but perhaps Pharma may be heading down the right path. It is ironic however, that while generic drug makers in developing countries are attempting to move up the value chain toward the development of innovative medicines, the big successful pharma companies are now heading in the opposite direction.

Almost every large pharmaceutical company today, including Abbott (NYSE:ABT), GlaxoSmithKline (NYSE:GSK), Lilly (NYSE:LLY), AstraZeneca (NYSE:AZN), Pfizer (NYSE:PFE), Novartis (NYSE:NVS) (via Sandoz), have been doing deals in the generics space. Much of the attention has been focused on branded generics. A branded generic as basically an off patent drug sold under a brand name.

Big Pharma has long flirted with branded generics, but this time it looks like the real thing. In the US, generics have gained a 75% share of all prescriptions in 2009, with 25% of all sales, totaling over $70 million. This is up substantially from the year 2000, when generics held only 49% of the market. Even as the share of all generics has grown, branded generics not kept pace. They made up 11% of all prescriptions in 2000, and only 9% in 2007- this despite their higher level of profitability relative to unbranded generics. Simply put, there is significant untapped opportunity in the branded generics space.

But Pharma is looking beyond the US borders for growth in the branded generics market. The world market for generic drugs now averages 25% of all drug sales- higher still in emerging markets. This is particularly important considering emerging markets are estimated to represent 30-40% of global drug sales in the next ten years. In many of these countries, health insurance is sorely lacking and patients pay out of pocket for much of their medicines, increasing the popularity of generic drugs.

This is where Western Pharma companies seek to leverage their brands, which have a perceived higher level of quality and effectiveness over local generics, often made by companies with lax quality controls. Even though patients pay out of pocket, they are willing to pay extra for the branded generics from big name Western pharmaceutical companies.

With so much at stake, it is odd then, that branded generics have made so little headway in the world’s largest drug market. Pharma companies spend hundreds of millions building up a brand name drug during its patent life, then leave it to die when the patent expires. They stop all promotions and cede nearly all sales to generics makers. The only sales that are retained are from die-hard loyalists.

Branded generics have the benefit of being a known entity and a recognizable name. This already differentiates them from plain generics. In large markets, a branded generic can return twice the sales of the high-priced brand name drug. Sold at a premium, to the no-names, they provide increased margins and preclude a fight to the bottom in a chase for market share.

Big Pharma has already embraced branded generics abroad; the same principles apply here. Branded generics have the ability to change the US generics landscape.

Disclosure: Long NVS

Source: Big Pharma Embraces Branded Generics