End of an era

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The GCC's reputation as a brand drug stronghold is coming to an end. MT explores how the rise of generics is proving a success story for the subcontinent.

Start with a pharmaceutical market built almost entirely on imports. Add in a society weighted by chronic diseases, seeking every way to clamp down on healthcare costs.

Factor in the number of brand name drugs set to lose patent protection over the next few years. What you end up with is a prediction that over the next five years, generic drug manufacturers will dominate the GCC's pharmaceutical industry. And the biggest players, say experts, are likely to be Indian.

Thomas Butt, a pharmaceutical and healthcare analyst with Business Monitor International (BMI), forecasts a golden era for generics. He expects annual growth for the Middle East's generics industry to top 13% until at least 2012.

"It's a global trend, at the expense of patented drugs," he says. "The GCC holds the most potential and is very much a target market for Indian pharmaceutical firms."

Generic tastes

To date, the GCC's oil-rich states have largely resisted the coup seen in US and European pharmacies. Patented drugs have retained the lion's share of the market. Apathy on the part of prescribers, combined with the forceful promotion of brand medicines, means that these drugs often boast a bigger market share than their cheaper generic equivalents.

But decisions such as that taken by the United Arab Emirate's Ministry of Health last month to raise prices on European- largely branded - drugs, are fuelling the demand for copycat medications.

So much so, says Dr Ahmed El Hakim, senior manager of Pfizer's Middle East and Africa Group, that innovative multinationals are increasingly buying up generics firms to safeguard a share of the action. "Pfizer has already started down that path," he admits, chasing transactions seen by Novartis, GlaxoSmithKline and sanofi-aventis.

Such tie-ups between two traditionally rival industries indicate most clearly how generics are pinching the profits of Big Pharma. The diminishing ability of multinationals, seen in recent years, to create pipelines of innovative medicines is set to leave huge holes in their revenues as patents start to expire on blockbuster drugs.

"Despite spending US$7bn annually on R&D we have not seen a blockbuster for some time," says Hakim. Pfizer is set to lose the patent on its bestselling drug, the statin Lipitor, in 2011. "It's why generics are becoming a key strategy."

From this perspective, the GCC's history of spurning generics in favour of branded drugs serves to make the region more desirable. For drug makers, the Middle East usually ranks well behind the US and Europe in terms of priority as the market is considerably smaller.

Now, the combination of soaring chronic disease rates (certain GCC states are world leaders in obesity and diabetes incidence) and an underserved market means the GCC has never looked more appealing to generics firms. Equally, argues Hakim, generics have never looked so appealing to local governments struggling to keep a lid on health costs.

"Our disease profile is essentially split between the developed and developing world. We are seeing increased hypertension, diabetes, but are still battling diseases like tuberculosis. It's one of the reason costs are increasingly so significantly, and this is becoming a major issue for everyone."

Sampling the subcontinent

When it comes to cutting drug costs, Indian pharma firms lead the field. Experts agree that large domestic players like Dr Reddy's Laboratories and Ranbaxy Laboratories have the potential to do for the drug industry what Bangalore did for IT.

Already, Indian firms account for $8bn of the world's $48bn generics market. The country's low-cost manufacturing means its drug makers are perfectly positioned to undercut rival western generics firms. Currently, claims Hakim, generics sold in the UAE and Saudi are typically priced at 70 to 80% of the cost of the brand drug. "If these firms can offer better cost-competitiveness it will invigorate the sector," he suggests.

Indian pharma hasn't waited for a formal invite. Cipla, India's second largest drug-maker, derives 10% of its export earnings from stock sold to the Middle East. Dishman Pharmaceuticals, Ranbaxy, and Kopran have all established roots in Saudi Arabia, Qatar and Dubai respectively.

The GCC is very much a target market for these firms," enthuses Jamie Davies, head of pharmaceuticals at BMI. "I would say the GCC is their third largest target market, over fellow Asian countries, Latin-America and even Africa.

On the part of the drug makers, the GCC's move towards an insurance-based healthcare sector is helping to propel their interest. Abu Dhabi, Dubai and Saudi Arabia have all recently introduced mandatory health insurance schemes which, predicts BMI's Thomas Butt, are likely to erode branded drug use. "Universal healthcare schemes provide a huge opportunity for generics, because they feed into tender systems that are usually handled by the government," he explains.

They're aimed at providing value for money, so firms like Ranbaxy have a lot of potential because they have the scale and pricing to compete." Copycat drugs are also a hit with insurers, who will work aggressively to ensure their use. Daman, Abu Dhabi's government-supported insurance arm, already promotes generics by setting co-pays for brand drugs.

Cooperation from these stakeholders will be crucial in overcoming suspicions about generics. The GCC has a strongly brand-led culture, meaning generics have suffered from the misconception that they are less effective or of poorer quality than drugs with a household name.

Yet a number of Indian firms have earned their stripes in American's fierce pharmaceutical market which, Butt suggests, offers assurance that cheap doesn't mean poor-quality. "Ranbaxy or similar is the sort of company I would expect to really make a mark. It has a name, scale, and bioequivalent generics that it can confirm the quality of, because it has FDA-approved plants."

Many of the firms have succeeded in the US with branded generics (meaning a generic drug marketed by a multinational, and sold under a trade name), a ploy likely to do well in GCC states. Ranbaxy already has three brands in the UAE's top 50 list of popular drugs.

There is a big push for these branded generics," agrees Butt, "they are perceived as being of higher-quality. I would argue they have the biggest potential as the GCC is likely to opt for recognisable names.

On the home front

One potential barrier to the subcontinent's success may be the GCC's domestic drug makers. While far from pharma powerhouses, a number of firms have carved out a profitable niche on home turf. This is largely thanks to protectionism rather than innovation, argues Hakim.

The markets are typified by tough entry barriers and preferential prices for local industries. The governments are doing their best to protect and encourage local manufacturing."

Homegrown companies take full advantage of the commonly-used ‘country of origin' rule. This law dictates that price of an imported drug cannot be higher than the price charged in its country of origin and is aimed at strengthening the domestic market.

For firms shipping in from the pricey European or American industries, this works in their favour. For Indian companies, based in the cost-cutting capital of the world, it's a less attractive deal. "It's perverse," shrugs Butt. ‘If you're producing in a low-cost country, it's harder to sell in a higher-priced market.

"This law has the potential to limit generics from low-cost origins, but it does provide an opening for European or US drug makers."

The sway of domestic firms has also been distorted by the rule in most Arab states that firms established outside of a free zone must have a national partner. As a consequence, local companies eye Indian drug makers not as rival upstarts, but as a way to bulk up their portfolios.

Many have cut deals to ease their path into the market. Dishman, for instance, inked a deal with Saudi's Arab Company for Drug Industries and Medical Appliances (ACDIMA). In a rare coup, Dishman is rumoured to have secured a 51% share of the joint venture.

The Mumbai-based Kopran, has tied up with Dubai Investment to front the pharmaceutical firm Globalpharma, receiving a more modest 35% equity share. In the UAE, Ranbaxy is aligned with the healthcare group NMC. The partnership has seen Ranbaxy ranked 12th among the UAE's fastest growing pharmaceutical firms.

For Indian drug makers these transactions have two-fold appeal. In the short-term they capitalise on existing distribution networks, something Butt terms as "the trump card of GCC manufacturers".

In the long term, they offer some protection against future competition and what can be brutal price pressure. Indian pharma learnt the hard way when its government applied international patent standards in 2005, that domestic markets can be fickle. By consolidating the GCC's industry, Indian firms stand less chance of losing their hard-won market share when the multinationals come calling.

"It is a tough region to compete in," acknowledges Pfizer's Hakim. "The larger a firm, the more advantages it has."

The generic gamble

The Middle East is beckoning, and India is answering. But it's not just local governments that stand to gain from its tempered drug costs. Just as multinationals stand to lose billions over the next few years as key drug patents expire, so generic firms will struggle.

When there are no innovative products left to mimic, they will be left to brawl it out with existing drugs just as existing markets are getting crowded. Globalisation is a key strategy if generic drug makers are to survive. The match between the emerging market of the GCC and Indian pharma could prove a remedy in more ways than one.

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