The generic drug industry started in the mid-1960s, when an effort by the federal government to prove the safety and efficacy of pharmaceuticals manufactured prior to 1962 opened the door for the full-scale development of generic products. In 1962 the National Research Council of the National Academy of Sciences evaluated all drugs that had been in use prior to 1962. The Drug Efficacy Study Implementation (DESI) program reviewed more than 3,000 products. The resulting list detailed which products were effective for all claimed indications, which were probably or possibly effective for claimed indications, and those that were ineffective for claimed indications. Following the publication of the findings, generic drug companies were able to file for approval to manufacture products that had been ruled effective without the need to conduct bio-studies. Thus, a number of pre 1962 medications entered the market without additional studies.

The milestone acknowledged as the start of the modern generic pharmaceutical industry was the approval of the Drug Price Competition and Patent Restoration Act in 1984. This law, known as the Hatch-Waxman Act, allowed manufacturers to file Abbreviated New Drug Applications (ANDAs) for generic versions of all post-1962 approved pharmaceutical products. To prove that the generic version is therapeutically equivalent to the branded version and to be approved under an ANDA, the manufacturer must submit to the FDA detailed information regarding bioequivalence, manufacturing processes, etc.

Since 1984, the generic industry has grown significantly. The aging population, the requirement of health care providers, rising health care costs, insurance companies and their need to control expenses related to prescription drugs have helped drive an increase in the substitution rate of higher-cost brand products with lower-cost generic products.

                 Source: The National Association of Chain Drug Stores, 2006

In the U.S., research shows that each generic drug brings in at least $5 more in gross profit than the branded equivalent. (Lehman Analyst Meredith Adler, 7/28/06 report on the retail drug sector) Retailer gross profit margins average 10-15% on a branded drug; 50-70% for a generic. (Drug Store News, 8/22/05 M. Kirsche) Top generics manufacturers forge close partnerships with drug and discount chains such as Target and Wal-Mart that result in less room for new small and medium sized companies.

Currently, profits generated by generic drugs sales subsidize the retail and wholesale distribution of much more expensive branded products. The "channel" (wholesalers, retailers, PBMs (Pharmacy Benefit Management) , etc. accounts for roughly 1/3 of U.S. retail pharmacy spending of $250 billion (Adam J. Fein, Ph.D. President of Pembroke Consulting, Inc. May 16, 2006).

• Due to inventory management and fee-for-service agreements, drug wholesalers now generate much less profit from branded pharmaceuticals. Pembroke Consulting, Inc. estimates that wholesalers generate 11% of revenues from generics, but that generics equal 52% of wholesaler gross profits.
• As the WSJ (The Wall Street Journal) article of May 8, 2006 notes, generic mail scripts are much more profitable for PBMs than a branded script filled in the retail network.
• In 2005, an FTC (Federal Trade Commission) study found that:
• Large retail chains generate 63% more dollar profit per prescription from generics vs. brands
• PBMs generate 83% more dollar profit per prescription from generics by mail vs. brands
• The four largest prescription benefits managers, i.e., Caremark, Medco Health Solutions, Wellpoint and Express Scripts, handle about 75% of the $235 billion spent on prescription drugs every year.

The erosion of branded pharma is more aggressive today than ever before. Following a busy year for patent expirations in 2006, a number of important therapeutic classes will also be affected in 2007, including antipsychotics, calcium antagonists and beta-blockers. In 2007, branded products with a value of more than $27 billion are likely to lose patent protection, which comes on top of $22 billion of products that lost protection in 2006. (Bain & Company) Consequently, branded products are making up a smaller percentage of the world market volume.

The geographic balance of the pharmaceutical market continues to shift away from the U.S. toward the world’s emerging markets - countries with a per-capita Gross National Income of less than $20,000 where the availability of healthcare is expanding and there is an increasing need for treatments associated with chronic diseases more typically found in developed countries. Emerging markets currently represent 17% of the global market, but will contribute 30% of growth next year. The U.S. will account for about 36% of the total growth in 2007, considerably less than the 54% it contributed five years earlier. (IMS, 2007)

The size of generic drugs retail markets varies widely between European countries. According to The French “Ministere de l’Emploi, de la Cohesion Sociale et du Logement” in 2004 the sale of pharmaceutical products in the five largest European markets approached 70B Euros ($91B) while the generic market was worth around 12.5B Euros ($16B).

Generic take-up rates and price differentials in selected European markets

Generics are required to meet the same stringent government standards for strength, purity and potency as the brand version. To gain FDA approval a generic drug must:

• Contain the same active ingredients as the innovative drug (inactive ingredients may vary)
• Be identical in strength, dosage form and route of administration
• Be therapeutically-equivalent
• Meet the same batch requirements for identity, strength, purity and quality
• Be manufactured under the same strict standards of FDA’s good manufacturing practice regulations required for innovator products

The FDA requires that a generic company's manufacturing methods conform to cGMPs, as defined in the U.S. Code of Federal Regulations and must comply with all phases of the manufacturing process, and continually monitor compliance and measure quality control. To ensure compliance with these standards, the FDA makes nearly 3,500 inspections a year of both brand and generic companies.

In order to market a generic equivalent to a brand pharmaceutical company’s drug and apply to the FDA for approval a generic pharmaceutical manufacturer must follow the Abbreviated New Drug Application (ANDA) process.

Under this procedure, the generic manufacturer uses the safety and efficacy data supplied by the brand company, and must only prove to the FDA that its generic product is equivalent to the branded product. The FDA does not require the generic company to conduct separate clinical studies for safety and efficacy since the brand drug has already been in use for many years.

In addition, and as defined in the U.S. Code of Federal Regulations, the FDA requires that a generic company's manufacturing methods conform to cGMPs, comply with all phases of the manufacturing process and continually monitor compliance and measure quality control. To ensure compliance with these standards, the FDA makes nearly 3,500 inspections a year of both brand and generic companies in the U.S. and abroad.

As soon as all FDA requirements are met, a generic drug is approved and is normally dispensed under the chemical name of the active ingredient. Generic manufacturers may also choose to market specific generic drugs under a unique trade-name. Generics may be a slightly different size, shape or color than their brand counterpart, but these cosmetic differences have no impact on safety or effectiveness.

The U.S. Office of Generic Drugs has continued to increase the number of approvals and reduce the overall time to approval, with the median time to approval in 2005 of 16.4 months down from 23 months in 1996, a 40 percent reduction. In fact, in Fiscal Year 2003, the OGD approved or tentatively approved 132 applications in less than 15 months after the receipt. In 2004, this 15 month figure went to 146 and jumped to 174 approvals or tentative approvals in 2005, with 106 applications approved in less than 12 months. (Scott Gottlieb, MD, FDA’s Deputy Commissioner for Medical and Scientific Affairs, April 7, 2006- Annual Generic Drug Forum)

In 2005, the generic sector in Latin America was valued at U.S. $1.7B, which represented a 26.9% increase over the 2004 figure of U.S. $1.3B. Regional generic expenditure per capita stood at U.S. $3.8. Venezuela had the highest expenditure per capita at U.S. $8.0, followed by Argentina at U.S. $5.8 (IMS).

Throughout the region, pharmaceutical patenting remains a relatively new concept and an on-going issue. Many countries have local industries geared to producing branded versions of drugs still under patent in their country of origin. These imitations tend to be priced less expensively than branded originals, thus diminishing the penetration of real generic; however, they are slowly being replaced by the steady introduction of bioequivalent generics. In an effort to increase local demand, raise awareness and increase export opportunities, bioequivalence standards are slowly being implemented.

Globally, generics growth will derive from several opportunities in key therapeutic areas and from increased volumes as government mandated cost control efforts intensify. Speed to market with the right molecule is a critical success factor and that means being flexible, competitive and fast to capitalize on new prospects. Facing deteriorating pipelines brand companies must demonstrate increasing creativity in handling IP expirations.

It is highly probable that the generics market of tomorrow will be dominated by a smaller number of larger companies. M&A continues to be a main strategy for growth as generics companies continue to vie to enhance their portfolio status, undertake geographic expansion or to gain monopoly in a particular region or therapeutic area, with price pressures and technology access being the key pressures driving acquisition activity. The U.S. market is crucial — in the not too distant future, those European and Asian regional companies that have little or no U.S. presence will become potential acquisition candidates, as already demonstrated by Novartis’ February 2005 acquisition of Germany’s Hexal and its U.S. affiliate Eon, that created the world’s second largest generics manufacturer, the January 2006 acquisition of Ivax by Teva or the May 2007 acquisition of Merck KGaA generic business by Mylan Laboratories.