In the world of asthma medication, there's a war approaching and GlaxoSmithKline (GSK) has just dodged the first bullet. The US Food and Drug Administration (FDA) has rejected Mylan's (US: MYL) first attempt at an unbranded version of GSK's top-selling respiratory drug Advair, thus delaying the inevitable sales decline of the original product.
GSK first gained US approval for its 'easy-to-use, all in one' asthma treatment in 2001 and Advair has made over $1bn (£0.8bn) of revenue every year since then, with peak sales topping $8bn. But, in 2016, the last of the drug's patent protection expired, leaving it vulnerable to competition from unbranded, generic copies. GSK previously said that the launch of a mass-market version of Advair within the first half of 2017 would result in a $1bn drop in annual sales and cause group earnings for the year to remain flat.
So Mylan's rejection gives GSK a bit of breathing space. But Advair is by no means out of danger. London-listed groups Hikma (HIK) and Vectura (VEC) have together filed an application for their own generic version of the drug with the FDA and are expecting a response in May this year. Novartis' (CH:NOVN) generics division, Sandoz, and Israel-based Teva (Is:TEVA) are also hot on their heels.
While some experts have argued that Mylan's rejection spells trouble for these rivals - as it suggests the FDA expects a lot from an unbranded copy of the drug - others think it provides an opportunity. If Hikma/Vectura gains approval in May it will be the only generic version of a drug used by millions of people. Plus, gaining the first generic approval in the US gives the company six months of exclusivity.
It's therefore only a matter of time before Advair feels the full force of generic competition.
What does 'generic' mean?
Put simply, a generic is an identical version of a branded drug allowed on to the market once the original loses its exclusivity protection. In the UK, these unbranded copies have an average price of £3.80 - £17 cheaper than the average branded drug.
Developing a generic drug can be likened to copying an expensive painting. A talented artist wanting to widen the availability of Van Gogh's 'Sunflowers', can visit the Kröller-Müller Museum in the Netherlands where the painting is held, study the intricacies and produce an identical copy, which he could then sell for a fraction of the price of the original. A generic drugmaker will obtain a batch of a branded drug, uncover the active ingredient and mechanism of action, replicate it and submit it for regulatory approval.
It is common for a branded drug to face generic competition on the first day after its patent expiry and it can deal a significant blow to the company that makes the original. The lower price of the generic automatically makes it the first choice treatment once available, and in order to stay competitive innovators must also lower their prices. The UK has an especially strong generics market and over three-quarters of all drugs prescribed by the NHS are unbranded.
The pains of a generic launch were felt by AstraZeneca (AZN) last year. Two of the group's best-selling drugs, Crestor and Nexium, faced generic competition for the first time within a year of each other and Astra's annual revenues plummeted 7 per cent as a result.
But while generics may be a pain to innovators, they are in fact a vital part of the pharmaceutical industry. "Our role is to control costs," said Warwick Smith, head of the British Generic Manufacturers Association. In the UK, generic drugs save the NHS £13bn a year. In the US, consumers purchasing their medicines at retail pharmacies save between $8bn and $10bn thanks to generic drugs and "billions more are saved when hospitals use generics", according to the Congressional Budget Office.
The result of lower prices is that more drugs are available to more people. For example, the introduction of generic copies of breast cancer drug tamoxifen drove the price down so much that the NHS was able to begin prescribing it for the prevention of breast cancer, rather than just for treatment after diagnosis.
Not so easy
So, amid the current drugs pricing controversy, it would be easy to think of the generics market as an antithesis to the expensive novel drugs market (a sort of Robin Hood in an age of a greedy pharmaceutical Sheriff of Nottingham).
But generic drugs too have come in for their fair share of pricing criticism. In January, the University of Liverpool presented data at the European Cancer Conference revealing how generic cancer drug prices have risen sharply over the past five years. Meanwhile, in the US, the FDA has seen a backlash over the significant backlog of generic drugs still waiting for regulatory approval. Critics argue that a lack of new generic drug approvals has been one of the factors driving prices up across the wider industry.
There are also problems when a drug is too complex to make a good generic version. In the UK, once a drug loses patent protection the NHS no longer has any control over its price and, without the competition of a generic, this gives the owner of the branded drug free rein over the market. Advair has shown how difficult a generic launch can be. The patent protecting the active ingredient expired in 2010, but the intellectual property (IP) on the delivery device - which only expired last year - is what's kept it from being replicated. GSK has therefore had monopoly on a market even though its drug doesn't have IP protection. Astra's Nexium also delayed generic rivals after the FDA banned the manufacturing facility approved to make a generic drug belonging to Indian group Ranbaxy. But seven months after Nexium's patent expiration, Teva managed to get a generic version on the shelves.
Plus, the launch of one generic is often not enough to lower the price of a top-selling branded drug. If Hikma and Vectura do succeed in getting their generic version of Advair approved in May they will have exclusivity in the US for six months. This duopoly is unlikely to bring the price of the branded product down that far. "It is multiple competitive products that control price," said Mr Smith. For example, Pfizer's (US: PFE) statin Lipitor, at one point the best-selling drug of all time, now has eight generic competitors. Its annual sales fell from a peak of $13.7bn in 2006, to $1.8bn last year.
Generic drugs: a good investment?
If competition is such a crucial part of keeping the generic drugs market ticking surely, as a business proposition, it's not that attractive?
Warwick Smith explains why, in the UK at least, this is not the case. "Volumes are high", he said, and compared with the rest of Europe there are "low barriers to entry". David Cox, healthcare analyst at Panmure Gordon, agrees. "Generics are a big part of healthcare," he said. "Back in the 1980s only 15 per cent of prescriptions were generics, now it's over 90 per cent. People are using generic medicines more and more and rightly so, because there's nothing wrong with them." According to Dr Cox, many companies are moving into the generics or biosimilars (unbranded versions of biotechnology drugs) space because, "it's a really important part of healthcare".
He also shrugged off queries that generic drugs are substantially easier to make than innovative ones: "Just because you get the recipe for the cake, doesn't mean your version tastes the same as Mr Kipling's" is his analogy.
