[ccebook.cn]The World in 2010

Business
Generically challenged
Nov 13th 2009
The pharmaceuticals industry may yet find inspiration in its old nemesis, the generic-drugs business
This could be the end of the road for Big Pharma’s failed business model. In recent years, the world’s
innovative drug giants have seen research productivity plummet even as the costs of research have soared.
Share prices have taken a beating as the industry has failed to come up with enough promising blockbuster
drugs to compensate for the revenue lost when old money-spinners lose their patent protection. Even the
recent round of mergers and acquisitions instigated by large firms such as Pfizer and Merck, followed by the
requisite cost-cutting and sackings, has failed to fix what ails the industry.
The heart of the problem is the looming patent “cliff” (see chart). EvaluatePharma, a consultancy, estimates
that 13% of global pharmaceutical sales are at risk from generic competition in the coming two years. This
matters because the price of a given drug falls by more than 85% within a year of patent expiry in
competitive markets like the United States. Over the next year, company bosses had better come up with
improved business models or else they will drive their firms right off that precipice.
And yet the industry’s salvation could very well lie in the embrace of that very same nemesis—generic drugs.
The coming year will bring dramatic moves by Big Pharma to learn from, copy and even get into bed with the
rivals it once decried as copycats and scofflaws. The explanation for this startling turn of events is two-fold: in
the rich world, generic drugs are advancing as a result of government action, whereas in the developing world
it is the booming middle class that is propelling them forward.
First, the developed world. In 2010 rich countries will boost the fortunes of generic drugs in two ways. In
many such countries, from Japan to Germany, governments struggling to control health costs will introduce
policies that favour the use of cheap generic drugs. The American precedent suggests this will be a powerful
trend. From 1999 to 2008, the use of generic drugs saved America some $734 billion. And the boom is set to
continue, with the American generics sector forecast to grow by over 9% a year to 2012.
Taking the medicine
But carrots will soon be accompanied by sticks. Regulators at America’s Federal Trade Commission and at the
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