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`Record: 1
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`Generic Formulators Position for Profits. By: Sauer, Pamela.
`Chemical Market Reporter. 8/13/2001, Vol. 260 Issue 7, pFR12.
`2p. Abstract: Focuses on the growth potential of generic drug
`formulators in the pharmaceutical industry. Competition faced by
`formulators; Importance of drug delivery technology on the
`success of generic companies; Top generic manufacturers in the
`market. (AN: 6040608)
`
`Database:
`
`Business Source Complete
`
`focus 2001: fine chemicals
`Section:
`
`GENERIC FORMULATORS POSITION FOR PROFITS
`
`A spate of drugs is scheduled to come off patent over the next several years, but is a
`
`generics feast enough to sustain profitability?
`Roughly $50 billion in branded drugs in the US will lose patent protection between now and 2005,
`providing generic formulators a rich opportunity. However, despite the huge potential of this market,
`analysts emphasize that differentiation will be key for formulators to realize gains.
`
`Although the generic drags macro environment appears favorable, this high growth potential is
`matched by an equally competitive market. "As a general rule, we favor companies that have
`evolved beyond broad-based generics and either have a major niche presence in the $25 billion
`controlled release/delayed release generic drug segment or have a proven ability to receive FDA
`approval on successful brand drags that are internally developed," says UBS Warburg analyst
`Steven Valiquette. "The companies that fit this criteria are likely to generate the most rapid
`eearnings per share growth and are equally likely to sustain this higher-than-industry-average
`growth for a longer period of time because of longer product life cycles and fewer competitors
`resulting from the technological barriers to entry."
`
`Drug delivery technology is one key element for generic companies for differentiation. "We favor
`companies with proprietary controlled-release drug technology to develop both branded and generic
`drags. These companies ultimately face less competition and thus more sustainable profit growth,"
`says Mr. Valiquette. Key companies in this area, according to the analyst are Andrx and Biovail, as
`well as Impax Labs.
`
`The other key means of differentiation is to diversify portfolios with branded drags. "Following the
`1996-1997 bloodbath of the generic drag industry, many generic drug companies decided to no
`longer focus exclusively on multisource pharmaceuticals, but to instead accelerate and hopefully
`generate more consistent earnings growth and expand profit margins through the development,
`manufacture, and sale of branded pharmaceuticals," says Mr. Valiquette. "Among the hybrid generic
`drug companies, we favor those with a proven ability to internally develop and market branded drugs
`as a means for generating more consistent profit growth and margin expansion."
`
`Companies that fit this bill are Teva, Watson and Ivax. "Teva has Copaxone; Ivax has its Easi-
`breathe respiratory franchise, and Watson has four major branded drags expected to contribute
`
`Helsinn Healthcare Exhibit 2042
`Dr. Reddy's Laboratories, Ltd., et al. v. Helsinn Healthcare S.A.
`Trial PGR2016-00007
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`meaningfully to the bottom line during the next several years--Ferrelict, Aslera, Unithroid and
`oxybutynin patch," points out the UBS Warburg analyst.
`
`He notes that there is less investor enthusiasm for broad-based generics companies. "We have a
`less bullish view about the companies that have not evolved with the group and are still considered
`more plain vanilla broad-based generic companies or for which the respective diversification
`strategies have not worked successfully."
`
`Alpharma, along with Mylan, were two companies cited by the analyst earlier this year for not having
`a strong enough diversification strategy. Alpharma is seeking to change that in part, through a
`pending three-part deal between the health care and logistics company Mayne Nickless Ltd.,
`Alpharma and Teva Pharmaceuticals.
`
`Last month, Mayne Nickless moved closer to its goal of acquiring the Australian-based
`pharmaceuticals company F.H. Faulding & Co. following a recommendation by Faulding's board of
`management last month to accept an improved bid by Mayne Nickels. If the merger is approved (still
`pending as of press time), Mayne will sell Faulding's genetic oral solid dose pharmaceuticals
`business to Alpharma Inc. for $660 million and will offer Teva Pharmaceuticals Industries Ltd. an
`exclusive opportunity to purchase Faulding's injectable business for $365 million. Included in the oral
`solid dose pharmaceuticals business sold to Alpharma would be Purepac Pharmaceuticals and
`Faulding Laboratories in the US and Foshan Faulding Pharmaceutical in China. These businesses
`have sales of roughly $200 million.
`
`In speaking of Alpharma's bid to buy the Faulding generic oral solid dose pharmaceutical business,
`Banc of America Securities analyst Jerry Treppel says, "We believe it would be a transforming
`acquisition that heretofore the company has not had--a highly visible US business with rapid growth
`and potentially a homerun product in generic Neurontin."
`
`Purepac has the first-to-file status on the '476 patent on Pfizer's Neurontin tablets and capsules, the
`subject of litigation between the two companies. "Figuratively and literally, generic Neurontin would
`be to Alpharma what generic Prozac would be to Barr. The potential financial impact could be
`expected to be similar," says Mr. Treppel.
`
`Purepac markets a full line of generic and solid oral dosage forms in immediate release and
`extended release formulation to national and regional retail chains, drag wholesales, drug
`distributors, mail-order houses and managed care facilities in the US. The company manufacturers
`roughly 2 billion tablets and capsules each year at its plant in Elizabeth, N.J., and it recently
`purchased an additional facility at Piscataway, N.J., to increase its product development and
`manufacturing capacity.
`
`"While Purepac's focus is in anti-infectives, cardiovascular, anti-inflammatories, analgesics, anti-
`depressants and tranquilizers, the company is most well known for being one of three players in the
`generic Cardizem market," says Mr. Treppel. Purepac currently retains a roughly 20 percent share
`of the market, which is estimated at roughly $50 million to $60 million.
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`The other pieces that would be gained by Alpharma are Faulding Laboratories and Foshan.
`Faulding Labs is a small pharmaceutical business that develops and markets branded proprietary
`products in niche therapeutic areas. "Its lead products include Kadian, an oral sustained release
`morphine for pain, and Serax, used to treat anxiety," with 2000 sales of $7.5 million and $5 million,
`respectively, according to IMS Health, a Plymouth Meeting, Pa.-based healthcare market research
`firm. The company's strength is in the development of modified release products and its history
`includes Eryc, an antibiotic, and Doryx, an antibiotic.
`
`Faulding's facility in China manufacturers and supplies the Chinese market with generic oral
`pharmaceutical products along with a range of traditional Chinese medicines. The facility, located in
`Foshan in Guangdong Province, is a joint venture 90 percent owned by Faulding and 10 percent by
`Foshan City.
`
`The other side of the Mayne's deal with Faulding would allow Teva Pharmaceuticals to purchase
`Faulding's generic injectable business for $365 million in cash. "Overall, we believe the acquisition
`of Faulding's generic injectables business will be a positive move for Teva. We continue to believe
`that Teva is in a class by itself in the generics industry and with this new agreement, along with
`recent alliances with Impax for controlled release genetic products, the distance continues to widen,"
`says Banc of Securities analyst Jerry Treppel.
`
`The analyst points out that the acquisition would fit well with Teva's existing business and provide
`opportunities for growth. Teva has a generic injectables business in Europe through the acquisition
`of the Dutch firm Pharmachemie in 1998, but it has no presence in the US, and Faulding is a
`competitor in Europe. "Most of the other competitors are local players, none with the global
`presence of a Teva or a Faulding. Thus, with this acquisition, Teva will be able to broaden its
`product line, expand into other regions in Europe, and achieve much greater penetration into the
`entire European market," says Mr. Treppel. He adds that this combination would also position Teva
`as the global market leader in generic oncology products.
`
`The analyst also points out that the Faulding deal allows Teva to expand into a less competitive
`segment of the generics market. "The production of injectable products is a highly capital intensive
`business that requires dedicated sterile manufacturing facilities and must meet stringent FDA
`requirements. Because of the barrier to entry, competition tends to be relatively limited," says Mr.
`Treppel.
`
`A Faulding acquisition also provides a growth platform for Teva's active pharmaceutical ingredients
`(API) business. "Teva, through its API business, already supplies many of the raw materials in
`generic injectable products. This acquisition will allow Teva to become vertically integrated in the
`injectable business just as it has in the oral solid dose business. This strategy has proven to been
`extremely successful in the oral solid dose business, as evidenced by the leading market shares of
`Teva's vertically integrated products. We see no reason why that would not be repeated in the
`injectable business," says Mr. Treppel.
`
`Another opportunity for Teva from the acquisition of Faulding's injectables business is entry into
`generic biologics. "Pan of this strategy has involved an alliance with Bio-Technology General (BTG)
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`for several genetic biotech products to be developed and manufactured by BTG and marketed by
`Teva. The acquisition of Faulding's injectables business with its manufacturing capabilities and
`technology may pave the way for Teva to develop these products on its own. Although the
`opportunity in generic biologics may be a bit further down the line given that a regulatory pathway
`has not been established, we believe the potential is enormous," says Mr. Treppel.
`
`Other generic players are also positioning themselves in the generics biologics arena. In April, Ivax
`Corp. acquired the remaining 70 percent of India Protein Technologies (IPT), which specializes in
`using recombinant technology to develop peptide-based pharmaceuticals. Ivax had acquired a 30-
`percent share interest in IPT in 1999. In addition to the Teva/BTG collaboration, Barr Laboratories is
`working on one biotech drag and Sicor has a facility in Mexico for biologics and announced another
`acquisition to beef up its biologics manufacturing capacity.
`
`Last month, Sicor Inc. agreed to acquire Biotechna UAB, a Lithuania-based manufacturer of
`recombinant protein products. "The acquisition of Biotechna is an important milestone in Sicor's
`strategic initiative to develop and manufacture genetic biopharmaceuticals," says Michael Cannon,
`president, biotechnology division. "Biotechna currently manufactures products for several emerging
`countries and, with its new facility designed with the help of US consultants and constructed by a
`highly qualified Swedish firm, is expected to be fully compliant with the good manufacturing practice
`requirements of both the US and the European Union regulatory authorities. We believe that this
`facility will be the key factor to Sicor's entry into this high-growth market segment and could
`potentially put Sicor, well ahead of its competition."
`
`"Through this acquisition, combined with our Mexican filling and finishing plant expected to be on
`line in early 2002, Sicor now has the means to develop and manufacture a broad menu of bio-
`engineered products with an estimated $10 billion worldwide market," says Carlo Salvi, president
`and chief executive officer. "These facilities will give Sicor the strength of the successful vertical
`integration model currently used by our traditional small molecule pharmaceutical operations, and
`provides us with the vehicle to execute our worldwide strategy of supplying biopharmaceutical
`products for, first, the emerging nations, followed by the EU and the US.
`
`Other generic players are using distribution strategies. For example, Mylan, which recently received
`generic approval for various dosage forms of paclitaxel injection, is setting its target of nifedipine, the
`generic equivalent of Procardia XL. "Mylan has struck a unique distribution agreement with Pfizer for
`all three dosage strengths (30, 60 and 90 mg) that especially limits generic competition for nifedipine
`in the 30 mg strength, for which Mylan has first-to-file status. We have a great deal of respect for the
`management at Mylan in its successful implementation of such a strategic maneuver," says Mr.
`Valiquette. The company is in need of a positive outcome as it struggled in 2000 to generate positive
`year-over-year comparisons in light of price erosion on clorazepam and lorazepate as well as the
`delay in launching buspirone, the generic equivalent to Bristol Myers Squibb's $1 billion anxiety drug
`Buspar.
`
`On the API front, Phytogen Life Sciences Inc., a Delta, British Columbia-based active
`pharmaceutical manufacturer, will supply Mylan Laboratories Inc. with paclitaxel. Last month,
`Phytogen reported its paclitaxel manufacturing process and facility underwent a successful
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`inspection by FDA in late June with no 483 observations. The inspection was the last step in the
`approval process for Mylan's product, paclitaxel injection, the generic equivalent to Bristol-Myers
`Squibb's Taxol. Phytogen operates a production facility in Delta, British Columbia. In addition to
`Mylan, the company supplies paclitaxel to Sinphar Pharmaceutical Co. Ltd., a Taiwan-based
`company. Drug Royalty Corp. Inc., a Canadian company that acquires royalty streams generated
`from pharmaceutical products, invested in Phytogen to fund expansion of its manufacturing platform
`in return for a 15-year royalty entitlement on all revenues.
`
`However, paclitaxel is a key revenue driver for Ivax Corp., which saw its first half revenues for 2001
`jump 52.6 percent to $561.7 million. Net sales of its paclitaxel product were more than $77 million in
`the second quarter following revenues of $50 million in the first quarter. In June, the company
`received a US patent for an oral formulation of paclitaxel. Merrill Lynch estimates $305 million in
`sales for Ivax generic paclitaxel in 2001 and $300 million in 2002. The company currently holds
`about 10 percent of the paclitaxel market, and an oral form could potentially boost that to one-third.
`Ivax is positioning itself in other markets. In July it completed the acquisition of Laboratorio Chile, the
`largest Chilean pharmaceutical company with 2000 revenues of $173 million.
`
`Outside the US, generic competition is also coming from offshore producers. Last month, the Indian
`producer Dr. Reddy Laboratories (DRL) received FDA approval for generic versions of
`AstraZeneca's Prilosec (omeprazole) and Eli Lilly's Prozac (fluoxetine) in 40 mg capsules. The
`approvals come in the midst of patent litigation for the products.
`
`DRL is setting up a sales and marketing organization in the US to market its 40 mg omeprazole
`capsules. In April, the company formed a profit-sharing deal with Pharmaceutical Resources Inc.
`(PRI) to co-market and develop 14 generic drugs, many scheduled to be launched in the 2002 or
`2003. and which PRI's operating subsidiary, Par Pharmaceuticals Inc. will market.
`
`DRL, which merged with Chem-inor Drug Limited in December, manufacturers bulk actives across
`six FDA-inspected facilities in India. DRL's generic finished dosage facility in Hyderabad, India,
`which has been commercially operational since 1997, will manufacture omeprazole. The facility
`produces oral dosage forms, hard gelatin capsules and soft gelatin capsules.
`
`Leading Generic Manufacturers
`
`Legend for Chart:
`
`B - Generic Market Share 1999
`
`C - Generic Market Share 2000E
`
`D - Overall Market Share 1999
`
`E - Overall Market Share 2000E
`
`A B C D E
`
`Mylan
`
`Labs 11.2 11.8 4.8 5.0
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`Teva
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`Pharma. 10.8 11.9 4.6 5.1
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`Geneva
`
`Pharm 6.7 7.2 2.9 3.1
`
`Watson Lab. 6.4 6.9 2.7 2.9
`
`Schein
`
`Pharma. 5.9 6.1 2.5 2.6
`
`Apothecon[*] 6.1 5.4 2.6 2.3
`
`Zenith
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`Goldline 4.8 5.1 2.0 2.2
`
`Abbott
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`Pharma
`
`Prods. 3.4 3.6 1.4 1.5
`
`Purepac 2.9 2.9 1.2 1.2
`
`Greenstone
`
`Ltd. 2.8 2.6 1.2 1.1
`
`[*] Acquired by Geneva
`
`Source: IMS and UBS Warburg LLC
`
`estimates
`
`Generics Exposure: Branded Drugs Off or Coming Off Patent
`Legend for Chart:
`
`A - Patent Expiration
`
`B - Brand
`
`C - Generic
`
`D - Patent Holder
`
`E - Indication
`
`F - 1999 Global Sales ($ MM)
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`A B C
`
`D E F
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`Dec-99 Humulin human insulin
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`Eli Lilly diabetes 1,087
`
`2000
`
`Feb-00 Hytin terazosin
`
`Abbott hypertension 570
`
`Feb-00 Vasotec enlapril
`
`enlapril Merck 2,305
`
`Mar-00 Glucophage metformin
`
`BMS diabetes 1,317
`
`May-00 Ceftin cefuroxime
`
`BMS anxiety 680
`
`May-00 Buspar buspirone
`
`Pfizer epilepsy 605
`
`Jul-00 Neurontin gabapentin
`
`BMS cancer 913
`
`Feb-00 Taxol paclitaxel
`
`Merck gastrointestinal 1,481
`
`Oct-00 Pepcid famotidine
`
`Pfizer cancer 910
`
`Oct-00 Cardura doxazosin
`
`Pfizer cancer 794
`
`Nov-00 ProcardiaXL nifedipine
`
`Pfizer hypertension 521
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`2001
`
`Feb-01 Prozac fluoxetine
`
`El Lilly depression 2,613
`
`Mar-01 Prilosec omeprazole
`
`AstraZeneca gastrointestinal 5,909
`
`Jun-01 Mevacor lovastatin
`
`Merck hypercholesterolemia 600
`
`Aug-01 Accutane isotretinoin
`
`Roche acne 705
`
`Dec-01 Prinivil lisinopril
`
`Merck hypertension 815
`
`Dec-01 Zestril lisinopril
`
`AstraZeneca hypertension 1,221
`
`2002
`
`Dec-02 Augmentin amoxicillin
`
`Glaxo infection 1,819
`
`Dec-02 Intron A interferon-Plough
`
`alpha
`
`Schering hepatitis C 650
`
`April-02 Axid nizatidine
`
`Eli Lilly gastrointestinal 350
`
`Dec-02 Relafen nabumetone
`
`Glaxo arthritis 267
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`2003
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`Feb-03 Singulair montelukast
`
`Merck asthma 500
`
`Nov-03 Flovent fluticasone
`
`Glaxo asthma 1,079
`
`Nov-03 Flonase fluticasone
`
`Glaxo allergy 593
`
`Nov-03 Cipro ciprofloxacin
`
`Bayer infection 1,625
`
`Dec-03 Engerix-B hepatitis B vaccine
`
`SmithKline Glaxohepatitis B 540
`
`2004
`
`Jan-04 Diflucan fluconazole
`
`Pfizer infection 1,002
`
`April-04 Paraplatin carboplatin
`
`BMS cancer 600
`
`April-04 Claritin loratadine
`
`Schering Plough allergy 2,700
`
`June-04 Xencial orlistat
`
`Roche obesity 499
`
`July-04 Lamisil terbinafine
`
`Novartis tinea pedis 700
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`Aug-04 Wellbutrin buproprion
`
`Glaxo depression 572
`
`Oct-04 Lupron leuprolide
`
`Tap cancer 730
`
`Dec-04 Lovenox enoxaparin
`
`Aventis deep vein thrombosis 760
`
`2005
`
`May-05 Biaxin clarithromycin
`
`Abbott infection 1,275
`
`June-05 Zofran ondansetron
`
`Glaxo nausea 674
`
`July-05 Prevacid lansoprazole
`
`Tap ulcer 1,900
`
`Aug-05 Aredia pamidronate
`
`Novartis hypercalcemis 588
`
`Sept-05 Zoladex gosereline
`
`AstraZeneca endometriosis 686
`
`Oct-05 Combivir lamivudine
`
`Glaxo HIV 736
`
`Oct-05 Zithromax azithromycin
`
`Pfizer infection 1,333
`
`Dec-05 Pravachol pravastatin
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`BMS
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`hypercholesterolemia
`
`1,704
`
`Dec—05
`
`Zocor
`
`simvastatin
`
`Merck
`
`hypercholesterolemia
`
`4,495
`
`Dec—05
`
`Zoloft
`
`sertraline
`
`Pfizer
`
`depression
`
`2,034
`
`Dec—06
`
`Paxil
`
`paroxetine
`
`Glaxo
`
`depression
`
`2,109
`
`Source: Orange Book and UBS Warburg LLC estimates
`~~~~~~~~
`
`By Pamela Sauer
`
`© 2001, Chemical Market Reporter, Reed Business lnforrnation Ltd All Rights Reserved. Copyright
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