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How to enter the US & European Generic Pharmaceutical markets

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How to enter the US & European Generic Pharmaceutical markets

  1. 1. How to enter the US & European Generic Pharmaceutical Markets - Generic Pharmaceutical Industry - Business Strategy - Market Entry - Finished Dosage Manufacturers The US and European markets are still the largest and most profitable in the generic pharmaceutical industry. However, there are many challenges to unlocking the revenue potential. Like most markets there are multiple tactical entry options: 1) Contract manufacturer 2) Strategic Partner 3) License IP 4) Distribution Deal 5) Joint Venture or invest in existing company 6) Acquire control of existing company 7) Set up NewCompany Inc to sell directly Each of these scenarios have individual challenges outlined in the report. Many of the comments are universal for entering any market, but this report is intended to reflect experience and observations for the European and US markets. Authored by: Asa Cox Founder & CEO Generic Pharma 2.0 LinkedIn - Twitter - Email +1 705 615 1500 x501 ENTRY OPTIONS
  2. 2. 1) Contract manufacturer Pro’s Con’s Low risk, low management commitment Low value, low profit. Very competitive. Relatively small investment (if new facility) No control over future revenues Revenue timetable: 1-2 years (conditional) No international presence or assets This is the commonly perceived quickest route to revenue for new markets. However, depending on the current manufacturing infrastructure, there could still be a lot of factory improvements required to meet EU or FDA cGMP standards. Many companies view international markets as an opportunity to manufacture more product in existing facilities, achieving better economies of scale and assume that profit margins will also be greater. This model is somewhat flawed. Whilst machinery might be new and certain senior management have international experience, the challenge to instill the necessary quality management understanding and improve total quality system is often underestimated in terms of time and investment. Although the SFDA have committed to raising local quality standards to get closer to those of US/EU, the current gap remains significant and can cause long delays in achieving regulatory approval to supply the markets. This causes frustration for both management and clients, often leading to change of tactics, introducing new challenges and delays. It must be understood that clients have many existing Indian CMO partners and most are only willing to evaluate new Chinese partners if there is significant cost advantages. These advantages are normally derived from vertical integration with the API. These cost savings must be significant to realise the investments required in changing suppliers (regulatory resources, fee's and opportunity cost). Unless your country is viewed as strategically important to the clients' supply chain plans, delays to key milestones and communication challenges quickly push projects down the priority list. It is recognised however, that many companies seek international approvals solely to meet government criteria for selling at higher prices in the local market. If this is the primary aim, then a CMO model could be the best route. Recommendation Undertake a cGMP gap analysis before building a business case to be a CMO. 2) Strategic Partner Pro’s Con’s Long term commitment from partner Multiyear timetable for product revenue
  3. 3. High learning potential Focus on cost reduction Cost sharing model Potential for partner to freeze or park project Establishing an exclusive or semi exclusive relationship with an international client with the intent to manufacture a portfolio of products. This model is used to secure commitment and investment from both sides. It often signifies the strategic importance of sourcing product from your country to the client and is historically used as a way to please or secure investors. Whilst securing greater commitment is important in building a business plan, the issues highlighted previously still remain and the relationship is likely to place commercial restrictions on the development of new clients. The timetable to revenue is the same. This type of relationship does provide a greater opportunity to learn from the client; a commitment to providing regulatory and/or cGMP 'training' is often part of the deal. Chinese companies must be aware that to secure such relationships, they will have to assume a large part of the costs (API, batch production, shipping etc). This is true for both larger clients (for whom priority is reduced) and with new companies seeking products (having limited financial capital). The client motivation is often to reduce cost of manufacturing and drug development. A good partner will help fill the knowledge/expertise gaps sought by the Chinese company to help it develop internal know-how. Most well known companies will already have Chinese partners for standard solid oral products for off patent molecules; some level of uniqueness will be required to secure headline clients. Recommendation Find a local advisor to help identify and negotiate strategic partnerships to reduce the time and investment. 3) License IP Pro’s Con’s Greater share of end sales revenue Multiyear timetable for product revenue Potential for significant revenue (PIV) No knowledge transfer Relatively quick deal timetable Potential for partner to freeze or park project
  4. 4. Whilst this is a significant step up the value chain; it is still a very competitive environment and has a number of inherent risks. Selection of suitable products years in advance of patent expiry is vital; licensing partners will often have their own internal R&D program for all but a few formulation technologies (e.g patch) or manufacturing facilities (e.g high potency) . This means that development timetables, IP strength, regulatory competency and security of supply chain all become points of evaluation. Only the largest of licensors would be willing to fund the litigation costs, but they are the same companies that have the largest R&D departments to ‘compete’ with. Given the long term nature of such projects it is possible for the priorities and commitments of a partner to change, leaving the product developer with little recourse but to cancel the contract and find another partner. By then the timetable could already be impossible to recover. There are many opportunity to license products closer to patent expiry or even expired products; however, the revenue potential will be substantially lower and the level of competition from existing players higher. The US and European markets are very different. In the US you can only license a product to one partner. In Europe you can license the same product to an unlimited number of marketing partners. Whilst Europe might seem like a more attractive target in this scenario; the level of competition is higher for each product development and often at approval. It is becoming increasingly common for licensing fee’s to be reduced (or even removed!) in order to secure a large partner who promises large volumes. Recommendation Work with an experienced local expert to undertake product selection; the most important consideration when building a business plan based on licensing. 4) Distribution Deals Pro’s Con’s Vast majority of sales revenue retained Multiyear negative cash flow No development phase conflicts Full responsibility for to-market activities Opportunity to progress into direct sales Best partner might be conflicted If there is sufficient capability, financial depth and risk tolerance, the greatest profit share can
  5. 5. be obtained from licensing deals made with products close to approval. An in-market entity would need to set up to submit the product and to directly resolve regulatory and legal issues. Licensing fee’s are always higher when a product has little/no risk of being rejected. The number of potential partners might be reduced however; many would not have the financial capacity and those that do would like have already made a deal or have their own product. Owning licenses/IP in the market also opens up the possibility of signing distribution partnerships. Appointing a company to handle solely the sale of products to the market; significantly reducing the share of profits required; although not as low as one might assume. Power is often placed with the party who has the connection to the end buyer. This model is much simpler in the US than in Europe; where there are few large buyers and one set of regulations. In Europe, each country requires specific regulatory and market know-how; it is likely that distribution deals would have to signed with different partners in each country too. This increases commercial and supply chain complexity, increasing the potential for unexpected delays in revenue. Recommendation Find a local advisor to help identify and negotiate distribution deals to reduce the time and risk involved in securing partnerships. 5) Joint venture or invest in existing company Pro’s Con’s Influence over project timetable & future Upfront cash investment likely Immediate access to sales infrastructure Tied to partner, reduces opportunism Direct access to know-how & resources Exposed to financial liabilities & risks A well structured partnership or investment could provide a more attractive business case than any other; especially if with an entity that has existing sales revenue. Whilst the upfront capital expense might be considered a significant risk for a Chinese company; the opportunity to generate cash flow from international assets and reap all the benefits of integration synergies, management learning and knowledge transfer. Investment in an existing operation will remove the time, cost and know-how to comply
  6. 6. with the abundance of legal and regulatory requirements for direct sales to the market. For example, approval is required to sell finished product in each of 52 US states individually. Such direct control removes any uncertainty over the future of subsequent investment in new manufacturing capacity, product technologies, human resources or IP development. However, it also exposes the investing company to liabilities for defective products, recalls and lawsuits. The most significant challenge is in the partner selection or investment target selection. Deep understanding of the market is required to evaluate targets and ensure the necessary client relationships are in place. Any partnership or investment should have the potential and capability to grow quickly once a streamlined manufacturing and development operation is in place. Recommendation A well experienced local advisor should be sought to guide identification and engagement of potential partner or investments. 6) Acquire control of existing company Pro’s Con’s Control over project timetable & future High upfront cash investment likely Immediate access to sales infrastructure Potential for relationships to be lost Direct access to know-how & resources Exposed to all financial liabilities & risks Whilst there is logic to acquiring total control of a marketing entity, securing the ongoing services of key management is vital. With many countries having few large buyers that accounts for the majority of revenue, maintaining those relationships is the only way to ensure value is achieved. Careful consideration must be made to financial incentives and market/ client reaction to the international acquisition of a domestic company. The importance of understanding of the current and future dynamics of the market in which an acquisition is sought cannot be underestimated. Regulations or competitors could change and remove any assumed value, advantage or growth that formed the basis of the acquisition value or return. Identifying undervalued assets (IP or manufacturing), know-how or relationships is the key to
  7. 7. improving an immediate and long term return from acquiring a market asset. Recommendation Contract a specialist investment advisor to identify, value and negotiate acquisitions. 7) Set up NewCompany Inc to sell directly Pro’s Con’s Timetable in complete control Reliant on capabilities of hired staff 100% of market revenues Enter market with zero history or credibility Potential for exit at multiple of investment Large competitors dominate Whilst the relative investment in a front end organisation might seem extremely attractive when the additional profits are considered, the challenges should not be underestimated. Many Indian companies have attempted to undertake a direct-to-market model in both Europe and the US. They either underperformed or failed for one or more of the reasons belows: - Insufficient relationships with key buyers - Underestimation of competitor response to protect market share - Using deep discounts to attract buyers created unsustainable cash flow (due to above) - Product selection based on domestic demand and not market demand - Insufficient understanding of total investment costs over time To overcome the above failings, new international entrants need to have very attractive products and a pipeline that ensures buyers view them as a viable long term supplier worth investing the required time and effort. Recommendation
  8. 8. Recruit a local market expert with strong industry connections to build a team focused on developing client relationships and establishing credibility. Use the team to advise on product selection. Questions? Are you developing a business plan to enter the US or European generic pharmaceutical markets? Generic Pharma 2.0 has a team of international experts who can guide you to the right decision for your company. Our team can provide: ● Gap analysis for your business: Where you are now vs where you need to be ● Business plan development: The strategy and tactic is best for your company ● Portfolio selection: The products you should develop for each market ● Partner engagement: Identifying and negotiating deals and partnerships Review our expert advisors Contact us to set up an introductory call Authored by: Asa Cox Founder & CEO Generic Pharma 2.0 LinkedIn - Twitter - Email +1 705 615 1500 x501

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