The Economics of Generics - Analyst Blog

A generic image of many stacks of coins Credit: Shutterstock photo

Besides the multitude of the world's poor, the aging population (2 billion people of 60 years or above by 2050) is a growing public policy concern, given the high healthcare and related costs. The West worries about age-related diseases, such as osteoporosis, arthritis and eye ailments. Concerns in Asia (India in particular) and Latin America include lifestyle diseases, such as diabetes and heart ailments and hygiene-related illnesses.

The deprived typically suffer from hygiene-related illnesses, like malaria, cholera and tuberculosis. So long believed to have been eradicated, these diseases have reappeared in a more virulent form. Tuberculosis for example, has already affected one-third of the world's population and affects one human being every second. Also disturbing is the increasing incidence of HIV/AIDS.

Understandably on account of affordability and the vast coverage, generics have to form a core strategy in the economics of healthcare and its efficient delivery. Interestingly, medicines happen to be one of the three most common causes of inefficiency according to the World Health Organization (WHO). The organization also estimates that countries could save 60% of their pharmaceutical expenditures by shifting from original medicines to generic drugs. This is a major shot in the arm for economies around the world singed by the global financial turmoil.

But the TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement, overseen by the World Trade Organization (WTO) that protects intellectual property rights to promote technological innovation and their transfer, makes the production and procurement of cheap generic drugs difficult.

Nevertheless, the genericization drive is gaining ground. Lipitor (single largest selling drug in the world - around $10 billion in global revenues), the anti-cholesterol drug innovated by the world's largest drug company - Pfizer ( PFE ), which went off-patent last month will now be sold in its generic form by India-based Ranbaxy Laboratories Ltd (part of Daiichi Sankyo Co Ltd - a Japanese biogenerics company) in the US. Other major drug makers, such as Bristol-Myers Squibb ( BMY ) and Eli Lilly ( LLY ), are facing patent cliffs on key drugs going forward.

As innovator drugs go off-patent, several other generics are in the pipeline. In 2010, health expenditure in the US was at least two and a half times higher than the OECD (Organization for Economic Co-operation and Development) average per person.

In Japan too, the share of generic drugs in the total pharma market increased at a CAGR of 1.4% between 2006 and 2010. With revenues of $3.5 billion, the Japanese generics market accounted for 18.0% of the total pharma market in 2010. In the European Union, estimates indicate that generic drugs can affect savings of 20% within the first year of entry of a generic drug.

Only 5-10% of the population in sub-Saharan Africa and South Asia has health coverage. Rising healthcare budgets and the ensuing general economic crisis across the globe strengthen the case for affordable healthcare and generic drugs.

Ineffective delivery of healthcare comes at the economic cost of lost productivity and lost income. WHO strongly advocates the concept of universal health coverage and narrowing the coverage gap between the rich and poor. This can be addressed with generic drugs and a more sustainable delivery system for health services, which ensures affordability, accessibility and availability.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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