(Bloomberg) -- Sixteen years ago, Glenn Saldanha took over his father’s business making copycat versions of novel medicines and added a side bet of his own: Instead of just imitating old drugs, his family firm would try to innovate completely new ones too.
Investors complained, competitors were mystified and Saldanha’s father was skeptical. Nevertheless, Saldanha pressed ahead in the painstaking trial and error process of new drug discovery. Now he says his Mumbai-based Glenmark Pharmaceuticals Ltd. is in the homestretch and one of its candidates should hit the market in the next five years.
Any breakthrough could be in the nick of time because in the coming years Glenmark and the rest of the $200 billion generic drug industry will abruptly find they have far fewer new drugs to copy. At the same time, profit from existing products is eroding as regulators like the U.S. Food and Drug Administration increase approvals to bring more competition.
The combination means the generic drug business as veterans like Saldanha, 46, have known it their entire careers, is coming to an end. Companies around the world are racing to figure out what’s next, from smaller firms like Saldanha’s, all the way to Israel’s Teva Pharmaceutical Industries Ltd. and U.S.-based Mylan NV, who are among the world’s biggest producers of copycat medicines.
For decades, the generic drug business has followed a simple model for growth: wait for a chemical medicine to go off patent, then copy it. But 2018 promises to be one of the industry’s last big bumper crops, with $27.8 billion worth of therapies losing protection. The following year’s haul drops by almost two thirds, and the year after it shrinks even further, according to research from Oppenheimer Holdings Inc.’s analysts.
"Companies have to figure out what the alternate business model is," Saldanha said in an interview at Glenmark’s headquarters.
For now, generics firms are still riding a wave of patent expirations. Combined expiries this year and next represent the biggest windfall the industry has seen in five years, according to a February report from Oppenheimer. But because of the time it takes to develop a new product in the drug business executives are already thinking about what to do in two years when that wave crashes.
Some, like Saldanha, are turning to innovation, although the most common reaction has so far been to consolidate. Because regulators are approving generic drugs at a faster clip -- the U.S. FDA approved a record 800 new ones last year -- there is more competition in more therapies and prices are eroding faster. That means the six months of exclusivity regulators grant for being first to genericize a patented drug is crucial. Buying other firms is one way to collect more such products.
Teva, the world’s largest generic drugmaker, bought Allergan Plc’s generics business in 2016 for about $40 billion, and Mylan last year bought Sweden-based Meda AB for about $10 billion. The dealmaking continued this year with Stada Arzneimittel AG agreeing to sell itself to private equity firms, and German generics maker Fresenius SE saying it would buy Illinois-based Akorn Inc.
The largest players like Teva and Mylan now probably have enough products with first-to-market exclusivity to offset price erosion, but smaller players will continue to face deterioration across their portfolio as high as 10 percent per year, according to Bloomberg Intelligence analyst Elizabeth Krutoholow.
"It’s definitely trending to bigger is better in generics," said Derek Archila, an analyst with Oppenheimer. But even with more consolidation he predicts political pressure will stop generic drug prices rising much, transforming the business into something like a low-growth utility dominated by a few big players.
Even with consolidation looking set to continue, in the long term companies must still contend with the diminishing opportunities in simple chemical drugs. In response the generic industry is looking to master a new class of copycat medicine called biosimilars. Six of the top ten selling medicines in 2015 were grown from living cells rather than brewed in a chemist’s lab and biosimilars are cheaper versions of these complex therapies.
But the manufacturing capabilities behind the two classes of medicine are completely different, which means generic companies are in many cases starting from scratch.
"We are behind many of our competitors in developing biosimilars, and will require significant investments and collaborations with third parties to take advantage of these opportunities," Teva said in its annual report last year.
While becoming a major player in biosimilars remains a long-term goal for Teva, in traditional generic drugs the company currently has the broadest portfolio in its history, it said via email. The company expects those products will continue to drive growth in the U.S. because many will be first to market, and are protected from further competition by their complexity.
Forecasts on the value of drugs going off patent, like the one cited by Oppenheimer, could underestimate Teva’s revenue opportunities because the company could bring drugs to market earlier by challenging patents in court, the spokeswoman said.
A Mylan spokeswoman referred to a company presentation from earlier this year which forecast that the company’s pipeline of harder to copy generics will also be sheltered from competition by their complexity. The company has said it expects to win more of the generic drug market both in and outside the U.S., and is making a push into biosimilars as avenues for growth.
For smaller companies like Saldanha’s Glenmark, transformation is even more urgent. Last week, Glenmark shares fell the most in about eight years after the company reported earnings that fell short of analysts’ estimates due to price erosion. Glenmark’s stock traded at around 684 rupees per share in Mumbai Thursday, the lowest point in almost three years.
On a conference call with analysts, Saldanha pointed to the innovative drug development program as one source of new revenue in the next year. He said the coming year could see a licensing deal for one of the company’s early-stage discoveries, similar to ones it has signed in the past with the likes of Eli Lilly & Co., Merck KGaA and Sanofi.
The company currently forecasts its leading innovative medicines, a dermatitis treatment and another for cancer, to be ready for a submission to regulators by 2022.
The strategy is still a gamble, but Saldanha says his father, who raided his own retirement savings to found the company, actually came around to it pretty fast. While his father passed away in 2012, he recognized the need for change.
"He enjoyed the risk taking," Saldanha says. "He was a risk taker himself."