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Posted on 30th October 2012

The waning power of brands

Not so long ago, it was possible to make a simple distinction between branded and unbranded generic markets in Europe. In unbranded markets, either doctors wrote INN scripts or else pharmacists were happy to substitute generics against a branded prescription. As a result, manufacturers competed mainly on price, via discounts or services offered to pharmacists and/or wholesalers. Prices in these markets were low and the most successful companies had a large range of products and a low cost base, with a sales force restricted to a few key account managers. Branded markets were very different. Doctors were the key decision makers and had to be convinced to prescribe a given company’s branded products by an extensive (and expensive) sales force. But with pharmacists unable or unwilling to substitute, manufacturers achieved higher prices for their products and generally made much better returns than their counterparts in unbranded markets. As a result, most new entrants to European generics tended to focus more on countries with a branded model, the exception being Indian manufacturers making a virtue of their competitive production costs.

Today, the branded markets are under siege. Some (Portugal, Spain, Italy and soon Ireland) have been forcibly ‘de-branded’ by the introduction of mandatory INN prescribing or – in the case of Germany – the introduction of tendering. Others remain technically branded, but reimbursement structures have been introduced that have forced prices down, sometimes to levels not dissimilar to those seen in the unbranded markets. Central Europe has been a prominent victim of this trend, with Turkey, Poland and Hungary all experiencing massive price declines over the last 12 months driven by changes in government reimbursement policies. At the same time, Slovakia has moved to INN prescribing, the Czech Republic is flirting with tenders and the planned introduction of a sales ‘claw-back’ in Romania seems set to wipe out industry profitability in that market, as it is based on gross sales in a market where deep discounting to pharmacists is the norm and where industry receivables stretch for over 12 months. Only Russia and the CIS republics have retained high prices, forcing regional players to depend increasingly on these politically risky markets to support their overall profitability.

Of course, some more profitable branded pockets remain, of which the largest are those segments of the German market that remain outside the tenders. To these can be added Poland and Turkey (despite the price cuts), Greece (but receivables are a problem here), Switzerland, Belgium, parts of former Yugoslavia, Bulgaria and Albania. However, there is no escaping the fact that all the high-volume markets in Europe other than Russia are now unbranded and that large sales forces are increasingly becoming unviable even in branded markets, as prices sink. Nor is it easy for new entrants to Europe to build a strategy around selling branded generics, unless they are small companies that are happy only to operate in a limited number of (mostly rather obscure) markets.

We draw two main conclusions from what is happening in Europe today. Firstly, branded generic markets are not the safe haven of profitability that they used to be and any market is vulnerable to government interference, regardless of how healthcare is funded. This applies equally to branded markets outside Europe. China has recently cut prices substantially at a national level and the Chinese regions are also using tenders, which are resulting in price drops so severe that even local companies find it difficult to compete. In India, meanwhile, the government plans to cap the prices of ‘essential’ drugs – a category that covers around two-thirds of the current market – despite the fact that the cost of purchasing these products falls on patients rather than on the state. And there are plenty of other examples from around the world.

The second conclusion, which follows naturally from the first, is that companies need to distinguish carefully between brands that actually have some unique characteristics and brands that exist purely by virtue of the regulatory structure of the market in which they are sold. Brands that are nothing more than generics with a fancy name on the pack are inherently vulnerable to pricing pressure and to ‘genericisation’ of the market (i.e. INN prescribing or active pharmacy substitution), even if they continue to benefit from being familiar to pharmacists and patients. Brands that have distinctive features (or OTC status) are much more defensible. So when companies decide to adopt a ‘branded’ strategy – which, on the face of it, makes a lot of sense – they need to look hard at the quality of the brands that they plan to invest in. As big pharma companies have already discovered, money tends to talk more loudly than any number of years of brand heritage and a brand name that appears invulnerable today, risks crumbling to dust tomorrow if the products that underlie it have nothing else to protect them.

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