Notes from the Advisory Board
Compared with the pharmaceutical markets in the US or Japan, the South Korean market is relatively small and, despite its moderate size, very fragmented (with almost 2,000 domestic players, most of them very small). It is difficult to point to any one dominant domestic player. Commercially, 2010 was a difficult year for the top-ten domestic generic drug producers, as they lost market share to competition from second-tier players. However, today, the first-tier South Korean generic drugs manufacturers appear to be in a healthy position to regain market share back again, now that the ban on providing rebates on drugs has been revoked by the South Korean government.
Nevertheless, given the lack of differentiation between the top generic players in South Korea, such as Yuhan, Dong-A or Daewoong, we believe it is a better strategy to focus on niche companies such as Green Cross which has a leading market position in vaccines and plasma products.
Taiwan - small domestic market, huge opportunities next door
Taiwan is another of the smaller Asian markets for generic drug manufacturers. As is the case with South Korea, it is a fairly mature market, and growth for local generic players is likely to come from exports. The big opportunity lies just next door: China. In this regard, companies like Yung Shin already have 30% of sales coming from China and in total 50% of sales from exports to outside of Taiwan.
The API sector (Active Pharmaceutical Ingredients) in Taiwan is fairly small, but healthy and thus warrants a closer look. While some of the top players in this market remain private, and are therefore not a suitable investment for the fund, there are signs that they could IPO over the next 12-18 months.
Emerging generic drug market Japan
As we have stated since the launch of the Pictet-Generics fund back in 2004, Japan is probably one of the single biggest opportunities for generic drug manufacturers. After the US, it is the second biggest pharmaceutical market, with over 60bn USD turnover p.a. (9% of global pharmaceutical drug market). Given the rapidly ageing population – Japan has the biggest proportion of citizens older than 65 years among the OECD –, there is a tremendous need to get a tighter grip on spiralling healthcare expenditures (for drugs and services). Historically, the Japanese government has taken surprisingly little action to curb healthcare costs, compared with other Western countries. This has started to change. More and more, the government imposes tighter rules on pharmacists, doctors and hospitals in order to switch from branded drugs to generic drugs. Such measures do have a significantly positive and immediate impact on healthcare expenditures, as generic drugs typically cost 80% less than originator drugs. Following the most recent round of incentives, the generics market is growing well. The outlook for generic drug manufacturers offering their products in Japan is very favourable going forward.
Besides, several Japanese players, such as Fuji Pharma and JCR, are working on promising biosimilar projects, i.e. generic versions of biological drugs. Biosimilars – worldwide – appear set to become the next growth wave in generic drugs manufacturing.
Biosimilars – the next wave in generic drug manufacturing
In highly regulated markets like the US or the European Union, biosimilars face significant technological and regulatory hurdles. In the EU, the EMEA* guidelines for approving follow-on antibody products are due to be published shortly. These guidelines will address important issues surrounding criteria for comparability and the importance of ‘glycosylation’** patterns for both efficacy and immunogenicity of antibody products.
In the US, following the passing of the Healthcare reform in March 2010, the first steps are being taken by the FDA in determining an approval pathway for biosimilars. But things will take time. Final guidelines are expected within 12 to 18 months at the earliest. In a similar way to the evolution of the EU market, simpler biosimilars such as GCSF*** or EPO**** and growth hormone are expected to reach the US market well ahead of the more complex antibody products.
Apart from the industrialised countries, biosimilars will have an impact in emerging markets, too. These markets are seen as important near-term drivers for biosimilars, since the approval process tends to be a bit less stringent. To illustrate this statement, the first follow-on antibody products are already approved on the Indian and Russian markets (e.g. a biosimilar version of Rituxan has been sold by Dr. Reddy’s in India since 2008)
Furthermore, Several South Korean companies, including Celltrion and LG Healthcare, are making significant capital investment to build biosimilar manufacturing facilities. They are utilising grants from the government and have been active in finding partners to distribute the future products in various markets. The concern here is that this manufacturing capacity will come on line before biosimilars are approved in developed markets in the EU and US, and hence the companies will have a lot of idle capacity for some years.
Pictet-Generics
The fund invests globally in shares of generic drug producers who are able to benefit from the major drivers pushing the industry forward. There are three major drivers: the emerging markets’ need for affordable drug supply; the emerging generic drug markets with historically very low generic drug penetration (e.g. Japan and France); the opportunities of next-generation generic drugs, i.e. biosimilars, as described above.
Participants
· Dr Hardy Chan, Co-founder and CSO Scinopharm (Taiwan)
· Dr Dave Gershon, Professor at Harvard University, Health Science and Technology Program (Boston, USA)
· Mr Michael Sjöström, Co-founder, Senior Investment Manager and CIO Sectoral Asset Management Inc. (Montreal)
· Ms Paulina Niewiadomska, Senior Analyst, Sectoral Asset Management Inc. (Montreal)
· Denis Schmidli, Senior Product Manager, Pictet Funds S.A.
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* The European Medicines Agency, a decentralised agency of the European Union, is responsible for the scientific evaluation of medicines developed by pharmaceutical companies for use in the EU, hence the European equivalent to the US Food and Drug Administration FDA in this matter
** Enzymatic process that attaches glycans to proteins, lipids, or other organic molecules
*** GCSF: Granulocyte colony-stimulating factor (G-CSF or GCSF), a colony-stimulating factor hormone
**** EPO: Erythropoietin
