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LEDERLE's $65 MIL. IN COMMODITY Rx BUSINESS IN U.S. IS SECOND BEHIND ROBINS AMONG RESEARCH FIRMS: LEDERLE HAS BROAD LINE, BACKWARDS INTEGRATION

Executive Summary

Lederle does about $45 mil. annually in generic Rx commodity product sales directly to drug chains and U.S. govt. agencies, according to a recently-released analysis of the U.S. generic drug business by the California consulting firm SRI Internatl. Estimating Lederle's full annual volume in commodity Rx items at about $65 mil., the SRI report notes: "Direct sales to chains and to government institutions and agencies probably account for two-thirds to three-quarters of sales." That estimate puts the Lederle direct generic business in the range of $43-$48 mil. annually. Despite the heavy predominance of Lederle direct generic sales indicated by the SRI estimate, the consulting firm states that the marketer will need "wholesalers to help with market coverage." SRI notes that Lederle has five distribution centers for servicing direct accounts in Atlanta, Chicago, Dallas, Los Angeles and Philadelphia. Based on that infrastructure, SRI maintains, "Lederle's ability to serve its customers directly is probably less than optimal." The Lederle generic line (Lederle Standard Products) is promoted by the company's 600-plus detail force. The detail force is oriented toward pioneer products; it is "paid by the Lederle Standard Products venture to promote and sell the Lederle Products Standard line." The Lederle Products Standard line did about $80 mil. in sales in 1984. The total sales figure includes about $15 mil. in OTC products and vitamins in addition to Rx generic products, according to SRI estimates. Acetaminophen, under the Pain & Fever brand, is probably one of the line's "biggest sellers," SRI says. SRI highlights Lederle in the report, (ITALICS)A Generics Milestone: Drastic Business Impacts, as an example of a major multinatl. drug company's participation in the U.S. generic drug industry. SRI ranks Lederle second among major multinatl. firms in the commodity generic business in the U.S. in terms of sales behind A. H. Robins and its Elkins-Sinn subsidiary. The Robins subsidiary did about $90 mil., according to SRI. Among the specialized generic drug businesses, SRI views the Rugby Labs group as by far the largest dollar volume participant in the U.S. industry, with annual sales in the $200 mil. range. United Research Labs is second among specialized firms, according to SRI's accounting, with annual sales of about $75 mil. The SRI examination of the Lederle position in the generic industry provides a way to look at the strategic options open to major multinatls. in the generic submarket. One of the key issues for major firms, according to the SRI view, is based on the value of backwards integration to the bulk chemical level. An overall characteristic of the industry is the absence of fully-integrated participants. "Few firms' entire product line is fully integrated from formulation/manufacture through marketing/distribution to the end customer," SRI maintains. "Even fewer firms are integrated backward into substance production." SRI notes a general lack of manufacturing capacity for raw materials among generic specialty companies. "Only two specialized generics manufacturers, Biocraft and Copanos, in the antibiotics field, have production capabilities," SRI says. Bulk chemical production ability is more wide-spread among major multinatls., the report notes. This asset "helps to provide the key to understanding [the posture of the multinatls.] toward, and their ability to compete in, the generics business." Lederle May Push Self-Manufactured Generic Items Up To About 50% Of The Line, SRI Predicts The backwards integration could be important to multinatls. if price wars develop among generic products in the U.S., the consulting firm speculates. "Depending on the characteristics of a compound (e.g., complexity of production, relevance of economies of scale, availability of key intermediates, current and potential competing producers, potential for novel and cheaper processes, and demand outlook), [multinatls.] may or may not have an advantage over specialized generics manufacturers if an all-out price war should erupt at the dose-form level," the SRI report says. Lederle has a ready-made source for bulk chemicals as a subsidiary of American Cyanamid, the report notes. Because of that relationship, raw material supplies is a likely target for cost cutting efforts by Lederle to preserve generic margins. From each average sales dollar for products in the Lederle generic line, at least 60 cents goes to raw materials, labor, packaging and inventory carrying, SRI estimates. The consulting firm identifies raw materials as a "20-cent item" that will always be at "the center of cost cutting attempts." "Perhaps 65%-75% of all raw materials costs are in bulk medicinal chemicals," SRI says. "Consequently, it is probably safe to assume that the race is now on at American Cyanamid -- and in numerous other firms with fine chemicals process know-how -- to devise simpler and more cost-efficient methods of producing 'big' compounds." SRI expects Lederle to increase its share of captively manufactured products, or own-label products manufactured in-house, from the current 35% of the Rx generic business to about 40%-50%. According to SRI estimates, there are 12 outside mfrs. supplying the Lederle line. Mylan is the single largest supplier, providing as much as 10%-12% of the LSP volume. For its Lederle Products Standard line, the SRI report says that the company deals with its dose-form suppliers on both a private-label and contract manufacturing basis. Crediting Lederle's activity in the generic business with having done "more than any other" major pharmaceutical company to bring "recognition and 'legitimacy' to the U.S. Rx generics business," SRI speculates that Lederle may be a trend-setter in spinning off the generic business into a separate public entity. A public offering spin-off of the Lederle generic business could convert the generic line "into a more efficient generics company." SRI notes that a spin-off through a stock offering or sale to private investors would create a "distinct corporate entity and thus one less inhibited by the inevitable pressures of being a small part of a large research-oriented" multinatl. Pointing to a recent decline in new product additions to the Lederle generic line, SRI speculated that the slow-down is attributable to successes in the company's pioneer product area. However, SRI beleives, that Lederle "has made a clear commitment to the generic pharmaceuticals business, and we would be surprised to see it forsake that commitment, even if it should be fortunate to come up with a winner at the research (pioneer product) gambling table." SRI expects Lederle to go after generic versions of all the major products as they lose exclusivity coverage. The consulting firm views Lederle's entrance into niche markets such as cancer products as more problematic. In a different form of diversification underway in the generic segment, SRI sees some of the generic companies aiming at the development of exclusive products. The Rugby group, for example, may be developing a research center, SRI reports. The Rugby group "already has one research center," SRI notes, and "is building a new one on Long Island." SRI speculates that the building "may indicate a new strategy for the group: entry into the research-based pharmaceutical business." SRI points out that the Waxman/Hatch exclusivity rules provide more incentive for generic firms to search for products with exclusive positions. In a companion piece to the Impacts report, SRI predicts that research-intensive firms may begin outlicensing more me-too brands to generic companies in the future as marketing costs become prohibitive for further development by the larger companies ("The Pink Sheet" April 1, p. 8). The SRI report is part of a two-volume project. Each volume is available from SRI for $2,150. The two volume set is $3,750. The reports were authored by SRI's senior health consultant Leif Shaumann. SRI Internatl. is located at 333 Ravenswood Ave., Menlo Park, Calif. 94025.
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