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PAR HAS CAPACITY FOR $125 MIL. OF TABLET MANUFACTURING, CEO SAWYER REPORTS; GENERIC INDUSTRY EXECS PROJECT RAPID GROWTH UNDER HEALTH REFORM

Executive Summary

Par Pharmaceutical has the capacity to manufacture approximately $125 mil. worth of generic tablets and capsules at its existing facilities, Pharmaceutical Resources CEO Kenneth Sawyer told the Furman Selz Generic Drug/Drug Delivery Conference April 21 in New York City. Par is currently producing about 250 mil. units a month at its Spring Garden, N.Y. facility, Sawyer said. "With two shifts we could probably go to 350 mil. units a month," he said. He estimated that would translate into $125 mil. in sales. Pharmaceutical Resources, Par's parent company, reported sales of $23.7 mil. for the fiscal quarter ended Dec. 31, which includes distribution revenues from two products manufactured by GenPharm. With the advent of health care reform, the generic drug industry could triple in size "over the next three to five years," Sawyer maintained. "That to me says that capacity has got to be the main key" for generic drug companies. When Copley Pharmaceuticals went public a year ago, the company made the same argument about a potential shortage of manufacturing facilities and capacity for the predicted upsurge in generic volume ("The Pink Sheet" May 25, 1992, p. 7). The growth in generics will be fueled by a combination of important new drugs coming off-patent and the emphasis "that the government will put on genericizing this country's medicines," Sawyer predicted. He estimated that the generic drug industry currently generates $2.5 bil. in sales at the manufacturer level. If all prescriptions that are currently filled with brandname drugs when a generic is available were instead filled with a generic, "the savings alone for this coming year would be in excess of $25 bil.," Sawyer contended. The Clinton health care reform effort "would defy logic not to go heavily into private incentives" for generic substitution, Sawyer declared. Pharmaceutical Resources has been expanding its personnel in anticipation of clearance under FDA's application integrity policy, Sawyer said. The firm has hired 80 people in the last eight months, with "most dedicated to manufacturing, processes, quality control and R&D." PRI now employs 400 people. Par has completed its validity assessment program, Sawyer declared. "The work that we have completed is now in the hands of FDA...for sign-off," he said. "I think that indeed we are close, that we have filled the necessary requirements." If FDA approves of Par's rehabilitation efforts, the firm will be eligible for approvals for the first time since 1989, when it was implicated in fraud. Par has 20 "commercially worthwhile" ANDAs pending, Sawyer said. "We have an additional 25 products that are being readied." Thus, he concluded, the company could have up to 45 new products to manufacture within two years. Par has begun planning for a 100,000-200,000 square foot expansion of its New York plant. "Capacity of course means not only plants, it means systems and it means professionalizing so that we do not ever again suffer the kinds of waves of scandal that we have seen in this industry since the 1970's and through the 1990's," Sawyer said. Working in the industry's favor, Sawyer said, is that "it has moved away from an industry of personalities to an industry of serious professional companies. I think that is a very serious factor in understanding the endurance of the industry and its ability to meet the challenges ahead." Several other generic drug industry execs echoed Sawyer's forecasts of rapid growth for the industry in the near future and specifically of the likely benefits from the current health care reform efforts. Adoption of a national health care system "could be one of the best things that has ever happened to the generic industry," Mylan Chairman Roy McKnight said. "It wouldn't surprise me to see the new health care policy stimulating the widest and most rapid use of generic pharmaceuticals ever," Copley President Jane Hirsh said. "Generic drug consumption is growing anyway as a means of cost containment," Hirsch noted. Generic prescriptions dispensed in 1991 were up 72% since 1986, she said. The generic share of the prescription market has climbed from 23% in 1986 to 34% in 1991, according to Hirsch. "The 1992 data is not in, but I believe it will at least be 38% and I wouldn't be surprised if [it] hit 40%." "We strongly believe in and support a national health care system," McKnight said. Pushing the concept of an ingredient reimbursement policy, McKnight declared that "federal reimbursement policy must adopt a single reimbursement level for the same product." McKnight and Hirsch also noted the significance of manufacturing capacity. Mylan has expanded its Morgantown, W.Va. facility by 60,000 square feet, McKnight said. "We are in the process of completing another 50,000 square foot addition to our plant in Puerto Rico." Mylan has also recently acquired two companies, Dow B. Hickham and Bertek. Alluding to investor concerns that President Clinton's proposal to cut back Sec. 936 tax credits could hurt Mylan, McKnight said "we considered all this before we decided to expand." Because the plant was built with future growth in mind "it was a very efficient and simple expansion." Noting that the Puerto Rico plant "is less than 10% of our business," McKnight added "we are in Puerto Rico to stay." "The only cloud on the generic industry horizon is the lack of a single strong voice," McKnight said. "The need for one organization representing the common cause has never been more evident." Alluding to a failed merger attempt between the Generic Pharmaceutical Industry Association and the National Association of Pharmaceutical Manufacturers ("The Pink Sheet" March 22, T&G- 1), McKnight said that "there have been several meetings recently between GPIA and NAPM in an effort to join forces, but somehow they have gotten off course." It "would probably be best for those two organizations as well as the National Pharmaceutical Alliance to form a single organization," McKnight continued, "There is strength in unity and there has never been a time when the industry needed to be heard more than right now." The upbeat tone by the generic industry execs at the meeting was matched by the interest exhibited by an audience of approximately 300 people -- much larger than previous sessions of the annual Furman Selz meeting. The companies fed the interest with rosy sales and earnings projections. Mylan, for instance, expects to report a sales increase of "at least 50%" for fiscal 1993 (ended March 31) and earnings growth of "at least 65%," McKnight said. In fiscal 1992, Mylan earned $40 mil. on $132 mil. in sales. Several generic firms have been able to operate at very high margins. Copley's focus on niche market generics coupled with a string of first generic launches helped the company show gross margins of 62.5% for fiscal 1993, the company reported. The firm estimates a generic industry average gross margin of 38.7%. Copley's net margins were 20.3% in FY 1993 versus an industry average of 9%. Another firm reporting above average profit margins is Watson Labs. For the first quarter of 1993, Watson's gross margins were 53% with net margins of 16%, President Allen Chao said. Most companies also reported numerous pending applications: Mylan has applications for "17 different chemical entities pending representing 39 different products," McKnight said; Copley said it has 27 ANDAs pending and 30 in development; Taro Vit said it has 21 ANDAs pending; Watson reported 27 ANDAs for 18 drugs on file and has 21 more drugs in development; Marsam said it has 20 ANDAs pending; and Lemmon reported 23 ANDAs pending (see related item, T&G-12). Beyond the near-term optimism, a common refrain was the need for a long-term strategy to develop patented products. Mylan, for example, announced April 20 the signing of a licensing agreement with the Spanish firm Ferrer International for North American rights to dotarizine for treatment of migraine and vertigo.
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