At an industry level the focus on generics within the Australian pharmaceutical industry continues to intensify. The loss of patent protection for leading PBS molecules such as Simvastatin has raised the awareness of generic medicines, which are now widely accepted by the Australian public. This is very important going forward as further high value PBS prescription medicines lose their patent protection in the next two to three years.

Government is also taking an increasing role in promoting the use of generic medicines as it seeks ways to hold spending on healthcare at growth rates similar to GDP growth. This remains a challenging target in the face of the continued ageing of the Australian population.

Industry Overview

Australian Pharmaceuticals - Market Summary 2006

Source: Genepharm Australasia estimates of Australian patient sales for the year ending June 2006

Market Competition

There has been significant rationalisation in the Australian generic market in the last 12 - 18 months driven by local and global merger activities.

On a global scale Novartis acquired the Hexal generic pharmaceuticals business in February 2005. Hexal has been merged into the Sandoz generic arm of Novartis pharmaceuticals.

Locally, Sigma acquired the Arrow Pharmaceuticals generic business in August 2005.

Both acquisitions resulted in the consolidation of competitors in the prescription generics market sector. Along with the Company's acquisition of DPAL over 99% of the total market value for generic medicines is supplied by five companies: Genepharm, Alphapharm, GenRx, Hexal and Sigma.

Importantly, there is a significant incremental opportunity that still exists in the Australian market for generic substitution away from the originator brand of medicine. Industry figures estimate that sales of the originator brand still hold around half of all dispensed prescriptions for a drug once the patent has expired. The Company sees this as a vital area for growth and will be implementing programs to extract sales from this market segment. The alliance with Primary Health Care Limited announced on 19 September 2006 is a key platform for achieving this goal.

The relatively small size of the Australian market, the strong regulatory regime, and small number of already well-established players are natural barriers to entry to other global players contemplating entering this market.

The Company expects that other global players will seek a presence in the Australian market via in-licensing strategies that include long term supply arrangements with existing market participants.

The Company's position as the only independent sales organisation has created a number of new partnership opportunities with global manufacturers to add unique product lines to the business.

Market Growth

The use of generic pharmaceutical products will continue to grow with a compound annual growth rate of around 20% until the end of the decade. The total PBS is estimated to grow at around 7% per annum over the next few years which is slightly below the historical four year compound annual growth rate of 8%.

Around one in every four prescriptions presented to pharmacists in Australia were filled with generic medicines in 2005. This level of use will almost double in the next five years as more than half of the top 100 selling prescription medicines in Australia will come off patent and be substituted for generic branded drugs.

By 2009 over 200 generic drugs will account for a dispensed value of around $2 billion. The top 10 generics will be responsible for 40% of this value ($800m) and the top 40 generics will make up 85% ($1.7 billion). This represents a significant shift in the current structure of the generic market for manufacturers and pharmacists. The patent expiry of leading high value drugs will drive increased competition at the small end of the pharmaceutical product range and also concentrate pharmacy generic activity and profitability.

Supporting the product growth are three underlying factors that will drive generic medicine substitution and compound the growth of generics from patent expiries.

• The Federal Government has signaled its intention to increase support for the use of generic medicines that is expected to underpin the Government's cost containment strategies for the Pharmaceutical Benefits Scheme (PBS).
• The ageing of the Australian population will increase the use of PBS funded medicines.
• In the face of increased price competition in pharmacy 'front of shop' categories pharmacists see generics as a means by which they are able to protect and maintain the overall profitability of their business.