Immune to Generics: Another Reason to Buy Biotech
By Rob Fannon, editor, Phase 1 Investor
January 26, 2007
In 1984, Rep. Henry Waxman (D-Calif.) teamed up with Sen. Orrin Hatch (R-Utah) to create legislation that paved the way for generic versions of traditional pharmaceuticals.
The Hatch-Waxman Act, as it's informally known, allows generic drug companies to piggyback on the huge amounts of effort, time, and money the big drug companies have poured into getting their brand-name drugs on the market.
Generic drugs have virtually no research and development costs. More importantly, these copycats don't have to go through any stringent laboratory or clinical trials, either. The knock-off drugs only need to prove a chemical equivalence to their brand-name counterparts – a much lower and less expensive hurdle.
Generic drug companies can either wait for drug patents to expire or expedite the process by challenging the validity of those patents in court. The generic drug industry is a ruthless, cutthroat business – much more than a mere thorn in the side of the drug industry...
Former CEO of Bristol-Myers Squibb (BMY), Peter Dolan, lost his job this past year due to his botched handling of a generic threat to his company's top-selling blood-thinner drug, Plavix. During negotiations with Canadian generic drug maker Apotex, BMY bafflingly surrendered its rights to receive lucrative damages if the Plavix patent should prevail in the ongoing litigation. Without the threat of charges, Apotex launched its generic version before the trial was even over, eating up a significant portion of Plavix's market share.
Pfizer, which stands to lose 50% of sales to generic drugs by 2011, announced this week that it would be slashing 10,000 jobs by 2008 in order to cut $2 billion in annual costs. This is on top of a 20% trimming it made in its sales force late last year.
And here's where the biotech drug industry comes in: Right now, the FDA has no formal guidelines in place for generic versions of biotech drugs. The regulatory agency doesn't have the expertise to evaluate such applications.
Traditional pharmaceutical drugs are just chemicals, easily susceptible to the reverse engineering needed to create generic versions. Biotech drugs, on the other hand, are complex proteins, enzymes, and molecules made from living cells.
Mass-producing these drugs often requires some genetic manipulation of plant or animal cells. It's difficult, if not impossible, to produce "biogenerics" – exact copycats of genetically engineered insulin, for example, or human growth factor.
However, the generic industry is trying to make inroads into biotech. Hatch and Waxman have plans to produce biotech legislation similar to their 1984 guidelines. And last year, the FDA did approve a biogeneric for the first time.
Importantly, though, the agency went out of its way to avoid instituting guidelines for other biogenerics, calling the new drug a “follow-on” product instead of a generic equivalent and even when new guidelines do get released, it's likely that biotech knock-offs will have to undergo some version of clinical testing – an expensive proposition.
In the next two or three years, 30% of Big Pharma's total revenues will come under generic threat. For now, the lack of a generic threat to biotech drugs is just one more reason why the world's biggest drug makers are eyeing the biotech industry with watering mouths.
With innovative technologies, products that command premium prices, and lack of a legitimate near-term competitive threats, there's no better investment available to Big Pharma right now. The same can be said for us as individual investors.
Good investing,
Rob Fannon
Editor, Phase 1 Investor
