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WSJ chimes in on “authorized generics”

http://online.wsj.com/article/0,,SB109217251515687900,00.html?mod=yahoo_hs&ru=yahoo

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Big Pharma
Courts Rivals
Of Generic Drugs

By HOLLISTER H. HOVEY
DOW JONES NEWSWIRES
August 11, 2004

NEW YORK -- Pharmaceutical companies have found a new way to thwart generic-drug makers trying to muscle in on the patents of their medicines: Don't fight a copycat drug maker; court its rivals instead.

This may make for strange bedfellows, but big pharma's thinking is this: By selling the distribution rights of a drug to an "authorized generic" manufacturer -- that is, a copycat drug maker considered a friend, not foe -- the pharmaceutical company can cut into the profits of any other generic-drug maker which rushed out a copy of a branded drug going off-patent.

Without the competition that such a licensing deal would engender, the first generic-drug maker to market would have six-months free reign of selling. It can charge more and bank bigger profits. Authorized-generics deals threaten this profitability.

This tactic by big pharma isn't new, but it is adding to the pressure generic-drug makers are under right now. In recent years, these copycat drug producers have grown strongly, thanks to billions of dollars worth of branded drugs moving off-patent. Now, their growth is slowing, compounded by a range of company-specific problems, pricing pressure and the fact that many of the companies are just bigger than they used to be.

"The fundamental outlook [for the generics companies] is overall positive, though not as quite as much as it was because of the authorized deals," Lehman Brothers analyst Richard Silver said. He believes much of this is already reflected in the valuation of the companies.

Shares of Mylan Laboratories Inc. have fallen this year, while shares of King Pharmaceuticals Inc., the company that Mylan hopes to buy, are also down, though there are other factors involved in these declines.

Mylan is buying King to help add brand-name drugs to its portfolio and to have a sales force that can push its own experimental blood-pressure medicine. It is a move away from the generics business. The Food and Drug Administration recently decided to stay out of the "authorized generics" issue, denying petitions from Mylan and Teva Pharmaceutical Industries Ltd. to limit such "authorized generics" deals. [See #msg-3480533.]

"The authorized-generics decision clearly devalues the 180-day exclusivity," said Kathleen Jaeger, president and chief executive of the Generic Pharmaceutical Association, the generic-drug industry's trade group. "The long-term implications to the industry and consumers are tremendous."

Ms. Jaeger said the trade association is "exploring all avenues" with this issue: "The 180-day provision has been the number-one priority for the trade association for the last couple years," she said.

The association contends that by taking away the profit levels seen under 180-day exclusivity, generic-drug makers will lose the incentive to attack the patents. [No kidding.]

Exclusivity is a major windfall for a generic company. It only pays a few million dollars in legal fees to challenge the patent of a drug. In contrast, the drug's developer could have spent as much as hundreds of millions of dollars on developing it and reaped hundreds of millions of dollars in revenue, if not billions.

Pharmaceutical Research and Manufacturers of America, the trade group representing brand-name drug manufacturers, doesn't think the incentive for generic-drug makers is lost. They say these companies will still chase the profit, even if it's at a lower margin. Spokesman Court Rosen said the group considers authorized generics "pro-competitive and pro-consumer" because they increase the number of competing products on the market.

Being the recipient of authorized deals isn't necessarily translating into an amazing stock price. Companies such as Watson Pharmaceuticals Inc. and Par Pharmaceutical Cos., which have been two of the main companies selling authorized-generic drugs, have seen their shares fall 45% and 42%, respectively, this year. Investors must remember that these companies aren't exclusively making authorized-generic deals. They have other divisions and feel pricing pressure like other drug companies.

Numerous big-selling drugs are expected to lose market exclusivity in the coming years, signaling a possible boon for the generics companies. However, it is also an opportunity for pharmaceutical companies to forge authorized deals.

Take Bristol-Myers Squibb Co. When Ivax Corp. was first to challenge patents on Bristol's type-2 diabetes drugs Glucophage XR and Glucovance in the last year, Bristol responded by penning a deal with Par Pharmaceutical. This gave Par rights to start distributing the authorized version of the drugs as soon as Ivax's version of the product hit the market, said Par spokesman Stephen Mock.

Ivax weathered the storm, though; its stock has remained relatively flat this year.

These distribution pacts don't always make sense, so experts don't expect the brand-name companies to enter them unless there are heavy benefits to holding on to a drug, such as the degree to which the generics company may be able to take over the market as well as manufacturing concerns.

Case in point: GlaxoSmithKline PLC ended its litigation with Par -- the first to attack Glaxo's patent on antidepressant Paxil -- by signing an authorized-generic deal. Par distributed a generic version of Paxil made in Glaxo's plant, enabling Glaxo to keep that facility running. This was important because Glaxo is still selling the controlled-release version of the drug exclusively under the brand name.

"I don't know of anyone who's done this solely for scaring off generics, though if it becomes common, it may have that effect," Richard Kelly, a director and shareholder at law firm Oblon, Spivak, McClelland, Maier & Neustadt in Alexandria, Va., said of authorized-generics deals.

Lehman's Mr. Silver also questions how far-reaching the practice is. "The bigger question is how widespread this is and who might be hurt more and who could be hurt less," he said. "Our view is that this isn't necessarily going to be widespread, not a permanent trend. It certainly will be more common, though we don't expect to see authorized generics in every case."

While the authorized-generics issue may hurt stock prices of generic-drug makers if these deals increase, it will also push down the price of drugs, which is important for consumers who have grappled with the affordability of medicines.

When a generic drug enters the market without other generic competition, it usually gobbles up a majority of the branded drug's market share. After all, the generic version is selling for about 25% less than the branded medicine. Compare this with the 45% drop in price experts reckon an authorized-generic version of the drug prompts.

"Bottom line, there is going to be a continued downward pricing pressure on the sales price of any kind of drug, whether it's brand-name, authorized generic or regular generic," said Martin Koenig, portfolio manager of the Integrity Health Sciences Fund.

"The consumer will probably be well-served because the price of prescription drugs will be more affordable."
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