Replies to post #2709 on Biotech Values

[DewDiligence]

>> Typical short-term perspective by FDA that played right into the hands of pharma. Characterizing [Authorized Generics] a "pro-competitive business practice" is ridiculous. <<

I can’t tell if the FDA’s decision was deliberately pro-big-pharma or just simpleminded. Is it unthinkable that the bureaucrats’ analysis was as shallow as: uh, duh, more generics must mean more competition… what’s the problem?

If this decision sticks, I predict an FDA-sponsored public hearing in a few years to discuss why there has been a drop-off in the number of generic applications.

[DewDiligence]

Mylan to Buy King Pharmaceuticals

[If you can’t beat em, join em. Perhaps Mylan’s losing its petition regarding “authorized generics” (#msg-3480533) was an impetus toward closing a deal to buy a branded-drug company.

There is one small misstatement below where the article says Mylan ranks second (behind Teva) in sales of generic drugs; in fact, Novartis ranks second!]

http://online.wsj.com/article/0,,SB109079748272873376,00.html?mod=yahoo_hs&ru=yahoo

>>
Deal Valued at $4 Billion
Gives Generic-Drug Firm
Access to Larger Sales Force

By LEILA ABBOUD and DENNIS K. BERMAN
Staff Reporters of THE WALL STREET JOURNAL
July 26, 2004

In a bid to expand its branded-drug business, generic-drug maker Mylan Laboratories Inc. agreed to acquire King Pharmaceuticals Inc. in a deal valued at $4 billion, according to people familiar with the situation.

Mylan's acquisition of the specialty-drug maker is the latest move in the broader trend of generic-drug companies pushing into the highly profitable branded-drug business. Other generic companies have been slowly adding branded drugs to their line-ups, but Pittsburgh-based Mylan's bold expansion in this market with one big deal could spur others to follow suit.

The generic-drug industry has enjoyed rising sales in recent years, thanks to cost-containment efforts by employers, and state and federal governments, which have pushed health-care beneficiaries to opt for cheaper off-patent medicine. But competition in this commodity business is intense, squeezing margins to razor-thin levels. Further pressure on the generics is coming from the entry of low-cost manufacturers in India and new strategies used by branded rivals to undercut the generics' profits.

Officials at generic-drug makers think selling branded drugs can strengthen profitability beyond what is possible in the cutthroat generic-drug business.

Mylan, the world's second-largest generic-drug company, already sells some branded products in the dermatology and neurology fields, with a sales force of several hundred people. Even before the deal the company was seeking to expand its branded-drug offerings by submitting an application to the Food and Drug Administration for a blood-pressure medicine called nebivolol.

The acquisition of King, Bristol, Tenn., would give Mylan King's sales force of about 1,200 representatives when nebivolol is expected to come to market in 2006. King's sales force is targeted at cardiologists because its biggest product is a blood-pressure medicine called Altace.

The deal awards King shareholders a hefty premium -- about 60% on King's 4 p.m. Friday price of $10.37, down 10 cents in New York Stock Exchange composite trading. But the premium comes at an opportunistic time: King's shares are just pennies off their 52-week low.

King has had stronger revenue growth than Mylan -- with sales growing 22% compared with Mylan's 8% in the 12 months ended March 31. But Mylan has been more profitable -- making more money on roughly the same revenue as King in the last year. For the first quarter, King posted a loss of $111.1 million, although the quarter included a loss from discontinued operations of $171.2 million and an asset-impairment charge of $34.9 million.

For the 12 months ended March, King had revenue of $1.47 billion while Mylan had revenue of $1.38 billion.

Since March 2003, the Securities and Exchange Commission has been investigating whether King overcharged state Medicaid programs. Amid the probe, Chief Executive Jefferson Gregory resigned in February. King also withdrew its 2004 earnings estimate after a disappointing first quarter.

The people familiar with the situation wouldn't discuss when the addition of King will be accretive to Mylan's earnings.

The transaction will give King shareholders 0.9 Mylan common share for each of their King shares. In 4 p.m. Friday trading on the Big Board, Mylan shares were down 31 cents at $18.51.

Upon completion of the deal -- which is expected by the end of 2004 -- Mylan shareholders will own approximately 56% of Mylan's shares outstanding, and King shareholders will own 44%. Mylan's board won't change, people familiar with the situation said.

Generic drugs now account for more than half of all prescriptions sold in the U.S., helped in large measure by a wave of blockbuster branded drugs losing their patent protection in recent years and aggressive efforts by managed-care companies to switch patients to generics. When a drug loses patent protection, the big profit comes in the first six months of sales exclusivity, which is granted to the first company approved to market a generic version.

The generic-drug company usually sells its version at a 20% to 30% discount to the branded drug and reaps huge profits. But winning that prize usually comes after a long, expensive legal challenge by the branded-drug company seeking to stave off generic competitors. After the six months of exclusivity, other generic companies rush in and drive the price down, often by 90% or more.

Another factor that may be propelling Mylan toward branded drugs is the threat posed by so-called authorized generics, which are the result of when the maker of the brand-name drug that is about to lose patent protection licenses it to a selected generics maker. [See #msg-3480533] The licensing deal allows the branded-drug maker to grab a chunk of the windfall sales that the first generic gets during the six-month exclusivity period. Since the authorized copies are able to skirt the exclusivity restrictions, they immediately cut into the rival generic makers' sales and drive down price.

Mylan is leading the fight against authorized generics, which they see as a major threat to their profitability. The company has sued the FDA over the practice, and has enlisted other generics companies to the lobbying fight.

Merrill Lynch & Co. and Skadden, Arps, Slate, Meagher & Flom LLP advised Mylan on the transaction. Goldman, Sachs & Co. and Cravath, Swaine & Moore LLP advised King.
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[DewDiligence]

WSJ chimes in on “authorized generics”

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

>>
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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