Generic Biologics Face Hurdles
By THOMAS GRYTA
The prospect of new generic versions of expensive biologic drugs, as outlined in President Barack Obama's proposed budget last week, may be inevitable, but their development faces a long, tough road to realization.
Biologic drugs are made by culturing specially engineered organisms, and no approval path for generic versions exists in the U.S. Legislation allowing generic versions of biologics is expected to be part of Mr. Obama's legislative agenda.
If such a law is drafted and passed, the producers of these complex generics -- often called biosimilars -- will likely face tough regulatory scrutiny, as well as high development and marketing costs. Furthermore, many prominent biotech drugs will remain under patent protection for a number of years.
"While we believe biosimilars are inevitable, the proposal did not contain any new details on the path forward," Oppenheimer & Co. analyst Bret Holley said in a note to clients. Like many, the firm expects legislation to pass later this year.
The very notion that these drugs could face new competition has spooked investors. Shares in Amgen Inc. since have dropped 16%, Biogen Idec Inc., 12%, Celgene Corp., 18% and Genzyme Corp., 24%, sharper declines than the market's performance. Genzyme shares were also hit hard this week by a surprising regulatory setback in plans to expand production of a key drug.
Christopher Raymond, an analyst with Robert W. Baird & Co., believes the reaction is overblown. Furthermore, he says the included proposals aren't exceptionally harsh, and they could be altered as the budget weaves its way through congressional hearings.
Under current law, generic drug makers can receive approval of copycat small-molecule drugs, like cholesterol-fighting statins, after their five years of exclusivity expire. The administration's budget proposes exclusivity for generic biologics that is "generally consistent" with that five-year limit.
Following the passage of legislation, the Food and Drug Administration would determine the approval process for biologic drugs and may do so on a case-by-case basis, analysts say.
Because of their complexity, many drugs may be biosimilars, or approved for the same uses but having their own brand name and not automatically substitutable for the original.
In applying for approval, small-molecule generics must show they have the same active ingredient and the same action as the brand-name version -- which allows them to rely on the original clinical trial results and avoid having to pay for new trials.
But biologics are large proteins that are sometimes thousands of times bigger than small-molecule drugs. Their manufacturing makes them sensitive to minor changes in the process, potentially altering their complicated structures and even how they work in the body.
The FDA has shown it is sensitive to the issue and last year decided that a version of Genzyme's Myozyme produced on a larger scale had slight differences and had to be reviewed as a separate product with clinical data. The larger-scale product will be called Lumizyme, and Genzyme estimated Monday that regulatory delays will delay marketing approval for three to six months.
If generic biologics have their own brands, then pharmacists won't be able to substitute them for the original, which means that generic companies will be forced to market their version of the drugs to physicians. Small-molecule drugs typically see generic substitution as high as 90%, a level not expected with branded generic biologics.
The cost of the marketing, and clinical trials to get approval, would make the industry drastically different than that for small-molecule drugs.
Cowen & Co. analysts who cover the biotech and generic drug industries estimate that 2007 revenue from major biologic revenue totaled about $25 billion. If all those products were made generic, at a 30% to 50% price discount, the generic-biologics market would be worth between $12 billion and $14 billion.
But with the lack of substitution, the firm only sees generic penetration of 20% to 50%, which means that total revenue would be between $3 billion and $7 billion.
Many drugs still have patent protection and won't be open to competition until their patents expire or are successfully challenged in court by a generic drug, as in the small-molecule model.
Some biologics face patent expiration in coming years, including Biogen's multiple-sclerosis drug Avonex, and Amgen and Wyeth's Enbrel for arthritis and psoriasis. But the story is different elsewhere: the patents on Genentech Inc.'s cancer blockbuster Avastin don't begin expiring until 2017 and Amgen's Aranesp anemia treatment is protected until 2024.
These multiple barriers to entry to sell generic biologics would limit the number of likely participants.
Teva Pharmaceutical Industries Ltd. Chief Executive Shlomo Yanai last week estimated that producing a generic small-molecule drug costs about $5 million to $10 million, while developing a generic biologic will likely cost $100 million to $150 million. Building the plants to produce such drugs will cost $300 million to $400 million, he estimated.
"Generic biologics will only be for a few players," he said at a meeting in New York. Teva is making a push into making such drugs, but Mr. Yanai estimated that "only two or three" other companies will likely pursue such a route.
The high cost means that entrants may actually come from within the drug-making industry itself, because the larger companies have the necessary cash, the relevant marketing experience and already possess needed technological capabilities.
Merck & Co. recently set up a unit to develop generic biologics and will devote $1.5 billion in research and development spending for the unit by 2015.
Write to Thomas Gryta at thomas.gryta@dowjones.com
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