"Where Best to Invest?"-Generic Drugs
Monday, January 15, 2007SUSIE GHARIB: The generic drug makers are another favorite of market monitor Al Goldman. Generics account for over half of all prescriptions filled each year and between now and 2010, an estimated 70 brand-name drugs will go off patent. Congress could also play a big role in the generics marketplace in the coming year. Dana Greenspon reports.
DANA GREENSPON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Expiring patents on drugs like Pfizer's Zyrtec and Sanofi-Aventis' Ambien will take a $10 billion chunk out of annual brand-name sales. And pharmaceutical analyst Ira Loss says that leaves the door open for generic drug makers to get a piece of the action.
IRA LOSS, PHARMACEUTICAL ANALYST, WASHINGTON ANALYSIS: In the next several years, there are some very big drugs that come off patent that are going to become lower priced options for consumers, and there should be a continued growth in the percentages of prescriptions that are filled with generic drugs.
GREENSPON: As a result, the industry is expected to grow around 20 percent annually in the five largest markets through 2010. But more opportunities aren't necessarily a prescription for stock success. A generic manufacturer can apply for a 180-day exclusivity period where it is the only company competing with the brand-name product. But few generic applications have been filed for those expiring patents, which means instead of one company getting a piece of the brand-name pie, many companies will. Generics analyst William Sawyer says all those competitors could create a profitless prosperity.
WILLIAM SAWYER, GENERIC DRUG ANALYST, LEERINK SWANN: We expect seven or more in most cases, and that's going to lead to very fragmented markets and pretty much low sales and even lower profitability in most cases.
GREENSPON: But Sawyer still sees potential with a select group of generic companies that have carved out opportunities in less crowded markets. Sawyer recommends Barr Pharmaceuticals, Mylan Laboratories and Watson Pharmaceuticals. They tend to focus on niche markets with fewer competitors. All three have had a major acquisition in the past two years, which analysts say bodes well for their growth potential. Barr Pharmaceuticals recently acquired Croatian generics company Pliva. Barr CEO Bruce Downey says his company will continue to look for growth opportunities.
BRUCE DOWNEY, CEO, BARR PHARMACEUTICALS: Each of the major players in our industry in the U.S. had a major acquisition in 2006. I think that trend will continue. There will be more consolidations, so we'll be active there.
GREENSPON: The generic makers could also be helped by a new Democratic Congress, which is expected to devote more time to issues impacting the industry. One problem generic drug makers are facing is an all-time high of backlogged applications at the Food and Drug Administration. But pharmaceutical analyst Ira Loss says the Democrats could change that.
LOSS: Look for a bigger budget for the office of generic drugs, and that's likely to come through tax revenues.
GREENSPON: Another hurdle for generic manufacturers is the approval process for generic versions of biotechnology drugs. Right now, generic biologics go through the entire approval process as if they were brand new drugs, not copies of existing biologics. Democrats have a bill to create an abbreviated approval pathway. Barr CEO Bruce Downey sees it as an important step for the industry's growth.
DOWNEY: It's a huge potential area of growth. Right now there's no growth at all because there's no way to get there. But once that pathway opens up, I see that as a very positive business opportunity for us and my competitors.
GREENSPON: And that pathway will be even more important in coming years. The number of brand-name blockbusters coming off patent peters over the next three years, and analysts say generic biologics will be the major drivers of growth. Without those, analysts say growth could stagnate or even decline. Dana Greenspon, NIGHTLY BUSINESS REPORT, Washington.
