NEW YORK (CNN/Money) -
Generic drug companies are developing more and more low-cost drugs, putting pressure on makers of name-brand drugs and raising fears of an FDA bottleneck.
"The branded industry is losing drugs from patent and the generic industry is circling like buzzards to pick them up," said Casey Alexander, analyst for Gilford Securities. "It's wonderful for the generic pharmaceutical industry. There's more food on the plate."
The Food and Drug Administration's Office of Generic Drugs is expecting to receive 771 applications for generic drugs this year, a one-third jump from 563 the year before, and with many drugs losing exclusivity in the next few years, more applications are on their way.
Some $100 billion worth of name-brand drugs will lose patent exclusivity in the next five years, with $21 billion going off-patent in 2006, according to Andrew Forman, analyst for WR Hambrecht & Co. The biggest-selling drug losing exclusivity in 2006 is Zocor, the cholesterol-reducing blockbuster from Merck & Co. (up $0.13 to $30.82, Research) that made $5.2 billion in 2004 sales.
"The market share for generics, which is already 54 percent [of prescriptions] should increase significantly," said Forman. Not only are more than $20 billion worth of drugs going off patent in 2006, but Medicare will offer more drug discounts on Jan. 1, opening new opportunities for generic drug makers.
Forman said that Israeli generic drug maker Teva Pharmaceuticals Industries (up $0.40 to $32.60, Research) is the dominant player. With newly acquired Ivax Corp. (up $0.16 to $25.78, Research), Teva has more than 200 applications being processed by the FDA, Forman said, and the company is projected to hold one-tenth of the U.S. generic market in 2006.
Ken Cacciatore, analyst for SG Cowen, projects that generic activity will keep growing over the next three to five years. But Cacciatore downplayed problems with price pressures.
"It shows that the generic industry is certainly active but it doesn't indicate to me that the branded companies are under any more threat than we were already aware of," said Cacciatore.
The FDA approved an unprecedented 474 generic drugs in 2004, up nearly a third from 364 the previous year. Nonetheless, in 2004 the agency managed to trim its approval process for generic applications to 15.7 months from 17 months.
The deluge of applications means more work for the FDA at a time when the agency is trying to speed up its process.
"I think what is a valid concern is an overburdened FDA, and whether the FDA becomes more of a bottleneck to getting new generic drugs approved and getting the prices of drugs down," said Richard Watson, analyst for William Blair & Co.
A single new drug application comprises up to 200,000 pages bound into 400 volumes, according to Fran Hawthorne, who wrote on the subject in "Inside the FDA." Drug companies sometimes rent trucks to cart the paperwork to the FDA's office in Rockville, Md. The "abbreviated" new drug applications for generic drugs are not nearly as large as for patented drugs because less clinical data is required, but they still present a ponderous workload for the FDA.
But Watson said the FDA's budget for processing applications has remained flat, raising questions about the agency's ability to process applications quickly. "When you see the abbreviated new drug applications going up and the budget remaining flat, you've got to look at the numbers and say, 'Something's got to give,'" said Watson.
The current surge in generic drug applications results from past successes in the branded industry. Kathleen Jaeger, chief executive officer for the Generic Drug Association, said the generic companies depend on the "ebb and flow" of innovation from the branded companies, and she hopes they will continue to make new products, translating into future products for the generic companies.
"If you have a situation where the innovators are having a drought, then in years to come the generic companies are going to have a drought," said Jaeger. "If they don't innovate products today, then we have nothing to sell tomorrow."
The analysts interviewed for this story do not own stock in the companies mentioned here.
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