Good times ahead for biotechs
With drug sales on the rise through 2015, biotechs are well positioned, but Big Pharma's going to get squeezed by generics.
By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - Drug sales, bolstered by Medicare coverage, are projected to keep rising for the next 10 years, and biotechs are expected to get the lion's share of that increase, while the more traditional Big Pharma companies get squeezed by generic drug makers.

U.S. spending on prescription drugs is projected to more than double between 2004 and 2015, to $446 billion from $188 billion, according to the Centers for Medicare and Medicaid Services. Drug sales are expected to jump 7.7 percent in 2006 alone, and to grow between 8 and 8.4 percent annually through 2015, according to CMS.

Big Pharma's big problem

This could provide a windfall for generics but not for Big Pharma, analysts say. That's because some $100 billion worth of name-brand drugs will be losing their patents in the next five years, according to WR Hambrecht analyst Andrew Forman. Seniors on fixed incomes and other patients will flock to generic drugs that have prices as much as 80 percent lower than their branded counterparts. This means a likely sales surge for generic drug makers like Teva Pharmaceutical (up $1.08 to $42.08, Research), the industry leader from Israel, and the Indian drug makers Ranbaxy Laboratories (up $0.26 to $10.14, Research) and Dr. Reddy Laboratories (down $0.37 to $29.30, Research). The anticipated flight to generics will make it difficult for traditional drug giants like Pfizer (up $0.55 to $26.19, Research) and Merck (up $0.33 to $35.92, Research) to take full advantage of the industry-wide surge in sales.

For its part, Merck faces patent expiration in June on Zocor, its cholesterol-cutting drug, or statin, that totaled $4.4 billion in 2005 sales. Not only will this erase billions of dollars in revenue for Merck, but it could also affect Pfizer, which produces the biggest statin of all: Lipitor, the world's top-selling drug with $12.2 billion in 2005 sales. Some analysts believe Pfizer may also lose sales as customers abandon Lipitor and flock to cheaper, generic versions of Zocor.

But biotechs are not so vulnerable to patent expirations. This is partly because the biotech industry is relatively new. Since most of their products haven't been on the market for long, the specter of patent expiration is too distant to pose a threat.

Biotechs in good shape

"I think most of the biotech products are going to be safe for the rest of the decade," said Al Rauch, analyst for A.G. Edwards & Sons. Rauch said this is why Pfizer has invested in biotechs like Esperion, which it bought for $1.3 billion two years ago.

But there is another reason why biotechs aren't so vulnerable to patent pressure. Biotech products, which are crafted with the use of microorganisms and DNA, are far more difficult to emulate as generics than the comparatively simple molecular compounds that serve as the basis for most Big Pharma drugs.

ThinkEquity Partners analyst Andrew McDonald points out that because biotech drugs are not based on simple molecular compounds, but "are made in cell cultures, and there's no way to ensure that the generic product is identical to the innovative product."

McDonald named four drugs, from three biotechs and one Big Pharma drug maker, that could see growing sales: Epogen, the $2.5 billion anemia treatment for dialysis patients from Amgen (up $0.55 to $75.08, Research), the world's biggest biotech; Avastin, $1.1 billion colorectal cancer treatment from the second-biggest biotech Genentech (down $0.21 to $83.47, Research); Humiram, the $1.4 billion rheumatoid arthritis treatment from the biotech Abbott Laboratories (Research); and Remicade, a $2.5 billion anti-inflammatory used to treat rheaumatoid arthritis and other diseases from Big Pharma drug maker Johnson & Johnson (down $0.11 to $59.03, Research).

"There's no way to make a generic out of a protein-based drug," said McDonald. "There's no regulatory path [with the FDA to do so.] Even if it goes off patent, there's no way to make a generic Humiram."

To read more about biotech expectations for 2006, click hereTop of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.