More good times ahead for biotechs
With drug sales on the rise through 2015, biotechs are well-positioned, but Big Pharma will be squeezed by generics.
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 (CMS). Drug sales are expected to jump 7.7 percent in 2006 alone, and to grow between 8 percent and 8.4 percent annually through 2015, according to CMS.
Biotechs and generics were outpacing Big Pharma even before the Jan. 1 implementation of the new Medicare coverage. U.S. prescription drug sales rose 5.4 percent in 2005, according to IMS Health, a health-care research firm. IMS said the increase was driven by sales of biotech drugs, which jumped 17.2 percent in 2005, and generics, which surged 20.6 percent.
Big Pharma's big problem
The projected increase in sales could provide a windfall for generics but not for Big Pharma, analysts say. 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 are apt to 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 $0.22 to $42.30, Research), the industry leader from Israel, and the Indian drug makers Ranbaxy Laboratories (up $0.28 to $10.41, Research) and Dr. Reddy Laboratories (up $0.35 to $29.65, Research). The anticipated flight to generics will make it difficult for traditional drug giants like Pfizer (down $0.02 to $26.17, Research) and Merck (down $0.42 to $35.50, 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, 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 (down $0.50 to $74.58, Research), the world's biggest biotech; Avastin, $1.1 billion colorectal cancer treatment from the second-biggest biotech Genentech (down $0.16 to $83.31, Research); Humira, the $1.4 billion rheumatoid arthritis treatment from the biotech Abbott Laboratories (Research); and Remicade, a $2.5 billion anti-inflammatory used to treat rheumatoid arthritis and other diseases from Big Pharma drug maker Johnson & Johnson (down $0.36 to $58.67, 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 Humira."
To read more about biotech expectations for 2006, click here.