Big Pharma blurring the lines with Big Biotech

Novartis, Abbott, Wyeth, Bristol hedging their bets with biotech drugs; less vulnerability to generics.

By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Big Pharma is starting to look more like Big Biotech.

The word "biotech" makes most people think of industry leaders Amgen (down $0.02 to $54.55, Charts, Fortune 500) and Genentech (down $0.10 to $77.54, Charts). But now large pharmaceutical companies are aggressively branching into biotech. Some drugmakers -- like Novartis (up $0.04 to $56.12, Charts) and Wyeth (down $0.46 to $57.71, Charts, Fortune 500) -- have diversified so much that they've effectively become pharma-biotech hybrids.

"Big Pharma is moving towards biotech, so it will be interesting to see five or 10 years from now what the biotech landscape looks like," said Robert Hazlett, analyst for BMO Capital Markets. "It may be much more populated by Big Pharma than everyone gives them credit for."

Biotech drugs, which are made out of living cell cultures, instead of the simple molecules used to create traditional pharmaceuticals, are an attractive investment for Big Pharma for two reasons: the industry is fast-growing, and generic competitors can't touch it.

The biotech industry is expanding much more rapidly than pharma. U.S. biotech sales grew 20 percent to $40.3 billion in 2006, while pharma sales grew 8 percent to $275 billion, according to IMS Health. Big Pharma wants a piece of the action that offers the most growth, and that's biotech.

Biotech drugs are also appealing because they're not vulnerable to patent expirations and generic competition, which are the chief concerns of the pharma industry. Big Pharma lost $14 billion worth of annual drug sales to patent expirations in 2006 and is expected to lose another $12 billion in 2007, according to IMS Health. But biotechs don't have this problem. They don't have to compete with "biogenerics" because the Food and Drug Administration hasn't created a system for regulating them, which is a requirement for drug companies to get their products onto the market.

In order to churn out new biotech drugs, pharma companies have been hard at work breaking ground on new factories. In April, Abbott (down $0.09 to $56.37, Charts, Fortune 500) opened a $450 million, 330,000 square foot biotech plant in Puerto Rico. Bristol-Myers Squibb (up $0.02 to $30.05, Charts, Fortune 500) is building a $750 million biotech plant in Devens, Massachusetts. Wyeth's Grange Castle, a 90-acre biotech facility in Ireland that cost $2.4 billion to build, is said to be the biggest biotech plant in the world, rivaling facilities built by industry leaders Amgen and Genentech.

Other pharma outfits are already riding the biotech boom. Abbott built its new plant to make the blockbuster biotech drug Humira, a treatment for rheumatoid arthritis, psoriatic arthritis, ankylosing spondylitis and Crohn's disease that contributes heavily to company sales. Humira accounted for $2 billion of Abbott's 2006 sales of $22.5 billion. The company forecasts the product to reach $2.7 billion in 2007.

Abbott, which also has a biotech facility in Worcester Mass., said the Puerto Rican plant is for the production of "future biologics," suggesting that Humira is just the beginning.

"This is a very high profile area for the company, but Abbott is by no means thought of as being in the biotech bucket," said Phillip Nalbone, analyst for RBC Capital Markets. "[But] certainly the effort to establish a bigger, more efficient manufacturing facility would signal that this is a bigger area for development."

The pharmaceutical company Eli Lilly & Co. also relies heavily on biotech drug sales, which contributed nearly $4 billion, or about 25 percent, of total sales in 2006. And in recent years, the drug giants Merck and Pfizer have bought up smaller biotechs to bolster their pipelines.

The bulk of Big Pharma's sales have traditionally come from name-brand drugs that are protected by patents, but only until the patents expire. After that, generic drugmakers can produce low-cost versions of the drug, which will cause sales to decline by up to 80 percent.

But Big Pharma knows that biotech drugs are safe from generic competition, at least until the FDA creates the bureaucratic foundation for a biogenerics industry.

"(Biotechs) clearly offer better patent protection," said Jon LeCroy, analyst for Natexis Bleichroeder. "Instead of having a drug on the market for 10 years, you have a drug that's on the market - right now - forever."

"The profit life cycle of biologics is much longer than it is with small molecules because there's no clear path for biogenerics," said Barbara Ryan, analyst for Deutsche Bank North America.

The FDA is still in the early stages of creating a regulatory pathway for generic biotech drugs, so it will be years before biogenerics pose any real threat to biotechs. But even when a biogeneric industry does take hold in the U.S., the complicated manufacturing process of creating these "biosimilars" might keep most players out of the game.

"There are going to be a lot fewer competitors," said Ryan of Deutsche Bank. "It's not going to be the blood bath that we see in generic competition for [traditional pharmaceuticals]."

The analysts interviewed for this story do not own stock in the companies mentioned here. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.