Generic drug superstars

NEW YORK (Fortune) -- When Big Pharma invents a new drug, it's like a cash machine. With patents protecting new discoveries from competition, drug developers like Pfizer, GlaxoSmithKline, and AstraZeneca can charge whatever they want for their little miracles.

Until, that is, the patent expires. Then it's goodbye profits, and hello generics! Behind every new drug is a generic copycat -- like Teva, Mylan, or K-V -- ready to start selling a nearly exact yet much cheaper version virtually the day patent protection ends.

This year, according to Standard & Poor's research, branded drug sales are set to decline for the first time. That's partly due to the economy, but also due to increasing competition from generics. IMS Health, the industry's clearinghouse for drug sales data, says that $24 billion worth of branded drugs this year will get generic competitors, up from $18 billion last year. The figure will hit $30 billion by 2012.

That's why, even though drug companies are some of the most profitable businesses in the world, investors are sour on them unless they've got a lot of new discoveries in the pipeline. Drug stocks hit a record low price-to-earnings ratio of 10x in June, according to S&P.

Investors know the generic onslaught will only continue. In the coming years, patents for blockbuster drugs like Lipitor, Viagra, and Plavix will expire. That's in addition to familiar drugs like Wellbutrin and Zithromax that already have generic competitors.

Here, based on data from IMS, are the best-selling generic drugs of last year:

Launched: January 2005
2008 sales: $900 million
Branded equivalent: Duragesic, by Janssen, 2008 sales of $1.1 billion

Mylan's copy of Janssen's Duragesic patch was the top-selling generic drug last year, raking in about $500 million for the Canonsberg, Pa.-based company. The patch treats pain related to cancer by delivering a steady release of fentanyl, a super-strong painkiller, to the nervous system over a 72-hour period. Though several other generics makers -- including Watson Pharmaceuticals (WPI), Lavipharm S.A., Actavis Group, and Teva Pharmaceutical Industries (TEVA) -- produce similar products, Mylan (MYL, Fortune 500) secured the first legal approval in November 2003 and represents just over half of the $900 million market for fentanyl-based drugs.

Launched: July 2007
2008 sales: $779 million
Branded equivalent: Norvasc, by Pfizer (PFE, Fortune 500), 2008 sales of $2.2 billion

Pfizer's Norvasc, which treats high blood pressure and chronic chest pain, had annual sales of $2.4 billion in 2008. But its generic counterpart, amlodipine, is gaining quickly, with revenues of $779 million last year. The biggest producer and distributor of amlodipine is Israel-based Teva, whose approval to produce it was approved by the FDA in May 2007. Teva set a generic industry record with $2.38 billion in sales in the second quarter of 2007, thanks in large part to the successful launch of amlodipine.

Launched: May 2008
2008 sales: $675 million
Branded equivalent: Toprol, by AstraZeneca (AZN), 2008 sales $807 million

The generic equivalent of AstraZeneca's Toprol, made by St. Louis-based K-V Pharmaceutical Company (KVA), treats high blood pressure. K-V first started making the drug six years ago, but it took five years to settle patent-infringement lawsuits with AstraZeneca. The generic version hit the market in May 2008. Since then, K-V's competitors Sandoz (the generics arm of global giant Novartis (NVS)) and Andrx Pharmaceuticals (the generic arm of Watson) have been working to develop their own versions of Toprol.

Launched: February 2005
2008 sales: $671 million
Branded equivalent: Lamictal, by GlaxoSmithKline (GSK), 2008 sales $1.6 billion

It took a long time for Teva to secure approval from the FDA for their generic copy of GlaxoSmithKline's bipolar and epilepsy drug Lamictal. Lamictal is one of the top-selling branded drugs in the United States, with around $2.2 billion in annual sales. After three years of legal wrangling, Teva won the battle in 2005 -- though Teva also lost a suit last year trying to bar GSK from producing a branded non-chewable version of Lamictal, saying that it violated the previous agreement. Even so, lamotrigine sales brought in $671 million for Teva and other generic drugmakers in 2008.

Launched: September 2008
2008 sales: $610 million
Branded equivalent: Risperdal, by Janssen, 2008 sales $2.1 billion

As with top-seller fentanyl, Mylan also took on Janssen-- founded by the eponymous Dutch scientist who invented antipsychotic drug Haldol -- in mental-illness drugs. Mylan released a generic version of Janssen's Risperdal Oral Solution, which treats schizophrenia and mania associated with bipolar disorder. Though the generic drug was approved for sale in September 2008, voiding an exclusivity agreement held by Teva, Mylan and co-developer Dr. Reddy's Labs (RDY) plan to ship it soon. Expect risperidone to move up the best-seller ladder.

Launched: July 2008
2008 sales: $609.8 million
Branded equivalent: Prilosec, by AstraZeneca, 2008 sales $1.1 billion

Prilosec, AstraZeneca's juggernaut small-intenstine cancer treatment, received its first generic challenge from Andrx, which developed a generic version in 1998. (Andrx is now a division of Watson, which acquired it in March 2006 for $1.9 billion.) However, AstraZeneca sued to stop the release of the drug and won, forcing Andrx to wait until AZ's patent expired. Once it did, in 2001, several generic drug producers secured FDA approval for their own versions of omeprazole, launching it into the ranks of the top sellers.

Launched: November 2005
2008 sales: $599 million
Branded equivalent: Zithromax, by Pfizer, 2008 sales $429 million

Generic drug companies aren't just persistent -- they're fast, too. When Pfizer's patent on Zithromax expired on November 1, 2005, Teva and Sandoz wasted no time in launching their generic equivalent, azithromycin. They both received FDA approval two weeks later and launched their products for sale the same day. Zithromax was the single most prescribed antibiotic at the time, but after its patent expired, Pfizer shifted its promotional focus away from the drug and towards Zmax, a similar antibiotic taken in just one dose instead of several times a day.

Launched: December 2006
2008 sales: $521 million
Branded equivalent: Wellbutrin, by Biovail (BVF), 2008 sales $579 million

Where there are generic drugs, there are lawyers. Biovail tried to avoid the coming generic onslaught for its antidepressant Wellbutrin by launching an extended-release version of the drug, called Wellbutrin XL, in August 2003. However, Taiwan-based Anchen filed a generic patent for the XL version, too. Biovail succeeded in suing to delay the release for 30 months, but a judge ruled in 2006 that Anchen could proceed. So Biovail took its case to the FDA -- but the FDA also approved Anchen's generic version. Anchen signed an agreement with generic competitors IMPAX Laboratories (IPXL) and Teva to jointly produce the drug. Now they're embroiled in a lawsuit alleging that the generic version doesn't work as well as branded Wellbutrin XL.