Wall Street bullish on prospects for generics

August 6, 2007

This story covers which generic companies are making gains.

Wall Street has its collective eye on the generic drug industry. And the financial world likes what it sees.

Higher than average growth is nothing new for generics. In 2006, Maryland-based market research firm Kalorama Information noted that six of the 10 fastest-growing drug companies were generics. Total generic sales were growing three times faster than brand-name sales. And that was before Medicare Part D encouraged even higher spending on generic products.

Lehman Brothers senior VP of specialty pharmaceutical research Rich Silver said the industry outlook remains robust, with continuing patent expirations as a key driver. The rapid pace of generic penetration should continue, he noted, but the benefits will not flow equally to all products or to all producers.

"The bigger players in the generic field are very keen to see legislation establishing a pathway for follow-on biologics," said Ira Loss, senior drug analyst for Washington Analysis, a research firm in Washington, D.C. "I think that could happen as soon as next year. When you remember that it took five years for the original Hatch-Waxman Act that created the generic industry to become law, getting a pathway to generic biologics done in two years would be pretty good."

Creating an approval process for follow-on biologics would be good for the generic industry, but the benefits of biogenerics won't flow equally. Creating and manufacturing biologics requires scientific expertise and financial resources that are beyond all but the largest generic houses, noted Jeffrey Holmes, partner and senior research analyst for Red Granite Advisors in Milwaukee.

That's encouraging news for all of the top-tier competitors. Most generic giants are already active in the nascent biosimilar market, as European regulators call follow-on biologics. So are Indian competitors.

Dr. Reddy's Laboratories, India's largest drugmaker, announced in June that it is developing eight generic biologics. Also a major player in the U.S. market, it plans to release one new product annually. It declined to specify which biologics it is developing, but said they include monoclonal antibodies used against cancer and a tumor necrosis factor product to treat arthritis. Dr. Reddy's already sells Reditux (rituximab), a branded generic for Rituxan (Genentech), and Grafeel (filgrastim), a branded generic for Neupogen (Amgen). Both generics sell for about half the price of the originator products, according to press reports. For now, sales are limited largely to India, but Dr. Reddy's is poised to submit product applications in Europe and the United States as patents expire. "When the United States and Europe open up, we will be there," said CEO G. V. Prasad in a public statement.

Bigger is better

Holmes likes Teva for more than the firm's potential to bring follow-on biologics to market. The biggest generic houses are successful in large part because they have designed more effective strategies than their smaller counterparts, he explained.

Silver reported that in June 1997, the top four generic firms-Zenith Goldline (7%), Apothecon (8%), Teva (8%), and Mylan (12%)-controlled 35% of the generic market among them. By March 2005, the top four generic firms-Sandoz (10%), Watson (11%), Mylan (13%), and Teva (14%)-controlled 47% of the generic market. That surge in growth can be traced back to strategic differences.