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Generic Biologics Face Uphill Battle

Karen Andersen, CFA

Karen Andersen: I'm Karen Anderson, senior biotechnology analyst at Morningstar. We've heard quite a bit about generic competition for large pharmaceutical companies, but what about biotech companies, are they vulnerable to the same kind of competition? And do generic companies actually have an opportunity here?

With me today to discuss the topic is generic pharmaceuticals analyst Brian Laegeler. Thanks for joining me, Brian.

Brian Laegeler: Thanks for having me.

Andersen: What is going on in Washington right now? Why hasn't there been any legislation passed for generic versions of biologics?

Laegeler: I think certainly generic drug firms are facing an uphill battle in Washington, and I think the key theme there is probably we can't underestimate the power of the branded drug lobby. On one side of the aisle you've got the branded drug lobby and almost embarrassingly the number of lobbyists outnumber Congress on Capital Hill.

On the other side you have the generic drug lobby and their team of constituents, which is virtually everyone else who is for cheap medicine. You have employers, consumers, and government agencies like the FDC and the White House and their Office of Management and Budget. And despite those outnumbering them in terms of number of constituents and just people, the dollars that are involved here are so much less on the generic side of the equation. And that changes the influence in Washington.

And I think it's evidenced by earlier this month when they were able to get an amendment to broader health-care legislation through a senate committee, a vote of 16-7 to get 12 years of market exclusivity for novel biologics. Disagreements on this issue have been the major sticking point for why legislation is now almost four years behind Europe in terms of generic biologics.

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Andersen: Why is exclusivity such an important issue?

Laegeler: Exclusivity is really a legislated monopoly, sort of bulletproof protection above and beyond the strength of a patent. If you have 12 years of exclusivity you have plenty of time to adjust the formula by a little bit. These drugs move in generations, so then you could essentially evergreen the drug and generic competition would never be a factor.

Keep in mind right now for small molecules there is five years for exclusivity for a novel drug and three years for a new formulation. Anything above and beyond that depends on the strength of the patent.

Andersen: So this 12 years of exclusivity that you were referring to, that doesn't sound like much of a compromise between biotechs and generics.

Laegeler: You hit it on the head. It's not a compromise at all. One side of the proposals were for zero to seven years of exclusivity, and I think the Obama administration is sort of sitting behind the seven, saying that that is a generous compromise.

On the other end the branded biologic and branded pharma lobbies are campaigning for 12 to 14 years. So they essentially, out of the committee, got exactly what they wanted. And now that that train has left the station it is unclear whether another compromise towards eight to 10, which would still be, in my opinion, probably way to generous towards the brand companies. But we will have to see how that turns out.

Andersen: How do you think this legislation is going to impact the companies you cover?

Laegeler: As far as the generic drug companies I think, as I mentioned, for legislation anything that happens this year will probably be potentially unfavorable or delayed, neither of which are great outcomes.

In terms of the companies themselves, this issue has gone from kind of a "nice to have" in terms of maybe seeing some extra growth to sort of a "have to have" situation. Because around 2012 or 2013 is when the patent cliffs start to dry up, which is the pipeline for generic pharma. If they want to sustain any level of growth that they have been used to this really is a "have to have" issue at this point.

The last thing I would say is even if legislation is in place it is not clear that that business is going to go towards generic pharma firms. The core competencies required for bio-similars are manufacturing, clinical trials and a direct sales force.

These are all things that are housed within branded companies right now. So the generic companies can acquire, or basically play catch up, but there is no saying that that business has to exclusively go to generic drug firms.