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Which Biotechs Are Vulnerable to Generics?

Copycat versions of blockbuster biologics are coming--but big biotechs still look strong.

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Senior pharmaceutical analyst Damien Conover wrote about the challenges of patent expirations in an article earlier this year, citing the 2011 patent cliff as a hurdle that large pharma firms are being forced to combat with heftier drug pipelines and sizeable acquisitions. However, these patent expirations are tied to small molecule (or conventional) drugs--produced in a lab via chemical synthesis. In contrast, most biotech drugs, or biologics, are manufactured using living cells. With a few exceptions relating to the oldest biologics, there is no pathway for the approval of generic versions of biologics (or "biosimilars") in the United States, and the complexity of biologics manufacturing has so far prevented a new law allowing such products from making its way through Congress.

However, the time for the approval of a pathway for biosimilars in the U.S. may have arrived. According to the Centers for Medicare and Medicaid Services (CMS), prescription drug costs amount to roughly 10% of total health expenditures, and biologics are a key growth driver. For example, last year IMS Health reported that global biologic sales reached $75 billion in 2007, reflecting a 12.5% growth rate--virtually double that of the global pharmaceutical market. While drug spending growth has moderated since 2007, as several blockbuster drugs begin to experience generic competition, the lack of a regulatory pathway for biosimilars has left branded biologics largely immune to such pressure in the U.S. The passage of large-scale health-care reform hinges on finding ways to pay for universal coverage, and biosimilars could find a place within such legislation this summer.

Karen Andersen does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.