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Fleeing Biotechs? Not So Fast


The stocks of biotech companies took a hit in late February, when members of Congress introduced bills that would allow copycat versions of their blockbuster drugs. Until now, competition from generic drugs has been limited to traditional medicines, like Prozac, made from small chemicals. That has trimmed billions of dollars from pharmaceutical industry profits, while biotech companies have been able to charge staggering monopoly prices for their more complicated medicines. A year's worth of Genzyme Corp.'s (GENZ) Cerezyme for Gaucher's disease tops $200,000. Genentech Inc.'s (DNA) Avastin, first approved for colon cancer, can cost $100,000 per year. If Congress were to break the logjam that restricts generic biotech drugs, it stands to reason the nation's health-care system would save billions each year. And the impact on the industry? "Devastating," says Genzyme CEO Henri A. Termeer. No wonder investors are skittish.

But bailing out of biotech may be the wrong response. The actual threat is both small and far away. Therefore, any dip in stock prices caused by worries over bio-generic competition "is a buying opportunity," says A.G. Edwards Inc. (AGE) biotech analyst Aaron S. Reames. Plus, surprisingly, some biotech and big pharmaceutical companies may be among the beneficiaries when Congress does open the door to biotech rivals.

The first point to consider is that generic biologics are still years away. While the new legislation has backing from Representative Henry A. Waxman (D-Calif.), and Senators Hillary Clinton (D-N.Y.) and Charles E. Schumer (D-N.Y.), and is seen as inevitable in the long run, Washington pundits put the chances of its passing this year as no better than 50-50. The bill will need the support of Senator Edward M. Kennedy (D-Mass.), chairman of the Health, Education, Labor & Pensions Committee, who is being lobbied heavily by Massachusetts biotech companies that oppose it. And Kennedy has his hands full renewing a law that pays for drug reviews by the Food & Drug Administration with industry fees. That law is set to expire this year.

Then, once a bill passes, it will take the FDA at least three years to issue the necessary regulations, and two more years to approve the first bio-copy. "Bio-generics' time has come, but it will be five or six years before they have an effect in the marketplace," says Citigroup (C) health policy analyst Paul Heldman.

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In addition, biotech medicines like anemia-fighting erythropoietin (EPO), an $11 billion per year blockbuster for Amgen Inc. (AMGN) and Johnson & Johnson (JNJ), are large molecules that are difficult to make. Small changes can cause serious side effects. So the FDA will require clinical trials of most copycat versions, essentially limiting entry to competitors with special expertise and deep pockets. Doctors will also be wary of switching to unproven copies, so these competitors will have to spend marketing dollars. And it's unlikely that patients will be automatically switched to generic biologics, the way they are with today's generic drugs.

The result will be a limited supply and relatively high prices. Today's generic drugs grab 80% or more market share within weeks of a brand-name drug losing patent protection, and eventually cost a third or less of the brand product's price. That won't happen with biotech copies. "Anyone who expects to see prices drop as with small-molecule generic drugs is dreaming," says Ira S. Loss, vice-president of Washington Analysis Corp. "Biological generics are coming, but they aren't coming tomorrow, and they won't be a catastrophe for the biotech industry."

To put the threat in perspective, the sales of biotech drugs in the U.S. are now about $30 billion a year and could jump to $90 billion by 2010. The eventual hit from copycats, in contrast, will be a few billion dollars per year, analysts estimate. That's hardly the menace one would imagine based on the biotech industry's dire warnings and intense lobbying against the bill. "Don't get out the violin when you hear them moaning," says Consumers Union policy analyst William Vaughan.

Still, a market of a few billion dollars is worth pursuing. The twist is that the big players probably won't be today's top generic companies like Mylan Laboratories (MYL), Barr Pharmaceuticals (BRL), or India's Ranbaxy Laboratories. Instead, "it may be Big-Cap Pharma or other biotech companies that decide it is an opportunity and that turn on their own," predicts Cowen & Co. analyst Ken Cacciatore. Two to watch are the Sandoz unit of giant Novartis (NVS) and Teva Pharmaceutical Industries (TEVA), which now makes both generic and brand-name drugs. So investors have a chance to profit from any misguided biotech downturns due to action in Congress, and to make a long-term bet on the winners in the biologic copycat market--whenever it arrives.

By John Carey


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