It's boom time ahead for generic-drug companies.
likely to pass some kind of a prescription drug benefit in the next year or two and a slew of major drugs losing patent protection, major generic companies such as
appear set for substantial growth.
Under unprecedented pressure to give prescription drug benefits to an estimated 13 million uninsured senior citizens, Congress is considering some 15 bills for Medicare reform. And because giving everyone access to expensive branded medicines would be hugely expensive -- estimates range up to $200 billion over 10 years -- Congress will likely opt to give minimal drug coverage, which would emphasize generics, say analysts.
"It's going to be a growth spurt the industry hasn't seen for years," predicts Angela Larson, drug industry analyst with
Salomon Smith Barney
. "It's going to be an excellent cycle."
Generic drug companies are the bottom-feeders of the $74 billion U.S. drug industry, grabbing the rights to sell chemical equivalents to profitable branded medicines when their 20-year patents expire. While branded prescription drugmakers like
typically fight tooth-and-nail to keep generics off the market, these efforts almost always ultimately fail.
And the cornucopia of major drugs losing U.S. patent protection in the next five years is staggering. Topping the list next year are ulcer drug Prilosec from AstraZeneca, with 1998 U.S. sales of $2.9 billion, and Prozac from Lilly, with 1998 U.S. sales of $2.2 billion.
Other billion-dollar plus brands biting the dust include Claritin from
, whose patent ends in 2004, and
Pravachol in 2005. Four major Merck drugs -- Zocor, Vasotec, Pepcid and Mevacor -- are scheduled to hit the wall in the next five years, the worst patent-expiration onslaught of any major drug company.
All Politics Is Local
As if that's not enough to keep generic drugmakers busy, they are also the likely beneficiaries of a new market to serve the legions of uninsured elderly who are now upbraiding their politicians for forcing them to make a choice between food and medicine.
The patent expiration scenario is good for granny-whipped politicians, because it offers them a chance to offer quality drugs at a cheaper price to elderly constituents at government expense. Generic drugs typically sell for 25% less in the first year after patent expiry, dropping down as much as 80% of the original branded price in subsequent years.
"You want to appear to offer the most and give the least," says Jeff Kraws, drug industry analyst for
, which does no underwriting for drug companies. Anyway, he says, "you couldn't raise enough taxes" to pay for branded drugs for everyone. "The system would go bust."
That's a major business opportunity for generic drugmakers, particularly the larger ones like
, says Salomon's Larson, who rates both stocks buy and does no underwriting for the companies. The bigger ones can offer a wider range of products and services to buyers like health maintenance organizations and hospital groups, she says.
The generic drug industry slumbered until the passage of the Waxman-Hatch Act in 1984, which gave generic drug companies new incentives to challenge drug company patents. That caused generics' market share to surge from 18.6% in 1984 to 41.3% last year, according to drug consultancy
. Salomon predicts the generic drug market share could leapfrog to 53% of the drug market by 2005.
Still, it's not necessarily time to dump those shares in Lilly and AstraZeneca in favor of Teva and Mylan. Because of patent protection, branded drugs can be far more profitable than generics, and demand for branded drugs is stronger than ever, fueled by the unprecedented blitz of consumer advertising for prescription drugs. And some generic stocks are expensive: The average price-to-earnings ratio for the top seven generic drugmakers is an uppity 39, compared to 28 for the top branded drug stocks.
Also, there are still a number of categories where there aren't any generics, such as for Alzheimer's disease, osteoporosis and incontinence. Furthermore, newer, branded drugs for conditions like diabetes and arthritis are often so superior to generics that lawmakers would face a major challenge excluding them. That means that while there could be major volume gains for generic drug companies, the branded drug industry will continue to be more profitable -- as long as the patents hold.
"The volume going to generics is going to be very large, but the question is how much money they can make from the increased volume," said one analyst who asked to remain anonymous. "We say competition will erode the upside."