Biotechnology companies, having outperformed the broader stock market in 2011, are for the first time bracing for competition from generic drug makers in an increasingly cost-conscious U.S. healthcare market.
As makers of biotech drugs seek to extend the longevity of expensive brand-name medicines, they are looking beyond some of the methods once employed by pharmaceutical giants grappling with the loss of patent protection.
Vigorous defense of patents through litigation is still common, but drugmakers are increasingly focused on improvements in cost vs benefit, rather than just tweaks, for their products.
The worldwide market for copies of biotech medicines will grow to $3.7 billion by 2015, from just $243 million in 2010, as more than 30 branded biologics with sales of $51 billion lose patent exclusivity, according to market analysis firm Datamonitor.
Sales of traditional branded drugs have already been pummeled by generic competition. IMS Health estimated that global sales growth of prescription drugs could be cut in half through 2015 as lucrative brands like Pfizer's cholesterol fighter Lipitor and Bristol-Myers Squibb's Plavix blood clot preventer lose patent protection.
The Nasdaq Biotech Index rose 12 percent last year vs. a flat return for the Standard & Poor's 500 Index.
The impending battle, along with expectations for 2012, will be a key focus for healthcare investors in San Francisco next week at the JP Morgan Healthcare Conference.
The annual event, expected to draw over 8,000 attendees, will feature presentations ranging from loss-making companies with promising experimental drugs to industry bellwethers like Amgen Inc. Amgen, the world's largest biotech company, will be represented by Bob Bradway in his first high-profile appearance since being tapped to replace Kevin Sharer as chief executive officer.
Amgen and other makers of top-selling biotech drugs are awaiting key guidance from the U.S. Food and Drug Administration on a path for approval of "biosimilar" drugs, but European regulators have already approved cheaper copies of some biotech medicines.
Unlike traditional drugs made from chemicals, the newer field of biotech employs living cells, and far more complicated processes. To "copy" such treatments, scientists must create a new, but highly similar, molecule.
"With the looming impact of biosimilars, I think biotech companies are thinking differently about the marketplace in terms of competitors to their brands," said Karla Anderson, a partner and head of PricewaterhouseCoopers' pharmaceutical and life sciences practice.
With insurers and governments increasingly focused on cost, the price advantage of generic drugs has become a major factor in the market for pharmaceuticals.
"The small molecule pharma industry has dealt with life cycle management with lots of strategies for a long time," said Glen Giovannetti, head of global biotechnology at Ernst & Young. "But the pressure on efficiency and keeping costs down is high and is only going to grow more intense."
Pharma companies like AstraZeneca and Forest Laboratories succeeded in recent years by obtaining patents on the mirror image of their existing drugs -- essentially doubling their patent life.
Many molecules exist as equal parts of a chemically identical compound that are mirror images of each other, so it is possible to separate the two and sell only a single mirror image as a "new" drug.
When AstraZeneca's top-selling heartburn drug, Prilosec, lost patent protection several years ago, the company had already launched sales of Nexium, a drug consisting of the active half of the Prilosec molecule.
Forest was able to effectively extend the life cycle of its antidepressant Celexa with the 2002 launch of Lexapro -- half of the Celexa molecule.
"Extended release, new formulations and combination therapies may still have a role, but the onus is going to be on the manufacturer to demonstrate enhanced value," Giovannetti said.
"I don't think payers are going to look at a superficial argument and keep paying a branded price when a cheaper generic is available."
Some biotech companies, including Amgen and Biogen, have said they plan eventually to manufacture copies of biotech drugs now produced by rivals.
Instead of "me-too" products, almost every biotech company hopes to come up with new drugs that work even better than their original discoveries, but efforts do not always pan out.
Genentech and Idec, now respectively owned by Roche and Biogen, launched Rituxan, or rituximab, in 1998 as a treatment for non-Hodgkin's lymphoma.
The drug has transformed treatment of the blood cancer, racking up sales of around $6 billion last year.
Genentech has sought for years to develop a better version of Rituxan, but results have been mixed.
Research unveiled this week at a meeting of the American Society of Hematology showed that obinutuzumab, a Roche drug with the same target as Rituxan, was initially effective in more lymphoma patients, compared with the older drug, but it also led to more side effects.
Roche has had more success with follow-on versions of its breakthrough breast cancer drug Herceptin, the company's third-largest seller.
It has developed two experimental successors to Herceptin, which is also known as tratuzumab -- pertuzumab, which binds to a different part of the HER2 protein targeted by Herceptin, and TDM-1, which uses Herceptin to deliver a powerful chemotherapy to cancer cells.
"We actually are able to have a greater impact in treating HER2-positive disease by both making a better Herceptin-based construct with TDM-1 and by better blocking of that pathway," said Sandra Horning, head of global oncology development at Roche's Genentech unit.
Roche also aims to commercialize, at least in Europe, what it says are more convenient injected versions of both Herceptin and Rituxan. Both drugs are monoclonal antibodies that require such large-volume doses that they have to be given by infusion.
Novartis, which transformed treatment of chronic myeloid leukemia (CML) with the launch of Gleevec in 2001, aims ultimately to replace the older drug, which had sales of more than $4 billion last year, with its second-generation drug Tasigna.
Gleevec will lose patent protection in 2015.
Novartis has shown in trials that Tasigna significantly slows the progression of CML, but that may not be enough for regulators to approve a label change, said Herve Hoppenot, head of the Swiss company's oncology division.
"They may need the rate of relapse," he said, noting that such results will be available in about three years.
A MAJOR COUP
Amgen, positioning for likely biosimilar competition to its $2.5 billion-a-year Epogen anemia drug, recently secured long-term contracts with the two largest operators of U.S. dialysis clinics.
The move effectively locked in two-thirds of the drug's market, although Amgen also agreed to future price discounts.
"If you are the manufacturer in that situation, you want some predictability in your business," Giovannetti said. "It's an admission that the market is going to be what it's going to be."
Amgen also scored a coup with the issuance of a long-disputed patent on Enbrel, providing the arthritis drug with protection from generic competition through 2028.
The company benefited from the fact that the patent claim was filed before mid-1995, when U.S. law was changed to say that patents would be valid for 20 years from the date of filing, not the date of issuance.
"With a broad patent estate that we have now established for Enbrel, we feel that the market exclusivity for Enbrel is going to be prolonged and we don't anticipate any biosimilar competition in the foreseeable future," Arvind Sood, head of investor relations at Amgen, said at a December conference.
The company's 2010 sales of Enbrel totaled $3.5 billion.
(Reporting by Deena Beasley in Los Angeles, editing by Matthew Lewis)