Large-Cap Biotechs Face Familiar Problem
Peter Benesh , On Thursday December 24, 2009, 5:59 pm EST
It looks as if Big Pharma and Big Biotech shares have begun a period of role reversal.
Most of the largest drugmakers have seen shares appreciate over the year. That includes notorious laggard Pfizer (NYSE:PFE - News), which is up around 5% for 2009.
Other Big Pharmas notching solid 2009 stock gains include Roche (Other OTC:RHHBY.PK - News) (up 12%), Novartis (NYSE:NVS - News) (10%), Merck (NYSE:MRK - News) (22%), GlaxoSmithKline (NYSE:GSK - News) (13%), Bristol-Myers-Squibb (NYSE:BMY - News) (11%) and Sanofi-Aventis (NYSE:SNY - News) (24%).
The performance of the five biggest biotechs has not matched Big Pharma. Genzyme (NasdaqGS:GENZ - News) is down about 27% for 2009. Gilead Sciences (NasdaqGS:GILD - News) has retreated 16%, while Amgen (NasdaqGS:AMGN - News) is down about 1%.
As of Dec. 23, only two of the top five biotechs showed gains for the year. Celgene (NasdaqGS:CELG - News) had gained around 2%. Biogen Idec (NasdaqGS:BIIB - News) was up about 10%, thanks mainly to a strong recent run that has seen its stock price surge 25% since late October.
The company should benefit from new diagnostic tests expected to determine which patients might suffer side effects from Biogen's multiple sclerosis drug, Tysabri, says Joshua Schimmer, a medical doctor and analyst at Leerink Swann.
'Big, Bloated Companies'
One reason large-cap biotechs have lost their allure is because they face many of the same problems that hit pharma in the last several years, Schimmer says. "Big biotechs are turning out to be big, bloated companies with too-large sales forces."
Meanwhile, pipelines are thin. Genzyme has seven biologic compounds in phase three development. Amgen and Biogen both have five, Celgene has four and Gilead has three.
In contrast, pharma has done a good job of replenishing its pipelines, largely through acquisitions and huge mergers. Pfizer's buy of Wyeth and Merck's purchase of Schering-Plough created two powerhouses whose mergers pretty much solved their pipeline problems.
According to recent financial statements, the new Pfizer has 20 distinct drugs in phase three trials, some aimed at multiple conditions.
Merck has 15 drugs in phase three trials.
Joel Hay, professor of pharmaceutical economics at the University of Southern California, says biotechs have grown complacent after years of success developing lucrative medicines.
"They've all been getting a lot of play from small-population, high-priced drugs, like those for cancer where they can charge $100,000 to $200,000 for a course of therapy."
But those prices won't be sustainable if, or when, competition begins. Just as Big Pharma is facing patent expirations, so is Big Biotech.
Epogen and Aranesp, two Amgen blockbusters with combined sales of $5.6 billion in 2008, will start to lose a series of U.S. patents in 2012. Generic Epogen has been available in Europe since 2005.
Gilead, which made its mark in HIV treatments, has 11 drugs losing U.S. patent protection between 2010 and 2021. Some of those drugs are marketed by Big Pharma partners.
Roche's U.S. Avastin patent expires in 2017. Its sales were $2.9 billion in 2008.
The value of biologic sales facing patent expiration in the next five years exceeds $15 billion a year.
Regulatory Protection
For now, the only thing protecting Big Biotechs from generic competition is the absence of a regulatory framework to approve follow-on biologics, known as biosimilars.
U.S. regulators have not figured out what standards must apply for a generic maker to claim its version is similar enough to the original to work as advertised.
Unlike traditional chemical-based drugs, generic biologic drugs cannot be carbon copies.
The standard likely to satisfy the Food and Drug Administration is that a generic biologic drug be biosimilar, Hay says.
The original manufacturers might get some market protection from the fact that a biosimilar "will never be perceived as identical to the originating product."
They might also get some protection from the complexities of the manufacturing processes. But that's not a bulwark against clever competitors such as Teva Pharmaceutical (NasdaqGS:TEVA - News), the world's largest generic-drug firm.
Moreover, biotechs face one problem Big Pharma didn't face: increased competition from marketing powerhouses with deep, deep pockets -- Big Pharma itself.
It's no secret that Pfizer and Merck, in particular, are aggressively acquiring biotech firms and biotechnology. Merck began making deals with biotech companies four years ago.
Richard Clark, Merck's chief executive, said back in 2006 that not only would Merck compete in biologics, it would become "the leading provider of high-quality, competitively priced, follow-on biologics."
Merck gave itself an early Christmas present on Dec. 17, acquiring privately held British firm Avecia Biologics, a contract manufacturer of microbial-derived biologics. Merck has said it plans to produce six generic biologics by 2017. Terms were not disclosed.
Pfizer Eyes Biologicals
Through its Wyeth buy, Pfizer got Enbrel, with sales of $3.8 billion. Pfizer markets it jointly with Amgen in the U.S.
Pfizer has told the press it plans to make biosimilars of Amgen's Epogen and Sanofi's Lovenox in the next five years. Pfizer's longer-term goal is to bring 10 to 15 biologic drugs to market.
It all adds up to a challenging environment for Big Biotech.
"Large-cap biotechs need to figure out how to position themselves," Schimmer said.
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