Me-Too Drugs: Are They Worth It?

"Me-too drugs" are the aptly named drugmakers' version of a bandwagon. One company finds a drug that treats a disease, and suddenly every company and its spinoff are developing something similar as well.

In some cases, particularly when there's a large market, companies on the same train can make serious money. Take the TNF inhibitors, used to treat diseases such as rheumatoid arthritis, for example:

That's a heck of a lot of revenue for drugs that do almost the same thing.

More often than not, though, the drugs that are late to the party don't do as well as the front-runner and have to settle for revenue that falls well short of blockbuster status. These incremental increases in revenue may work in some industries, but with the coming patent cliff, many drugmakers need blockbusters, not $200 million-per-year drugs. The drugmakers are bunting at the exact time they should be swinging for the fences.

Last one to the beta-blocker party
Forest Labs' (NYSE:FRX) Bystolic was the 19th beta blocker to gain Food and Drug Administration approval. I kid you not -- 19 drugs that do almost exactly the same thing.

Bystolic was so late to the party that some of its competition, like GlaxoSmithKline's (NYSE:GSK) Coreg, have gone through their complete marketing cycle and are now available as a generic. With sales last quarter of less than $4.4 million, it doesn't look like doctors are seeing too much benefit from using Bystolic over the myriad of other drugs available.

Too little, too late
Wyeth's new antidepressant Pristiq and Johnson & Johnson's antipsychotic Invega are essentially copycats of the companies' own drugs, Effexor and Risperdal, respectively. In both cases, the companies just figured out how the drug was metabolized in the body and then sold the resulting compound as a "new" drug.

Both Effexor and Risperdal are available as generics in their immediate release forms in the U.S., which makes for a hard sell for the drugmakers: "Would you like to try our almost identical product with a much higher price tag?"

Concentrating on switching
Shire is in much the same situation, with its ADHD (attention deficit/hyperactivity disorder) medicine Vyvanse competing with the older Adderall XR. But it has a little more time to get patients to switch; Adderall XR won't face generic competition until April of next year.

Vyvanse and Adderall XR aren't quite as related as Wyeth's and Johnson & Johnson's twins, which has helped Shire convince patients to switch over since Vyvanse was approved last year. While strategies like changing Adderall XR's website into a giant advertisement for Vyvanse have helped promote the switch, the company still has a ways to go. For the latest quarter, sales of Vyvanse were about one-fifth of those for its older brother, Adderall XR.

The moral of the story
The take-home message for investors is that they need to know when the marketing exclusivity ends on the major drugs in a drugmaker's arsenal, and, more importantly, what the heck a drugmaker is going to do to replace them.

It's probably better if the company is working on something completely different rather than pumping out a me-too drug that will just have to compete with the soon-to-be generic. Sure, drugs that have novel targets are often more risky and more likely to fail in the clinic, but a well-stocked pipeline -- to cushion the failures -- can offer tremendous growth, year after year.