So far, GlaxoSmithKline (NYSE: GSK ) has managed to confound generic competitors trying to copy its Advair treatment, the company's best-selling lung drug. However, this could soon be about to change after the Food and Drug Administration recently set out the requirements that generic versions of the inhaled drug would have to meet.
Advair accounts for around 20% of GlaxoSmithKline's sales, and until recently, many had assumed that a fully generic version of Advair would be impossible; only substitutes would be available due to the complexities of the delivery device. However, these new guidelines from the FDA make the prospect of a full Advair substitute possible.
Previously, the complex delivery system of the Advair inhaler meant that many generic producers could not compete with Glaxo. And while the Advair medication itself lost patent protection last year, the Diskus delivery device remains under patent until 2016. This delivery system is key as it controls the exact amount of medication that the patient receives. However, the recent FDA statement laid out the requirements that any generic inhalers should meet, removing a serious barrier to entry for generic producers and opening up the door for Diskus copies before the patent runs out.
Novartis' (NYSE: NVS ) Sandoz generics division has been driving hard to grow sales over the past few years as a number of key patents in the biotech industry expire. Novartis has not been exempt from patent expirations itself, but Sandoz's rising sales have to some extent softened the blow. In addition, acquisitions have boosted growth. In 2012, Sandoz acquired Fougera Pharmaceuticals for $1.5 billion, creating the world's biggest generics company focused on dermatology medicines.
That said, Novartis was rewarded with a stroke of luck recently as the generic drug maker Ranbaxy Laboratories (NASDAQOTH: RBXZF ) had an import alert notice severed on one of its factories by the FDA. Ranbaxy was due to start production of a generic version of Novartis' blood-pressure pill, Diovan, this month but the import alert is set to delay production. This delay in production is expected to result in an additional $1 billion in revenue for Novartis.
Ranbaxy already has import alert notices on two of its existing manufacturing facilities.
Fraught with troubles
Ranbaxy itself has been hit hard by the import alert, which is yet another hitch in the company's plants for growth. Ranbaxy was granted exclusive rights to start selling the generic version of Diovan beginning back in September, but the company failed to win regulatory approval for the product, once again, to the benefit of Novartis. In addition, Ranbaxy has already admitted to the FDA that it lied about how it tested drugs at two of its existing plants and agreed to pay $500 million in charges to resolve fraud allegations made about the company.
Consistent slip-ups by Ranbaxy and its management -- which seems not to have learned from previous experience -- have led to analysts aggressive downgrading the company's earnings estimates. Since August, the consensus analyst estimate for Ranbaxy's fiscal 2013 EPS has been downgraded 17%, and since July, these declines extend to 40% to 14.5 INR per share, putting the company on a forward earnings multiple of around 20 -- expensive considering the consistent slip-ups.
Ranbaxy's mismanagement makes Eli Lilly's (NYSE: LLY ) impending collapse in sales look appealing. Eli Lilly is set to lose exclusive manufacturing rights to its key Cymbalta depression drug in December, and analysts expect a 25% decline in sales during 2014 thanks to the loss. Sales of Cymbalta brought in $5 billion during 2012 -- 22% of Eli Lilly's total revenue. To offset the coming storm, Eli Lilly has been aggressively cutting costs, shaving 2% from its operating costs during the second quarter and laying off hundreds of employees, mainly from its marketing departments. The company has also closed a German distribution center and cut its research and development spend.
With such large sales declines forecast, it is hard to view Eli Lilly in a positive light, despite its cost cutting. In addition, the company has suffered setbacks on some of its experimental treatments, and management has stated that it does not believe that the company will start to rebound again until 2015. Having said that, a promising division of Eli Lilly is its animal health products section, which noted a 6% rise in sales during the second quarter. However, total sales from Eli Lilly's animal health products only amounted to $544 million, 9.8% of total sales during 2012..
So all in all, while many companies such as GlaxoSmithKline and Eli Lilly are suffering from patent expirations, Novartis and its generic Sandoz division are set to reap the benefits.
Another way to play health care stocks
The best way to get into the biotech space is to find companies that shun the status quo and instead discover revolutionary, groundbreaking technologies. In The Motley Fool's brand-new FREE report "2 Game-Changing Biotechs Revolutionizing the Way We Treat Cancer," find out about a new technology that big pharma is endorsing through partnerships, and the two companies that are set to profit from this emerging drug class. Click here to get your copy today.