Leading the Pack of Follow-On Drug Makers

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Generic drug maker Dr. Reddy's Laboratories (NYSE: RDY) is taking a big risk -- and I love the move. It's planning to spend $20 million to increase the number of generic biologics it makes, adding one a year for the next eight years. Currently, there is no abbreviated review process for generic biotech drugs to get FDA or European approval, and therein lies the risk: Dr. Reddy's is developing products for which a global market doesn't exist yet.

Biotech drugs -- called follow-on-biologics in their generic form -- are produced in live cells in a process that is far more complex than the chemical synthesis of small molecule drugs. There aren't simple tests to ensure that the follow-on drug is equivalent, so the biotech companies want the FDA to require generic drug makers to run clinical trials to prove that the follow-on-biologics are equivalent to the brand-name drugs. The high cost of clinical trials would inflate the expense of making the follow-on drugs, allowing the biotech companies to charge more for their drugs.

But when a biotech company decides to change the process it uses to make a biological drug, the FDA doesn't require it to repeat clinical trials. As a result, it seems likely that the FDA will eventually put a system in place for approving follow-on-biologics that doesn't require clinical trials.

It's not clear when that will occur, but 5,000-liter fermentation tanks -- and the buildings to house them -- take time to build. By not waiting until the process for approval is in place, Dr. Reddy's is getting a jump start on its generic-drug-making competitors like Barr Pharmaceuticals (NYSE: BRL) and Mylan Laboratories (NYSE: MYL)

The biotech craze started about 10-15 years ago, so many of the drugs that will be coming off patent in the near future are biologics. The company didn't say which biologics it's planning on starting with, but they probably include drugs from companies like Roche, Amgen (Nasdaq: AMGN), and Genentech (NYSE: DNA).

Dr. Reddy's already sells two generic biological drugs -- versions of Roche's Rituxan and Amgen's Neupogen -- in India, so it has a small market to work in until the FDA gets an approval process in place. Currently, less than 5% of Dr. Reddy's revenue comes from biologics, but that's sure to increase as the U.S. and European markets open up. The company is taking a huge risk to get ahead of the pack, but I think it's well worth the rewards of being in front of its competitors.

More generic Foolishness:

• The Coming Generic Drug Boom
• Mylan Goes on a Drug Binge
• Teva Giving Eisai Heartburn

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Fool contributor Brian Orelli, Ph.D., hasn't bought brand-name shampoo in 15 years. He doesn't own share of any companies mentioned in this article. "The Fool's disclosure policy is anything but generic," says the lawyer who wrote it.