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Benefiting From 2008's Generic Drugs

Here at The Motley Fool, we talk a lot about the coming patent cliff that drugmakers will teeter over at the end of this decade, but some not-so-lucky drugmakers will be hit with patent expirations this year. As some drug companies scramble to make up for lost revenue, others will actually benefit from the coming patent losses.

OK, so it probably goes without saying, but generic-drug makers stand to benefit the most from the loss of drug patents, by waiting it out or by proving the patents invalid in court.

It's not just the incremental addition of new revenue that makes the new products so valuable; the first company to bring a generic drug to market can reap serious rewards for quickly developing the knockoff.

The FDA gives the first company to file an abbreviated New Drug Application (aNDA) a 180-day head start on its competitors. Not only does the first-to-file applicant reap all the generic drug sale profits for six months, but the monopoly allows the company to sell its knockoff at a price just below its branded counterpart.

An FDA study of generic-drug prices found that the prices are about 94% of the branded-drug price when it's the only one available, but the generic price drops to around 25% of the branded price when five more competitors jump into the market. An exclusive marketing period results in a serious bump in gross margins and the resulting bottom line.

Perhaps this year's biggest windfall for generic-drug makers has already begun. Earlier this month, Merck's (NYSE: MRK  ) Fosamax lost patent protection, and Teva Pharmaceuticals (Nasdaq: TEVA  ) and Barr Pharmaceuticals (NYSE: BRL  ) were there to step right in. The duo will share the exclusive period for the highest dose of Fosamax, with Teva getting the exclusive benefit for the lower doses.

Other blockbusters losing their patent protection in 2008 include Johnson & Johnson's (NYSE: JNJ  ) Topamax, which Barr Labs and Mylan (NYSE: MYL  ) are set to sell; GlaxoSmithKline's Advair and Lamictal; Wyeth's Effexor XR; and AstraZeneca's Casodex. Expect generic-drug companies to jump all over these drugs, which had sales in excess of $1 billion a year.

Not so obvious
A couple of bystanders to the patent wars will also benefit from drugs going off patent.

Pharmacy benefit managers such as Medco Health Solutions and Express Scripts (Nasdaq: ESRX  ) make gains because they're able to leverage generic drugs more than their branded counterparts.

Those footing the bills for the drugs -- insurance companies such as UnitedHealth (NYSE: UNH  ) and WellPoint -- also benefit from the lower prices. Sure, they can pass the higher health-care costs on to their members, but any savings they can muster probably helps indirectly by retaining members.

I guess we could throw the U.S. government onto the list as well, since Medicare benefits from generic drugs, but I'm not sure that's a reason to go out and buy U.S. Treasury bonds.

The drugmakers that hold the patents can't actually benefit from their loss, but they are trying to limit the damage. It's become routine for pharmaceutical companies to license authorized generics to one generic-drug maker to recoup some losses from the launch of the generic drug.

The pharmaceutical companies make the drugmakers and the generic-drug makers ship the drug out through their channels. It's another way for generic-drug makers to take advantage of getting in on the patent-expiration party, although they can send their revenues on a rollercoaster ride.

The authorized generics are also a good way for pharmaceutical companies to call a generic-drug maker's bluff when patent-infringement negotiations break down.

Investors can benefit two ways from this by buying shares of generic-drug companies and by making sure that they're taking generic versions of drugs when they're available. Insurance companies, through the pharmacy, will usually switch the prescription to the generic automatically, but it pays to double-check your prescription.

To find out when other branded drugs you're taking are going off patent, check the FDA's Orange Book.

The coming years will present an interesting battle between pharmaceutical and generic drug companies -- with a few related industries watching closely. As long as the pharmaceutical companies continue to innovate, both industries could emerge victorious from this ceaseless war.

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12/22/2008 4:02 PM
BRL.DL $65.80 Down +0.00 +0.00%
Barr Pharmaceutica… CAPS Rating: ****
ESRX $69.61 Down -1.43 -2.01%
Express Scripts CAPS Rating: *****
JNJ $113.44 Down -1.43 -1.24%
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MRK $61.20 Down -0.72 -1.16%
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MYL $37.02 Down -0.59 -1.57%
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TEVA $44.00 Down -0.21 -0.48%
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UNH $145.37 Up +0.30 +0.21%
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