Stop Worrying About Follow-On Biologics

Biotech investors need to have stomachs of steel. Clinical trials and decisions by the Food and Drug Administration can have disastrous effects on drug developers' stock, but it's President Obama who's had investors reaching for the antacid over the last few days.

Company

Decrease in stock price Feb. 25 - Mar. 2

Amgen (Nasdaq: AMGN  )

15.3%

Biogen Idec (Nasdaq: BIIB  )

13.0%

Celgene (Nasdaq: CELG  )

17.9%

Genzyme

18.2%

S&P500

8.4%

Source: Yahoo! Finance, using closing prices.

Included in the president's budget was a plan to save money on health care by authorizing the FDA to approve generic versions of biologic drugs. Currently, after small-molecule drugs lose their patent protection, generic-drug makers can get approved to sell knockoffs of the same drug, but there's no approval pathway for protein-based biologic drugs. That's given biotechs a de facto infinite patent life on their drugs.

While their moat may be ending, follow-on biologics aren't going to be a death sentence for biotech companies.

We're only on step one-half
The thing I find most surprising about the above drops is that we already knew this was coming. Obama has said that he wants to lower health care costs, and one of the ways he was going to do it was through follow-on biologics. Perhaps Americans have become jaded after years of empty campaign promises by politicians?

It's important to remember that this is just a proposal. It still has to get through Congress, where compromises will likely be made.

Step one could offer some relief
The biggest sticking point in getting this through Congress is likely to be the amount of time that branded biotech drugs are given exclusive sales before generic-drug companies like Teva Pharmaceuticals (Nasdaq: TEVA  ) and Mylan (Nasdaq: MYL  ) can enter the market. Drug companies can get up to a five-year extension on their drug patents to help them recoup the cost and long development time required for drug development.

Biotech companies are hoping to more than double that patent protection because biotech drugs tend to be harder to develop. In 2007, the Senate came to a bipartisan compromise to give biotech drugs 12 years of exclusivity, although the bill didn't get any further than that. Biotech companies aren't likely to go down without a fight, and I imagine we'll see a similar patent extension in any bill that eventually makes it to the president's desk.

Step two could be a roadblock
While Congress and the president are responsible for setting up the approval process, it's the FDA that will ultimately have the final say in the approval of follow-on biologics.

The drugs are usually referred to as biosimilars, or follow-on biologics, because they won't be exact copies of the branded drugs. And that's the problem right there. It's relatively easy to confirm that generic small-molecule drugs that are made through chemical synthesis have the same chemical structure as the branded drug, but with complex protein-based biologics, it's nearly impossible to confirm that two drugs have completely identical structures.

I think it's likely that the FDA will take a hardnosed approach to approving follow-on biologics. It has already been giving some drug companies hard times about making more of their already-approved drugs. Genzyme announced yesterday a delay from the FDA in getting approval for making its Pompe drug, Myozyme, at a larger scale. Also, yesterday the FDA asked Bristol-Myers Squibb (NYSE: BMY  ) and Eli Lilly (NYSE: LLY  ) to do a study to prove that the Erbitux made by European partner, Merck KGaA, was the same as that sold in the U.S. The duo is trying to get the FDA to approve Erbitux for treatment of an additional type of cancer, but the clinical trials used product made by Merck KGaA.

If the FDA requires generic-drug companies to run clinical trials, that will drive up the price and make it much harder for generic-drug makers to establish the post-patent dominance that they currently have with small molecule drugs.

Your final step
Stop being fearful. Follow-on biologics aren't going away, but they're not going to kill the biotech industry either.

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Fool contributor Brian Orelli, Ph.D., prefers the follow-on biologics to biosimilar, but he's afraid he's going to lose the rhetoric battle. He doesn't own shares of any company mentioned in this article. Biogen Idec is a Stock Advisor pick. The Fool's disclosure policy has groupies that follow it everywhere.


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