It's good to be in specialty drugs these days.
According to Medco's (NYSE: MHS) 2005 Drug Trend Report, spending on specialty medicines, which includes such things as biologics for rheumatoid arthritis and synthetic human growth hormone, increased 66% from 2003 to 2004. Such a rapid rise is a double-edged sword, though, in an environment in which public and private insurers are struggling with ballooning health-care bills.
Novartis (NYSE: NVS) may emerge as insurers' new best friend. TheWall Street Journal reports that the Swiss drug giant has prevailed in its legal effort to get the Food and Drug Administration to issue a ruling on Omnitrope, a human growth hormone that Novartis wants to market as the generic equivalent of Pfizer's (NYSE: PFE) Genotropin. The FDA finished its review of Omnitrope in August 2004, but it has delayed its decision as the agency struggles to come up with rules governing the approval of generic biologics.
The case has broad implications for biotech drug makers. Until now, companies selling biologics have not had to worry about the kind of generic competition that typically erodes sales of branded medications at the end of their patent life. Six product areas -- insulin, human growth factor, epoetin, colony stimulating factors, interferon alpha, and interferon beta -- with $20.2 billion in global sales, are immediately vulnerable to competition from biogenerics, according to Datamonitor.
Notably, though, the approval process for biogenerics will undoubtedly be much more rigorous and expensive than that for small-molecule generics. But guess which company is well positioned to exploit these barriers to entry? Novartis, of course. The company already has oodles of regulatory experience from its large-branded pharmaceutical business, considerable financial resources, and the necessary manufacturing infrastructure.
Given the drive to contain drug costs, Novartis looks very well positioned, especially when -- not if -- biogenerics become a reality. With a broad stable of branded and generic medicines, the company may have a unique advantage in locking in large deals with major drug buyers. Recent developments suggest Novartis' strategy may be close to paying off.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
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