Investing in Follow-On Biologics

The FDA has a structure in place to approve generic versions of small-molecule drugs once they go off patent. But for biologics -- protein-based drugs -- the process of proving equivalency is more difficult. Thus, the existing FDA approval structure can't be used for so-called follow-on biologics, and there's currently no alternative pathway their manufacturers can use to get approval. Last June, it appeared that key senators had reached a compromise to establish such a pathway -- balancing the needs of all the interested parties -- but little progress has been made since then in bringing a bill to the floor.

With the establishment of a pathway for FDA approval of follow-on biologics possibly dead until after the 2008 election, it may seem like there's little hope for investing in this potential multibillion-dollar market. But broadening your horizons may well lead you to a much different conclusion.

Europe
Europe appears to be more receptive to approving follow-on biologics, although all of the recent positive recommendations and approvals have been focused around the red-blood-cell-stimulating drug erythropoietin. That's the main component of Johnson & Johnson's (NYSE:JNJ) Eprex, which is marketed by Amgen (NASDAQ:AMGN) and J&J as Epogen in the United States. It's not surprising that generic drugmakers want a piece of the action, given that the drug currently costs patients $10,000 or more a year in the United States

In August, Novartis (NYSE:NVS) received marketing approval for its epoetin alfa equivalent. Then, last week, Hospira received a positive recommendation from the Committee for Medicinal Products for Human Use (CHMP) for its follow-on version of epoetin zeta, which it named Retacrit. With just the European Commission hurdle to jump over -- it usually follows the CHMP's recommendation -- Hospira will likely be marketing the drug in Europe by early next year.

With two approvals likely this year, it looks like 2007 will mark the beginning of the follow-on biologics era in Europe. Look for more approvals as generic-drug makers try to expand into other biologic drugs.

India
Unlike Europe, India has been approving follow-on biologics for quite a while. Most Indian drugmakers trade only on the Bombay Stock Exchange, but there are a few exceptions.

Dr. Reddy's Laboratories (NYSE:RDY) currently makes two generic biological drugs -- versions of Roche's Rituxan and Amgen's Neupogen -- in India. The company is planning on expanding its capabilities to sell more follow-on biologics in both India and the U.S. once a pathway for approval is established. In its earnings conference call this week, management updated investors on its progress, which included the establishment of a team of almost 200 people dedicated to the development and manufacturing of follow-on biologics.

Another Indian generic-drug maker with experience in follow-on biologics is Matrix Laboratories. While you can't buy shares of Matrix directly on U.S. stock markets, you can get a piece of the action by buying Mylan (NYSE:MYL), which is a majority shareholder.

United States
I know -- I said there was no U.S. pathway for approval of follow-on biologics. But the FDA did make one exception with Novartis' human growth hormone. Essentially, the FDA decided that there was enough information known about human growth hormone, such as Pfizer's (NYSE:PFE) Genotropin, to approve Novartis' version. In my eyes, where there's one exception, another is sure to follow. It seems like the issue of follow-on biologics is more a question of "when" than "if."

In addition to all the players mentioned above, Momenta Pharmaceuticals (NASDAQ:MNTA) is also keeping a close eye on Congress, and the company will likely throw its hat in the ring when an approval process is set up.

While additional approvals of follow-on biologics in the U.S. are probably still years away, now is the time to do your research. Those that are leading the race overseas are likely to be first in line when the FDA opens its door to applications.