What would happen if a drug went off patent, but no generics came in to gobble up the leftovers? This wonderland of postpatent monopoly isn't a complete fairy tale. It's a situation that some branded-drug makers find themselves in with a little help from the Food and Drug Administration.
The most obvious example comes from protein-based biologic drugs. While biologics from companies such as Johnson & Johnson
At this point, after patents have expired, generic-drug makers are free to apply for approval of so-called follow-on biologics, but they have to file a new Biologics License Application (BLA), which requires the same level of clinical efficacy and safety data that was required for the original drug's application.
In contrast, generic-drug makers get to file an Abbreviated New Drug Application (ANDA) for small-molecule drugs. The ANDA only requires them to prove that the drugs are similar enough to the branded drugs. The added cost of clinical trials when filing a BLA has deterred all but a few drugmakers from taking the long road to approval of follow-on biologics.
The recently approved health-reform bill gives the FDA the power to approve follow-on biologics through an abbreviated system, but don't expect it to be the walk in the park that ANDAs are. Biologics are complex molecules, and branded-drug makers such as Bristol-Myers Squibb
I expect that the FDA will be even more rigorous in approving follow-on biologics, considering that generic-drug companies know little about the manufacturing of the branded product.
Brand-name biologics won't enjoy a monopoly in the U.S. forever, but the difficult requirements for approval of follow-on biologics will certainly keep the competition to a minimum and help them retain a fair amount of their original market share.
A few more examples
It's not just biologics that have enjoyed freedom from competition; generic-drug makers are having trouble getting approval of some drugs under the ANDA process.
Unlike the branded-drug process, there aren't any PDUFA goals for the FDA to meet with generic drugs. Lovenox is a complex molecule, and the FDA is taking its sweet time deciding whether the generic versions have satisfied the requirements of proving that they're identical enough.
The chance of generic competition for GlaxoSmithKline's
The move for investors
For biologics, the advantage is clearly with the generic-drug makers, who will get access to a new market they didn't have before. Just don't expect the opportunity to be a major one. If you own drugmakers with biologics, expect some revenue drop as they go off patent, but not to the same extent you'd see for a small-molecule drug.
For complex ANDAs, it's difficult to predict how and when the FDA will decide. Momenta, which doesn't have any drugs on the market, is sure to skyrocket if its ANDA is finally approved, but investors have to be in it for the long haul -- it's been 4.5 years since Momenta turned in its ANDA.
On the flip side, the value of branded drugmakers like Sanofi and Glaxo will surely go down if the FDA ever approves generic versions of Lovenox and Advair, but it's nearly impossible to determine when that might occur once a generic-drug maker has submitted its ANDA. The best investors can do is write off the value of the drug now and enjoy the fairy-tale revenue while it lasts.
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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Novartis is a Global Gains pick. Johnson & Johnson is an Income Investor selection and Motley Fool Options recommended buying calls on the stock. The Fool owns shares of GlaxoSmithKline and has a disclosure policy.