Generic Biotech Drugs? Don't Count Them Out
By Amy Tsao
You could almost hear the whoops go up among biotech investors recently, when giant Amgen (AMGN ) triumphed in a closely watched court battle against tiny Transkaryotic Therapies (TKT ). On Jan. 19, a district court judge in Massachusetts ordered Transkaryotic to stop making a generic brand of Amgen's top-selling drug for anemia: erythropoietin, or EPO for short. Transkaryotic had argued that it uses a novel method to arrive at the same protein -- by activating genes that encode the protein in human cells, instead of genetically engineering the substance in hamster cells, as Amgen does. But Judge William Young ruled that Amgen's patents on EPO are intertwined with the processes used to make them.
In the aftermath of the court decision, Transkaryotic stock promptly lost half its value, and Amgen shares roared toward their 52-week high. The triumph was in the principle preserved by the court decision -- at least for the time being. "The industry had been immune to generic competition because of the specialty involved in manufacturing biotech products," says Michael Becker, an analyst with Wayne Hummer Investments. Amgen's win "shows if you have discovered a novel protein and you know the sequence, and you have the recipe [for making the drug], then it's yours."
NEW RULES COMING?
But investors had best quiet down: This battle is far from over. The case will more than likely be appealed. Moreover, Transkaryotic's position is a sign of things to come as makers of generic versions of popular biotech drugs move to get the U.S. Food & Drug Administration to set up new rules in the pioneering field.
With no generic biotech industry to worry about, big biotech's bottom line sure would look a lot stronger. Protected from feisty upstarts making generic drugs, biotechs wouldn't have the problems afflicting pharmaceutical drug companies, whose profits are often cut into deeply by generics. While they may be dwarfed by makers of branded drugs, the generic-drug industry is still a multibillion-dollar business.
The Transkaryotic/Amgen case showed just how hard it will be for an upstart to enter the marketplace with a copycat biotech product. EPO is a genetically engineered protein -- not a chemically made drug, such as the allergy medicine Claritin. While both are thought of as drug treatments, EPO is considered a biological treatment -- that is, a complex protein produced naturally from living cells. Like the pharmaceutical industry, biotech companies get separate patents that cover both the protein as a "product" and the "process" to make it.
But biotech companies insist their processes can't ever be copied, even after patents expire. By contrast, makers of generic chemical drugs have started to prepare themselves to make versions of medications like Claritin as the chemical drug's patents near expiration.
ANSWER TO STEEP PRICES?
For now, no FDA procedures are in place to get a generic biological treatment approved. But that could change, as the patents on several blockbuster biotech drugs expire, and the cries to lower the cost of drugs grow louder. The generic-drug industry is widely seen as an answer to the problem of steep drug costs since competition tends to keep drug prices in check.
Amgen's EPO brought in close to $2 billion in sales for the company in 2000. No wonder Transkaryotic, and its partner, Franco-German drugmaker Aventis, risked so much to bring EPO to market. "The bottom line really is, if there's money to be made in biotech products, other entities are going to try to find ways to invalidate or design around them," says John Kilyk, a patent lawyer at Leydig, Voit & Mayer who specializes in biotechnology patents. He says other companies besides Transkaryotic are attempting in some way to "mutate and rearrange genes and protein sequences to avoid other people's patents, while still attaining same therapeutic benefit," even before the patents on these products run out.
The trade group for the generic-drug industry, the Generic Pharmaceutical Assn., is pushing for new rules to be put in place by the FDA that would allow generic-drug manufacturers to start making biotech drugs. "As biotechs come off patent, generic-drug firms would love to have a new group of compounds they could take generic," says David Maris, generic-drug analyst at Credit Suisse First Boston.
BRACING FOR BATTLE.
And the generics have an opportunity approaching: an upcoming FDA review of the Hatch-Waxman Act of 1984, which outlines rules for the generic-drug industry. That review could set the ball in motion for new regulatory guidelines on biotech generics. The biotech industry is bracing for battle. "Anyone who suggests that it's possible to craft a generic biologic like one can craft a generic drug is just flat wrong," says Steve Lawton, general counsel for BIO, the biotech industry's trade association.
For now, TKT is mum about other projects that might result in lawsuits involving other major biotechs. The company says it will appeal the lower-court ruling on EPO and is confident it will ultimately prevail. "We look forward to competing with them to provide patients with the best possible product after a successful appeal," says TKT's CEO, Richard Selden. Meanwhile, TKT will mount a court fight against Amgen in Europe over EPO in the coming weeks. Analysts expect the company will have an easier time winning rights to make EPO in Europe.
Eric Schmidt, an analyst at SG Cowen, still has hopes for the company's technology despite the EPO disappointment. Gene activation, which TKT uses to make EPO, "can be a better way to make proteins in some cases," he says. The company also has two promising research programs for rare genetic diseases and gene therapy, Schmidt notes. He still rates TKT stock a buy and has a $25 price target on it, based on approval for the company's treatment for Fabry disease, a rare genetic disorder.
But the approval process on this product could be stymied by Genzyme (GENZ ), which submitted an application for its version of the treatment within days of TKT's filing to the FDA. Further adding uncertainty, regulators have asked both companies to provide additional information on their applications for the treatment.
Not everyone is sanguine about TKT's chances. Morgan Stanley Dean Witter analyst Douglas Lind downgraded TKT stock to neutral after the ruling. "Even though the company has a reasonable chance of prevailing on appeal, the chips are against TKT," he figures, noting the appeal could take more than a year. But if TKT comes out on top in the race against Genzyme for the Fabry-disease treatment, the stock could move to the mid-20s from around $20 right now, Lind says. If the FDA doesn't approve the drug, Lind sees TKT stock dropping to the $8 to $9 range.
This much is clear: If the Bush Administration is serious about reining in health-care costs, making it easier for upstarts such as TKT to introduce generic equivalents is one way to go. Competition will hold costs down for what are -- and will be -- among the priciest miracle drugs on the market. In the short term, though, TKT and smaller biotech companies have some tough shoals to navigate.
Tsao covers biotechnology issues for BusinessWeek Online
Edited by Douglas Harbrecht