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Biotech's Health Care Bonanza

Written By Brian Hicks

Posted December 31, 2009

Given all the winks, nods, and backslaps in the health care reform bill… Christmas came early this year for biotech stocks.

Because buried somewhere in those 2,000 pages is a gift, wrapped up and delivered to Big Pharma, courtesy of Rep. Anna Eshoo.

And while that gift may turn out to be nothing more than a lump of coal for consumers, Eshoo’s present was undoubtedly at the top of the wish list for most of the industry’s biggest players.

That’s why 1,228 of the drug industry’s top lobbyists spent about $609,000 a day "educating," arguing, and otherwise buying the votes of elected officials in the health care debate.

Biotech’s Health Care Bonanza

You see, given the havoc generic drugs have already wreaked on their pipelines, there was no way the big players were going to let it happen all over again with biologics — at least not without a fight.

As a result, according to The New York Times, dozens of Democrats and Republicans have been shaping the deal using the verbatim talking points provided to them by biotech industry lobbyists.

At stake for the industry is billions and billions of dollars in revenue related to the greater patent protection for biologic drugs that Eshoo’s provision now provides.

As the industry wanted, the new provision would give developers of ground-breaking biotech drugs 12 years of statutory protection from generic competition.

That’s a huge win for the biotech industry, since current federal law under the Hatch-Waxman Act of 1984 only provides five years of the same protection for conventional pharmaceuticals.

What’s more, Eshoo’s provision would also allow companies to "evergreen" these drugs when they "tweak" the formula by giving them an additional 12 years of protection. Currently, those same tweaks for chemically-based drugs afford them an extra three years of protection.

The end result is that under the right circumstances, a new biologic drug can be protected from generic competition for as long as twenty-four years versus the current eight years.

Generic Competition Meets its Match

That development brought out the howls from Kathleen Jaeger, President and CEO of the Generic Pharmaceutical Association. In a written statement she said, "The bill passed by the Senate, unfortunately, amounts to a treasure trove to brand drug companies who stand to make enormous profits from health care reform."

"This bill" she continued, "is no holiday present to American consumers."

According to a new report assembled by IMS Health and commissioned by Jaeger’s organization, generic medicines have saved the American health care system more than $734 billion in the last decade (1999-2008), with approximately $121 billion in savings in 2008 alone.

Meanwhile, another report by industry consultant Robert Shapiro found that generic versions of the top 12 categories of biologics whose patents have expired or will expire soon could save Americans up to $108 billion in the first 10 years… and as much as $378 billion over two decades.

Needless to say, that’s a lot of dough. And thanks to the way the deal is going down, all of it will end up in the pockets of the drug companies, boosting their share prices along the way.

Because let’s face it: if you’re in the drug business, 12 years of patent protection makes it a lot easier to score development deals and earn big buyout premiums. In that regard, it is simply a matter of math.

New Rules Mean Bigger Biotech Bucks

For instance, did you know that on average, it takes an investment of more than $1 billion over 10 years to develop a biologic drug?

That means a company has to earn back a $1 billion in net profit to just break even on the R&D costs before a copycat "biosimilar" drug comes in and devastates their market share.

After all, when given the choice between two drugs that are virtually the same, consumers almost always choose the cheaper brand. It’s a no-brainer.

However, with an additional seven years of protection and possibly even longer timeframes, Big Pharma earned a much longer period to make these new drugs economically feasible.

In the end, that likely means more drugs will likely be pursued, opening the way for smaller biotech companies — including those involved in regenerative medicine.

And while only 20% of drugs on the market today are of this variety, it is expected by 2015 that half of all new drugs approved will be biologic.

Prior to the new provision, the FTC was pushing for the same five-year protection for biologics, while the Obama Administration was pushing for seven years. The new provision — if finalized — simply gives the situation considerably more clarity.

As a result, shares of the SPDR S&P Biotech ETF (NYSE: XBI) jumped on heavier-than-normal volume when the current language was put into the current bill:


biotech chart

That’s why, political wrangling aside, the biotech industry is now poised to become one of the top sectors over the next decade.

Thanks to Rep. Eshoo, her colleagues, and millions of dollars spent lobbying against it, generic competition seems to have met its match.

Granted, it’s not pretty… but right or wrong, that’s the way our government works these days.

The political clout of the few still outweighs that of the many. Invest accordingly.

Your bargain-hunting analyst,

steve sig

Steve Christ, Investment Director
The Wealth Advisory

One final note: Government action on new stem cell research has also opened the way to big profits in this field. Needless to say, new patent protections will only drive this trend higher. To learn more about The Wealth Advisory and how to play this radical trend in medicine, click here.