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Next Phase of Pharma Growth: Generics

Michael McTague, Ph.D., Executive Vice President, Able Global Partners in New York, serves clients in a variety of industries that seek capital for expansion, acquisition, consolidation or re-financing.
Michael McTague, Ph.D., Executive Vice President, Able Global Partners in New York, serves clients in a variety of industries that seek capital for expansion, acquisition, consolidation or re-financing.
The industry is also undergoing rapid expansion in specialty medications.

Investors have been rattled by many pieces of bad news for months but the massive pharmaceutical industry brings some relief. For 2022, Pfizer ( Pfizer Inc. - $0. 0.18 (0.00354%)  ) is looking at an additional $20 billion in revenue over last year, actually a repeat of its 2021 versus 2020 performance. Their assets are way up and feature $31 billion in cash. Johnson and Johnson ( Johnson & Johnson - $0. 0.10 (0.00056%)  ), which is looking at more than $95 billion in revenue this year, has about the same amount of cash and short-term investments on hand. 

A walk through Grand Central confirms that more people are going back to work at the office. That means the vaccine bubble has largely burst. A month into the rollout, a mere 4% of eligible people have gotten the latest Covid booster shots. No more long queues as were common earlier. Even so, the pharmaceutical industry rolls along.

Recent posts looked at the importance of speed in manufacturing and packaging. As the year heads for a close, speed has emerged as the most critical strategic element in the pharmaceutical industry. Next year, many more generics will start their process of coming on line with new manufacturers.

Rare Opportunity

The industry is also undergoing a rapid expansion in the area of specialty medications. Investors who watch the drug industry know huge amounts are spent on research related to major diseases and many breakthroughs have been found. Related to this is the intense focus on rare diseases, ailments with relatively few patients, but where new treatments and medications are needed badly. Spending on these expensive drugs has roughly doubled in the last decade. The main medical areas are autoimmune and oncology therapies, and treatments for rare diseases that only recently have moved onto the dashboards of the giant drug companies.

Take, for example, primary myelofibrosis, a rare disorder that causes buildup of scar tissue in the blood marrow and disruption of blood cell production. About 50,000 people suffer from this disease. A remarkable feature of today’s medical environment is that more and more qualified doctors and researchers focus on rare diseases, which are very hard to diagnose, but which find many patients ready for testing. Inrebic, a treatment for this condition approved by the Food and Drug Administration only three years ago, is made by Bristol Myers Squibb ( Bristol-Myers Squibb Co. - $0. 0.43 (0.0053%)  ). 

Meanwhile, Amgen ( AMGEN Inc. - $0. 0.60 (0.0021%)  ), GlaxoSmithKline ( GSK Plc - ADR - $0. 0.19 (0.00537%)  ), Kartos Therapeutics (Private), National Cancer Institute (USA), Telios Pharmaceuticals (Private) and Vanderbilt University Medical Center collaborated to develop Navtemadlin (KRT-232), another treatment for this disease, which employs proto-oncogene protein c mdm2 inhibitors. BOREAS, another potential breakthrough, approaches myelofibrosis after treatment with a class of drugs called Janus kinase (JAK) inhibitors. This project is already in Phase 3 testing.

Collaboration is a great feature of this industry. Note that the giants now frequently work with smaller companies with innovative ideas. Kartos Therapeutics was founded only four years ago and is privately held. 

Like the giants, generics makers and smaller producers need to hit the market fast. The frequently small runs place a premium on efficiency. Here, we find an opening for the little guys. The giants are at a certain disadvantage. They are used to expensive blockbuster rollouts. Investors love to hear about billions added to the financials. But, generics with a strong following are solid products also. Even at a level below Covid-19 vaccines, low-cost production and speed determine the winners. 

For example, in half a year, Ranbaxy Laboratories, an India-based manufacturer, took in $500 million in sales from its generic-version of widely-used Lipitor. Their success generated much interest. Sun Pharmaceuticals (SUNPHARMA.NS), with a market cap over $2 trillion, acquired Ranbaxy in 2015. Ranbaxy was a weathervane for things to come.

Among those with attractive prospects is EuroPharma, based in Green Bay, Wisconsin. The name and location allow the company to show a bit of swagger – bringing European ideas to the American market. Among their interesting features is that they make a wide range of products, including many vitamins. They also offer a product called Calm Kids, which they say “supports mental focus.” (If only the Teachers Union and parents would latch onto it!)

Intense Pressure

While the giants expect every product to be a blockbuster, the pharma giants find themselves under intense pressure because so many of their prime money makers – breakthroughs from years ago — are turning generic. The treadmill is running backwards in terms of making profit from research-intensive, costly, hard-earned patents. Of significant interest to investors is the rise of small biopharmaceutical firms that can act quickly to roll out their products. Obviously, generics account for much of this trend. Next year will be interesting.

This look inside the wide-ranging pharmaceutical industry delved into some major events. Next month we will move on to other business matters.  

Michael McTague, Ph.D., is Executive Vice President at Able Global Partners in New York, a private equity firm.

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