December 25, 2008

Is a bubble forming around generics?

Brian Laegeler of Morningstar is predicting a boom in generic drugs once Obama is settled in the White House. The president-elect's plans to increase insurance coverage and generic drug utilization, as well as a legislative pathway for generic biologics, paint a rosy picture for generics. Nearly $20 billion in branded drug sales are up for grabs when patent protections expire between 2009 and 2012. That could spark a price war come 2013.

There are several factors to keep in mind when trying to predict a bubble, Laegeler writes:

  • Emerging Markets Exposure - Generic drug markets in Eastern Europe, India, and Latin America have higher growth rates than in the U.S., and some Western European markets are underpenetrated by generics.
  • Generic biologics - Characterization process, limited clinical trials and application review will prevent the first major round of biologics from happening before 2013. Even if a generic is approved, big pharma and biopharma are still strong enough to take at least 50 percent of the market share.
  • Cartel behavior - Laegeler believes the drug industry isn't concentrated enough to form a true cartel; barriers to entry are too low, he writes, and "the biggest players will always have to match the craziest price."
  • Branded drugs - Large generic drug companies have a branded drug component, which could strike a balance a price war in U.S. generics.
  • Branded sales growth - "The nominal branded sales at risk in 2013 and beyond will continue to increase during the next five years," Laegeler writes. "However, growth will become harder to come by in this economic environment. The differential between 2012 and 2013 will not change much as both figures continue to increase."
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