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The Coming Windfall For A Brand-New Drug Industry

By Rob Fannon, editor Phase 1 Investor
Thursday, May 17, 2007

In 1989, Edward Cohen blew the whistle on the largest criminal scandal the FDA had ever seen.
Five years prior, Congress passed a piece of legislation that spawned a new business overnight – the generic drug industry. To encourage cheap alternatives to high-priced drugs, the legislation gave a six-month monopoly to the company that submitted the first generic version of a top-dollar, off-patent drug.
Companies clawed for the coveted first-to-market privileges, and the FDA received more than 1,000 applications in the bill's first year.
Among the piles of applications were multiple submissions by Edward Cohen. Founded in 1970, Cohen's company had been manufacturing drugs for two decades before the critical legislation, now known as the Hatch-Waxman Act. Cohen's firm produced antibiotics, primarily for distribution by larger drug companies.
Sure, it was a good business. But huge income could be made selling generic drugs directly. Even at prices from 50% to 80% cheaper than the brand-name counterparts, the profit margins were ridiculous.
Cohen's competitors secured FDA approval for generic drugs and started raking in the cash. Meanwhile, his own applications languished… and his complaints went unanswered. Other companies received approvals to sell the antibiotic drugs that Cohen's company manufactured, though Cohen was sure his company was first in line. The FDA continued to ignore his protests.
Two years later, Cohen managed to convince a much more powerful audience to hear his pleas – the House Committee on Energy and Commerce. Cohen's testimony in May 1989 prompted a congressional investigation into the monkey business between the generics industry and the FDA.
When the dust settled, more than 40 agency officials and company executives pleaded guilty to corruption and fraud, some paying hefty fines and others heading off to prison. Of the nation's 52 generic drug companies, only five weren't involved in the scam, including Edward Cohen's business.
With the playing field leveled, the next decade brought great prosperity to Cohen's company. Billions in revenue were up for the taking as scores of top-selling brand-name drugs came off patent. Then, as the land grab subsided, the industry underwent massive consolidation. With his company in place as one of the top players in the game, Cohen stepped down in 1994.
Today, Cohen's company is back at it again, protesting FDA practices. This time, however, the topic isn't corruption, but bureaucratic foot-dragging.
Cohen's company has its eyes fixed on the next big windfall – generic versions of ultra-expensive biotech drugs. These are billion-dollar medicines, some of which carry $20,000 annual price tags. Many of these costly drugs have come off patent.
For example, the European patent for Epogen, a $2.5 billion anti-anemia drug, expired in 2004. Yet, the FDA has no regulatory mechanism in place to approve generic versions of these golden medicines, also known as biogenerics.
Eventually, Congress will pass some form of biogenerics legislation in the U.S. And, hopefully, Europe will streamline its process.
But unlike the huge generics industry created by Hatch-Waxman in the mid-1980s, only a few players have the scientific expertise and manufacturing capability to produce biogenerics. These players include Israel-based Teva and Novartis' Sandoz division.
As I mentioned, biogeneric medicines can fetch incredibly high price tags… and with just a handful of likely competitorsable to compete in this area, the right companies stand to make billions in the coming boom.
Good investing,
Rob Fannon

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