BY LEWIS KRAUSKOPF
Barr Laboratories Inc. became the scrappy emblem of the generic pharmaceutical world in August when a stunning legal victory gained it early access to one of the most famous and profitable prescription drugs, Prozac.
Based in Pomona, N.Y., and with operations in Northvale, Barr won a patent battle that could allow it to sell a lower-cost, chemically identical version of the popular antidepressant by this summer. After besting Prozac's maker, drug colossus Eli Lilly and Co., in court, Barr's stock price shot up 68 percent into the $70-a-share range, where it has hovered ever since.
However, earlier this month, Barr formed its own proprietary research and development unit and hired an executive from a major generic-producing company with success in the branded arena to run it.
So why, after notching its big legal victory and spending 30 years establishing itself as a company that makes chemical equals of brand drugs, is Barr apparently moving away from being simply a generic specialist?
Barr's shift represents a wider trend in the pharmaceutical sector. Firms such as Barr began to thrive in the 1980s as new government regulations made it easier to win approval to produce less costly copies of drugs other companies invented, but more recently some of these companies have attempted to mature into "specialty" drug companies, seeking to diversify by marketing brand-name products.
"There's been some of that going on because it leads you to a strong foundation across the board," said Marshall Hayward, vice president for business development for Chatham-based Hurley Consulting Associates Ltd., a service provider for the health sciences industry. "The difficulty in the generic industry is the very competitive nature of the generic business. . . . You look at it, and say, 'How can I protect my drug product?' When you're a generic, you have very little to no protection."
Although generics have flourished into an industry, the figures pale in comparison with the big players. A $7 billion-a-year business in the United States, the generic industry registers smaller sales than the top three brand-name drugs alone.
Even at Barr, where all $482 million in sales came from generics last fiscal year, the company expects one-third of revenue will come from proprietary products within four years, under the guidance of the new research executive, Dr. Carole Ben-Maimon formerly of Teva Pharmaceuticals Industries Ltd.
Israel-based Teva is seen by observers as what traditional generics are striving to become: a company with a broad line of generic products that has also developed a brand treatment. Teva's brand treatment for multiple sclerosis became its hottest-selling product in 1999.
Other firms are reaching for that proprietary promised land, such as Watson Pharmaceuticals of Corona, Calif., Pittsburgh-based Mylan Laboratories, and, closer to home, Sidmak Laboratories of East Hanover.
"The holy grail of the pharmaceutical industry is to get patent protection. . . . And in the generic industry, that's impossible to do," said Tim Chiang, a Banc of America Securities analyst who follows specialty drug companies.
Although the reward for success is potentially lucrative, the risks inherent for branded drug companies come into play for these burgeoning specialty firms. Failed clinical trials, millions of dollars spent on development, and the possibility of regulatory denial add elements of uncertainty.
"You definitely have to spend a lot on [research and development] to develop a product," Chiang said. "Clinical trials take time . . . so in a lot of ways it's a riskier proposition."
Generic drugs are chemically identical to the brand-name products they are intended to replace. Once a patent expires on a drug, manufacturers can apply to market generic versions. They are sold under their chemical names; for example, Prozac will be sold generically as fluoxetine hydrochloride. As with new prescription drugs, the U.S. Food and Drug Administration approves and regulates generics.
The industry was revolutionized in 1984 when a federal law created a new approval process for generics. Drug companies devoted to manufacturing generics formed, and larger operators diversified, starting their own generic divisions. From being less than a fifth of all prescriptions issued in 1984, generics now make up nearly half.
But consumers are drawn to generics over the brand-names because of the lower cost, leading to lower profit margins -- because no company generally has exclusive rights once a patent expires, competition drives prices down.
That leads maturing companies to the proprietary realm. The first but least common way generics enter the brand-name area is by developing a new product from scratch, from molecule to market. This expensive, time-consuming and risky innovative process is generally left to traditional pharmaceutical or biotech companies who can make the investment in hopes of finding a breakthrough therapy.
Instead, some generic firms take an existing product and alter the regimen, such as changing a twice-daily drug, to a once-daily product. Barr is attempting this strategy with its development for Seasonale, an oral contraceptive taken daily for up to 84 straight days, reducing a woman's annual menstrual cycles from 13 to four.
For its other major proprietary product, CyPat, Barr has started U.S. development of a drug sold in Europe by Schering AG. Barr is doing clinical trials for the product, over which it has chemical exclusivity in the U.S. CyPat treats hot flashes for prostate cancer victims who have undergone castration. Other companies license products from other companies or buy the rights of drugs other companies no longer have an interest in selling.
"There's very little 'R' in a generic house," said Robert Lieberman, chief executive officer of the Morristown-based consulting firm Bogart Delafield Ferrier LLC. "They have some developmental capabilities, but really not research capabilities. . . . They don't have the cash flows to invest in the required research that by definition will fail more than they will succeed."
At Barr, part of Ben-Maimon's role will be shepherding Seasonale and CyPat through the final stages of clinical trials and onto the market. They are scheduled to launch in 2003. Barr said it has five other proprietary products in development.
Through May, IMS Health ranked Barr as the fourth-biggest seller of generics in the U.S. Its breast cancer drug, tamoxifen, had the most revenue of any generic, with $278 million.
Barr has long made a name for itself with patent challenges. In addition to the Prozac victory, it enjoyed victories against the British firm Zeneca PLC and Germany's Bayer AG, although failed in its bid to sell a generic version of Glaxo Wellcome's AIDS drug, AZT.
Being the first generic company to challenge a patent of a brand-name replacement can entitle the generic manufacturer a 180-day exclusivity period, during which the company has the generic market to itself. The Prozac ruling has led some analysts to predict Barr's annual sales for fiscal 2002 could double, to more than $1 billion.
But Lilly has an appeal on the ruling, and questions remain as to whether Barr will get a full 180-day exclusivity period. This uncertainty that comes when generics do battle with the large drug firms represents another reason for Barr to search for stability in its proprietary division, Chiang said.
"With generics you
have a lot of uncertainty on the regulatory side; you never know what branded
pharmaceutical companies will try to do in preventing entry," he said.
"How [Barr has] derived revenues in the past may not be the way they derive
revenue in the future."
Staff Writer Lewis Krauskopf's e-mail address is krauskopf@NorthJersey.com
2001 North Jersey Media Group Inc.