Editor's Note: Ernie's paid-up Biotech Insider Alert subscribers just got a recommendation to play a tiny, $25 million company that's poised to conquer a disease that kills a retiree every 10 minutes on average. But… there are lots of promising biotech stocks out there. Ernie does the legwork for his readers every week, but you can use this strategy to track down winners, too…
When you're evaluating a biotech, or even a full-fledged pharmaceutical company, you'll want to look at its product pipeline, upcoming catalysts, and financial indicators.
But the most important asset it possesses, the heartbeat that drives everything else, is its intellectual property (patent) portfolio…
That's what will make it attractive for acquisition, merger, or licensing deals.
And it's what protects its products from marauding generic drug manufacturers, who will produce copycat therapies and sell them at cutthroat prices.
For a drug development company, that spells disaster.
When a drug goes generic, it's not unusual for the original brand manufacturer's market share to drop more than 40%…
The Government Changed the Playing Field
Like other manufacturing companies, drug producers protect their products through trade secrets, trademarks, and patents. A new drug patent lasts for 20 years, but that number is deceiving.
In order to ensure the safety of a new drug's design (or a "non-obvious" change in a manufacturing process or improvement to an older drug), the maker will generally apply for a patent at the beginning of clinical trials. On average, it takes eight years for the drug to get from there to market, presuming it survives the regulatory gauntlet, and cancer drugs take even longer – 12 years or more.
That means branding companies can find themselves out in the cold after fewer than eight years. In fact, some patents have expired before clinical trials ended!
A lot of the risk here comes from a law sponsored by Senators Orin Hatch and Henry A. Waxman that passed Congress in 1984: The Drug Price Competition and Term Restoration Act, better known as the Hatch-Waxman Act.
The law introduced more competition into the pharmaceutical marketplace by allowing knock-off producers to skip the usual requirement of running clinical trials to prove their meds safe and effective. Instead of the usual new drug application (NDA), they would be allowed to submit an abbreviated NDA (ANDA) and prove only that their product was "bioequivalent" to an existing drug whose safety and efficacy had already been demonstrated.
The FDA defines bioequivalence as "…the absence of a significant difference in the rate and extent to which the active ingredient or active moiety [part of a drug or molecule-Ed.] in pharmaceutical equivalents or pharmaceutical alternatives becomes available at the site of drug action when administered at the same molar dose under similar conditions in an appropriately designed study."
To say the least, the new law put big pharma companies under the gun.
To be fair, the law also levied strict limits on when generic companies could make their move. They had to wait until a brand drug's patent protection expired, or until 30 months had elapsed after a patent had been declared invalid by the FDA. Hatch-Waxman also allowed brand manufacturers to apply for patent extensions, which could last up to three years.
A (Perceived) Challenge Can Hammer a Stock
The generic manufacturers, naturally, saw that word "invalid" and recognized a golden opportunity. They found that if they challenged an existing patent, often the patent wouldn't hold up under review. So it made sense for them to take legal action wherever and whenever they could.
That fact created a new negative catalyst: Just the whiff of a suggestion that patent litigation might be on the horizon can send a stock plummeting.
About the Author
Ernie Tremblay has more than 25 years of experience in following and analyzing the latest developments in health, medicine, and related technologies. He understands the FDA approval process, as well as the "hard science" behind new, experimental drugs and the market demand for them - and has a comprehensive grasp of the complex dynamics that determine whether a new drug will be a breakthrough winner, or just another casualty of the FDA approval process.