June 22, 2016 – Excerpt from Q2 2016 letter to IMA’s clients
Purchase of Amgen: First we need to explain a peculiar difference between pharmaceutical and biotechnology companies. A simplistic explanation would point to the sciences they pursue – chemistry vs. biology.
Pharmaceutical companies work with chemical compounds (some of which are derived from plants). Biotechnology companies rely on biology since they are trying to duplicate or change the functioning of living cells. Biotechnology firms rely heavily on advances in genetic research.
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This difference in the fundamental building block of their research – living organism vs. chemical compound – has a profound impact on the economics of their respective businesses. In theory, pharmaceutical and biotechnology companies receive the same patent protection under US law. They are granted 20 years of exclusivity, after which their compound becomes fair game to any competitor that can prove to the FDA that their copy is the same (bioequivalent) as the original (branded) drug.
Here is an example of what happens to a simple chemical drug after its patent expires: Today a one-month supply of Pfizer’s Lipitor (branded drug) will cost a consumer $212. However, a generic copy will cost only $10.50 a month. Lipitor used to be the highest-grossing pharmaceutical – its sales in the US peaked in 2009 at $11 billion. After its patent expired, sales dropped by 84% to $1.9 billion in 2015.
Generic chemical drugs are considered to be a perfect copies with the same active ingredients as the originals – a pharmacist is able to substitute Lipitor script with a generic at will (unless the doctor specifies no switch to a generic – some people may be allergic to an inactive ingredient in a generic, e.g. coloring). As you a consumer you won’t even know or care which you receive (unless you’re the one paying for it).
Now enter biopharmaceuticals. After patent exclusivity expires, a biotech firm’s drug also becomes fair game for others to make copies (they are called bio-sim