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The Good, The Bad: The Generics

Adamis Pharmaceuticals Corp. stands unique among San Diego’s many drugmakers: It’s going generic.

Headed by biotech vet Dennis Carlo, Adamis (Nasdaq: ADMP) is eschewing the San Diego life science sector’s costly and time-consuming norm of new drug innovation, focusing instead on the expansive — and controversial — generic drug market.

And unlike many of the drugmakers in San Diego, Carlo expects to turn a profit — quick.

“It takes years and years — and hundreds of millions of dollars — to get a new drug approved,” Carlo said. “With Adamis, I wanted to go the generic route and actually bring in revenues early in the game.”

Generic drug production is a profitable and competitive industry that offers unequivocal patient benefits with its less expensive medicines. The Food and Drug Administration, in the form of a 30-year-old federal law called the Hatch-Waxman Act, actively encourages pharmaceutical companies to develop generic drugs.

But there’s a double edge here. Many generic drugmakers can be aggressively litigious and pose serious threat to the innovation and sales at companies that develop new medicines. It’s long been burdensome to big pharma. And these patent lawsuits, which challenge drug exclusivity for companies that have spent many years and many dollars to develop new medications, are a growing concern for San Diego’s life sciences sector.

For example, companies such as San Diego’s Santarus Inc. and Somaxon Pharmaceuticals Inc. suffered from challenging generic drugmakers. Generic companies attacked their patents and threatened to scoop up market share early in the game — impacting Santarus’ stock value and, in the case of Somaxon, forcing a relatively low-value buyout.

“Patent litigation can be particularly devastating for smaller pharmaceutical companies because it cuts severely into their budgets and can really stifle innovation,” said one patent lawyer, who asked not to be named because he represents generic drugmakers and San Diego life sciences startups alike. “It’s like killing the golden goose.”

Lower Margins, Higher Volumes

Nevertheless, government has long supported generic drug development, and even patent litigation, because it helps reduce health care costs. Patients can better afford much-needed medications, and generic drugs are even a boon to employers as such savings are reflected in insurance rates. Generics have saved the U.S. health care system $1.2 trillion over the course of a decade, according to the Food and Drug Administration.

Generics cost up to 95 percent less than branded prescription drugs. The lower margins are offset by the higher volumes sold — generic drugs account for some 85 percent of all medications prescribed in the U.S.

And they make money. The companies’ base costs are low because they have little to invest in research and development — generics companies have a more perfunctory regulatory process than do companies launching new drugs. And the majority of generics are developed abroad. Adamis, though headquartered here, has carefully vetted manufacturing sites in Belgium and Bangladesh.

“The development process for generic drugs is light years cheaper than brand name products,” said Michael Swit, a lawyer at San Diego-based Duane Morris LLP versed in FDA regulations.

Expiring Patent Means Opportunity

One of the drugs Adamis is preparing to launch is a “branded generic” asthma inhaler that mirrors GlaxoSmithKline PLC’s Advair Diskus — a blockbuster that brings in $8 billion annually. Advair is an expensive drug, costing about $300 per month. Adamis projects its APC5000 will be priced at half that or less, with the added benefit of a proprietary new dispensing system that improves upon Advair, Carlo said.

The patent for Advair, which accounts for a fifth of the multinational drugmaker’s sales, is set to expire in 2016. Adamis, along with several other generic drugmakers, are waiting in the wings to hit the market when this patent cliff arrives.

“If we took even a small percentage of that multibillion-dollar market, we’d still do very well,” Carlo said.

Adamis has several other generic drugs in its pipeline, such as a cheaper alternative for the EpiPen, which it expects to commercialize later this year.

Meanwhile, losing drug exclusivity is rough for companies like GSK (NYSE: GSK). Nearly 400,000 jobs have been cut in the pharma industry since 2000 — many of which were in research and development, according to reports from firms Challenger, Gray & Christmas and EvaluatePharma Ltd.

Generic companies are now attacking drug patents earlier and earlier — often before the branded drugs even hit the market. Drug companies typically have a span of three to five years of exclusivity after their products hit the market, and that window shortens significantly if generic companies win litigation.

“Because products go generic, the industry has to keep on its toes. We can’t be lazy,” said Hank Loy, president of San Diego-based Leading Biosciences Inc., an early stage company that’s already shoring up its intellectual property protections to prevent future patent litigation.

“The challenge now is to get things to market as soon as we can,” Loy said. “If the clock’s ticking on a patent, you really hurt your valuation.”

Branded drug companies need a few years to recoup development costs by charging hefty sums for their products — some estimates say it costs $4 billion to develop a new drug. Patent litigation costs can run from tens of millions to hundreds of millions, according to a 2011 study in Northwestern University’s Journal of Technology and Intellectual Property. Without allowing companies time to recoup the many dollars spent in developing the drugs, companies have lost sales and even folded, Swit said.

Patent Litigation Wears Some Down

Santarus (Nasdaq: SNTS) launched a heartburn drug called Zegerid in 2006, but its patents were invalidated in 2010 by a Delaware district court judge, and generic competitors entered the market. This led Santarus’ sales to slow and its stock to plummet, and it laid off 200 employees to compensate.

Though Santarus stayed afloat, thanks to having several other drugs in its pipeline that helped offset losses from litigation and a loss of sales, the patent attacks were “obviously a very devastating suit and a major blow to the company,” CEO Gerald Proehl said. Santarus, which was acquired late last year for $2.6 billion, was able to have the patents reinstated in a higher court in 2012.

Somaxon developed a drug for treating insomnia called Silenor that obtained FDA approval in 2010, but it took about $170 million and three attempts to achieve it — leaving the company in a vulnerable financial position. It still was viewed as promising, with shares peaking at around $27 in 2011, and some analysts projected the drug could bring in as much as $250 million in annual sales for the company.

But eight months after it hit the market, it faced patent litigation from four generics companies, which reduced the company’s outlook in eyes of investors. By late 2012, it entered settlements with three of those companies that would allow them to sell a generic version of the drug earlier than expected. Somaxon, hit by the financial burden from the litigation, had to lay off the majority of its employees and was sold to Texas-

based drugmaker Pernix Therapeutics Holdings Inc. (Nasdaq: PTX) for $25 million. Its shares had dropped by then to about $3.

“There’s certainly a need for generics, but I think some of the companies can be very predatory, as you can see in the case of Somaxon,” said Cam Garner, chairman of the board of Cadence Pharmaceuticals Inc. (Nasdaq: CADX), another company that faced a two-year attack from generic drugmakers. “Generic patent litigation is definitely the underbelly of the industry, and warding it off has become a way of life.”

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