Those numbers make Richard Lane's mouth water.
Lane is CEO of Davie-based Andrx Corp., the world's fifth-largest generic drug maker. In massive warehouses in Davie and Weston, Andrx crafts off-brand versions of popular drugs that it sells for as little as 30% of the price of the brand-name originals.
Check out some more numbers: Spending on prescription drugs has more than doubled since 1997, to $154.5 billion, and is expected to rise as much as 14% a year for at least the next three years. Industry analysts expect generics, whose lower prices appeal to both consumers and insurers, to double their share of total pharmaceutical sales to 16% by 2005. "Tremendous opportunity," says Lane.
But if the future's so bright, why has Andrx's stock fallen by more than 75% in the last year? There's one more number that Lane isn't so excited about: 11. That's how many patent infringement lawsuits Andrx faces from large drug companies -- so-called Big Pharma firms.
Big Pharma's success at using the intricacies of patent law and federal regulation to delay generic competition has made the generic drug business much more complicated and much less predictable -- factors that send investors running.
Meanwhile, Andrx and other generic firms must conduct business in a state of perpetual gamesmanship, trying to stay a step ahead of the brand-name drug makers' efforts to protect their products, particularly their blockbuster sellers.
EXPIRING PATENTS
Brand-name patents facing expiration through 2005:
Abbott LaboratoriesMerckBiaxin2005Singulair2003AstraZenecaZocor2005Zoladex2005Novartis PharmaceuticalsAventis PharmaceuticalsLamisil2004Lovenox2004Aredia2005BayerPfizerCipro2003Diflucan2004Bristol-Myers SquibbZoloft2005Paraplatin 2004Zithromax2005Pravachol2005Roche LaboratoriesEli LillyXenical2004Axid2002Schering-PloughGlaxoSmithKlineClaritin2002Augmentin 2002Intron A2002Relafen2002Tap PharmaceuticalFlovent2003Lupron2004Flonase 2003Prevacid2005Engerix-B2003Zofran2005Source: Generic Pharmaceutical Association
The patent infringement lawsuit is typically the first hurdle for a generic firm attempting to win Food and Drug Administration approval for its copycat version of a Big Pharma product. In recent years, brand-name drug manufacturers have taken to bombarding the FDA with additional patents that sometimes verge on the absurd -- patenting a medicine's color, for example -- and then filing additional infringement lawsuits against the generic firms' products. (President George W. Bush announced a plan in October to limit Big Pharma's ability to use litigation to delay competition from generics.)
Beyond patent lawsuits, there are several other obstacles. Technically, a generic drug company can market a drug while patent litigation proceeds, but it must have regulatory approvals from the FDA. Gaining those approvals can involve testing products in the same ways the original manufacturer has tested. There are other potential roadblocks: Big Pharma firms can extract another six months of patent protection by testing their products on children, which a federal law allows in order to encourage development of drugs for children.
Consider Andrx's battle to sell a generic version of heartburn drug Prilosec, also known as the "purple pill." In 1998, Andrx applied for FDA approval for its generic Prilosec. It had to know that AstraZeneca, the company that makes Prilosec, wasn't going to relinquish the rights gladly. At that time, Prilosec was the world's top-selling drug, bringing in more than $2.3 billion in 1997 sales. But the stakes were also high for Andrx: Analysts estimated that generic Prilosec could generate sales of $500 million for Andrx during the first six months alone.
In May 1998, AstraZeneca sued Andrx for patent infringement. That alone, according to federal law governing the generic business, automatically delayed Andrx's ability to sell the generic for 30 months.
The litigation dragged on much longer than that. The lawsuit didn't even go to trial until December 2001, and the trial lasted well into July. Finally in October, the judge ruled that Andrx had infringed AstraZeneca's Prilosec patent. Andrx plans to appeal the ruling, but the blow sent shares tumbling 40%.
The stock rebounded to more than $18 after Andrx decided to join forces with another company, KUDCo, that prevailed when AstraZeneca sued it for patent infringement over its version of Prilosec.
Unrelenting campaign
Meanwhile, AstraZeneca pursued a campaign against its generic rivals outside the courtroom. In March 2001, it listed four new Prilosec patents with the FDA, prompting Andrx to strike back with its own lawsuit claiming that AstraZeneca was illegally trying to block generic competition.
AstraZeneca also tried to foil rivals by winning FDA approval for new labeling based on an "applesauce test" -- it performed a clinical trial demonstrating that patients who find pills hard to swallow can sprinkle Prilosec on applesauce. Doing so meant that generic firms seeking FDA approval would have to conduct applesauce tests on their own pills, introducing further regulatory delays.
Having fought enough similar battles over the years, Andrx had anticipated AstraZeneca's move and already had submitted an applesauce test to the FDA. It won final FDA approval for its drug in November 2001 -- four years after applying.
AstraZeneca's most recent tactic to hold onto Prilosec dollars: Winning approval to market the drug over the counter, which would greatly lessen the appeal of an Andrx generic.
Andrx isn't immune to criticism that it's trying to play the system. In 1997 Andrx cut a deal with drug maker Aventis over Aventis' hypertension drug Cardizem: After Aventis sued Andrx for patent infringement, Andrx agreed not to begin selling generic Cardizem while the suit was pending, even after receiving final FDA approval to do so. In return, Aventis paid Andrx roughly $89 million.
Consumer groups, in numerous class-action suits against Andrx, called that "illegal restraint of trade," claiming they could have saved millions had Andrx begun selling its generic sooner.
Andrx denies that; it says the Aventis agreement didn't hurt consumers because Andrx never would have risked selling the generic before resolving the patent lawsuit anyway. (Generic makers who start selling a generic and then lose a patent lawsuit may have to pay damages.) Andrx also said it used Aventis' money to create a different formulation of its drug, thus ending battles between the two companies.
The Federal Trade Commission investigated but found no wrongdoing. Meanwhile, attorneys general from 28 states and the District of Columbia, as well as four Blue Cross Blue Shield insurers, also have sued Andrx over the Cardizem deal. In September, Aventis and Andrx settled some of the claims for $110 million.
Dumping drugs
The impact of the war with Big Pharma imposes other costs beyond the hundreds of millions of dollars in delayed sales. Most obviously, legal fees add millions to Andrx's overhead -- it's impossible to say how much, as Andrx doesn't break out those costs. Delays caused by either litigation or the FDA sometimes force Andrx to dump drugs the company had hoped to sell; in the third quarter, Andrx wrote off $41 million in Prilosec-related inventory, putting the company into the red so far this year.
Lane, who arrived at Andrx just five months ago, shrugs off these issues. "You've got to play the game," he says. "Our legal expenses will be well worth the price as our products make their way onto pharmacy shelves."
But Lane also is aiming to make Andrx less vulnerable to the ups and downs of the courts by developing its own brand-name drugs -- several featuring an extended-release technology invented by Andrx's former top scientist. Its first branded product, Altocor, is an extended-release version of an off-patent cholesterol drug called Mevacor made by Merck. In addition to Altocor, Andrx is working on an extended-release diabetes drug and studying the use of its extended-release cholesterol drug as a treatment for Alzheimer's.
Ironically, Lane, who for 20 years was a top executive for Merck and Bristol-Myers Squibb (most recently as head of its entire $18-billion pharmaceutical division), led the launch of Mevacor when he was a marketing executive for Merck.
A Wharton MBA with a bachelor's degree in biochemistry, Lane, 51, says he has the skills to move Andrx into the branded business -- a big reason Andrx's board hired him. "I've built sales forces for four different companies," he says. "I know what makes brands successful."
Getting into the branded-drug business is an expensive, cutthroat proposition, however, requiring a highly trained and well-paid sales force to push products. Andrx already has built a 300-member sales force and is considering beefing up that staff to 500 within 18 months. The sales team and legal costs are a big part of why administrative expenses nearly doubled in 2001 to $119 million.
Brand-name drugs do require higher "activation energy," as Lane puts it, but if launched successfully, they can drive sales for as long as 10 years. Lane's plan is for those brand-name drug sales to balance the uncertainties of the generic business.
Underpinning Lane's strategy is Andrx's distribution arm, Anda, which sells generic products to about 14,000 independent pharmacies and regional chains. Anda's 2001 profit margins of 17% pale next to the 72% gross margins of the generic business, but it's a cash machine that has helped Andrx fund R&D and litigation without going into debt. "Ideally, we want to complement generics with brands that have longer predictable life cycles," Lane says.
For now, though, Andrx still depends on generics, with a total of 27 awaiting FDA approval or the resolution of lawsuits. "On the generic side," Lane says, "legal is the equivalent of R&D."
SOUTH FLORIDA GENERICS
Andrx isn't the only, or even the biggest, top-drawer generic firm to call south Florida home. Sixteen years ago, entrepreneurial dermatologist Phillip Frost got rich selling a pharmaceutical company to Schering-Plough. Afterward, he merged several small chemical and pharmaceutical companies into what's now called Ivax Corp. Last year, Miami-based Ivax hit $1.2 billion in sales.
Ivax is something of an Andrx ancestor. Before founding Andrx, Alan Cohen sold a drug distribution business to Ivax and worked there for a while. He then took two top Ivax executives to Andrx with him; one, Elliot Hahn, is now chairman of Andrx. (Cohen left Andrx last year to focus on his newest acquisition, the Florida Panthers hockey team he purchased from Wayne Huizenga.)
In fact, most of south Florida's biomedical and pharmaceutical business communities are related, winding back to three early stalwarts: Frost's first company, Key Pharmaceuticals; stent maker Cordis Corp., bought by Johnson & Johnson in 1996; and Coulter Corp., now part of Beckman Coulter.
Andrx too is retracing Ivax's path when it comes to strategy. Ivax warred for years with a powerful drug maker over a high-profile drug -- in Ivax's case, Bristol-Myers Squibb and its breast cancer medicine, Taxol. Ivax also has lessened its reliance on generics. Its branded business, which includes products for allergies and asthma, now represents 43% of revenues.
IVAX VS. ANDRXIvaxAndrxSales$1.2 billion$749 millionProfit$243 million$37.5 millionR&D spending$88 million$53 millionGeneric drug applications pending3527Employees8,1751,837Source: 2001 annual reports