Your Complete Guide To The Generic Drug Industry

On Monday, embattled drugmaker Mylan NV (NASDAQ:MYL) announced that it will launch a generic version of the EpiPen at a 50% discount to the branded version as the company continues to respond to widespread criticism surrounding the pricing structure of the popular allergy medication.

Mylan’s new generic EpiPen not only offers patients a more affordable treatment option, but it also adds to the company’s massive generics portfolio. Regardless of the recent criticism the company has faced, Mylan’s generics business is one of the largest in a very competitive global industry (also read: Mylan Promises $300 Generic EpiPen).

With the spotlight on Mylan and the oftentimes absurd price hikes that have become commonplace in today’s pharmaceutical industry, some attention has to be given to generic drug manufacturers that attempt to offer medications at lower costs to the consumer (also read: Here's How Drug Companies Justify Massive Price Hikes).

With that said, sometimes it feels like the generic drug industry exists in the shadows, with new options sprouting out from seemingly nowhere and making a major impact on the overall pharmaceuticals market. Today we’ll take a look at how generics are developed and how they affect the drug industry today.

Same Standards

Generic drugs are defined by the U.S. Food and Drug Administration (FDA) as being equivalent to the brand-name product in dosage, strength, route of administration, quality, performance, and intended use. Generics are required to have the same active ingredients as their branded counterparts, although they do not need to contain the same inactive ingredients.

A potential generic drug manufacturer is required to prove that its drug is bioequivalent to the brand name drug. A wide range of bioequivalence data is collected and reviewed by the FDA during the approval process. For instance, after a patient takes the generic drug, they will be tested to see whether the same levels of the drug are found in their bloodstream.

The FDA also regulates the manufacturing and distribution of generic drugs. All related quality standards must be met in this regard, and many generic drugs are actually made in the same manufacturing plants as the brand name versions to help meet this guideline.

Patent Patience

When a pharmaceutical company is developing an original drug, it can apply for a patent that gives it the exclusive right to distribute that chemical compound for a specific time period, after which generic drug manufacturers can seek approval to manufacturer a non-brand version.

In the United States, the latest major update to this regulatory process came with the Patient Protection and Affordable Care Act—more commonly known as Obamacare—in 2010. Obamacare established an exclusivity period of 12 years for drug patents, with the ability to extend that period only if significant updates or improvements are made to the drug.

Drugmakers oftent attempt to extend their exclusivity periods with a number of different strategies. In a process that critics call “Evergreening,” pharmaceutical companies will typically try a variety of moves, including aggressive litigation and minor tweaks to a drug’s inactive ingredients, in an attempt to delay generic competition.

Once a drug’s exclusive period has expired, a wannabe generic manufacturer can file an Appreciated New Drug Application (ANDA) with the FDA to seek approval for their product. The ANDA looks at a wide variety of factors, including the quality standards mentioned above.

Once a generic drug’s ANDA is approved, it can hit the market and is available to all patients who need the medicine. Generic drugs appeal to customers because they are typically significantly less costly than name-brand drugs, as generic manufacturers have significantly less operating costs than other pharmaceutical companies.

It’s important to keep in mind that generic manufacturers do not need to replicate the drug’s original tests, and most generic businesses do not spend much money on marketing and promotion, which means the company’s overhead remains lower. In 2010, the FDA found that FDA-approved generics saved about $158 billion in that year alone.

Tickers to Watch

Of course, as an investor you’re probably most interested in which companies operating in this sphere are publicly traded. As mentioned before, Mylan is one of the world’s leading players in generics, while Teva Pharmaceuticals (NYSE:TEVA) is the largest generic drug manufacturer in the world, especially after its recent $40.5 billion acquisition of Allergan’s (NYSE:AGN) generics business.

Other notable stocks to watch in the industry include Amphastar (NASDAQ:AMPH) , currently a Zacks Rank #1 (Strong Buy); Axogen Corp. (NASDAQ:AXGN) , currently a Zacks Rank #2 (Buy); Akorn Inc. (NASDAQ:AKRX) , a leading supplier of therapies used in ophthalmology and other specialty areas; Perrigo (NYSE:PRGO) , which has a deep portfolio of generic sprays, ointments, and injectables; and Novartis (NYSE:NVS) , which operates its generic business through its Sandoz subsidiary.

ETF-focused investors can also check out the VanEck Vectors Generic Drug ETF GNRX, which tracks companies that derive a significant portion of their revenues from generics or have the potential to derive a significant portion of their revenues from generics.

Complicated Competition

At this point, you might be asking, “If generic drugs are equally effective and cheaper, why would anyone ever opt for a name-brand drug?” Well, first remember our exclusivity windows! Plenty of pharmaceutical companies are cashing in on name-brand drugs that have no generic alternative right now.

For those drugs that do have a generic versus name brand competition, the answer lies in the subtle differences of humans. All drugs have to operate within blood concentration thresholds, and some patients can notice the subtle differences or even react negatively to whatever the pill capsule is made out of. With some diseases, the range of safe concentration levels is incredibly narrow, which could make switching from name-brand to generic dangerous.

In most cases, however, generic drugs are completely safe and more affordable than their name brand counterparts. For more coverage on drug prices, check out the latest episode of the Zacks Friday Finish Line podcast, where Mylan’s recent scandal was the first segment:

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