Prescription for profit A Phila. maker of generic drugs, URL/Mutual, has become a player in the lucrative market and in the long legal fights over patents.

Posted: October 12, 2003

Driven by health insurers' push for lower-cost prescription drugs and expiring patents on top-selling brand-name medicines, makers of generic drugs have come into their own.

"Once the 98-pound weaklings of the pharmaceutical industry," said Standard & Poor's analyst Arthur Wong, generic-drug companies now are competing aggressively and giving giant pharmaceutical companies "a run for their money." And their drugs.

Generics account for 42 percent of all prescriptions dispensed, and that number should inch up in the coming years, according to Doug Long, vice president of industry relations for IMS Health, a health-care information company with major operations in Plymouth Meeting.

United Research Laboratories/Mutual Pharmaceutical Co. Inc. in the Juniata Park section of Philadelphia is emblematic of the growth in the generic-drug sector.

URL/Mutual ranks 11th among generic-drug companies in the United States in number of prescriptions dispensed - 40 million for the 12 months ended June 30, according to IMS. In contrast, Teva Pharmaceutical Industries Ltd., one of the world's biggest makers of generic drugs, with U.S. headquarters in North Wales outside Philadelphia, dispensed 193 million prescriptions in the 12 months ended in June.

With 550 employees and a 160,000-square-foot factory on Orthodox Street, URL/Mutual makes 50 generic medicines, including the diabetes medicine metformin (sold under the brand-name Glucophage), antibiotic sulfamethoxazole with trimethoprim (Bactrim), pain reliever tramadol (Ultram), and the antidepressant amitriptyline (Elavil).

The privately held company, founded in 1946, has had its financial ups and downs, and twice has been on the verge of bankruptcy, said president and chief executive officer Richard Roberts. In 1997, two New York equity investment firms, Momar Corp. and Elliott Associates L.P., pumped $30.1 million into the aging plant, and the company restructured its professional management team, Roberts said.

Sales last year were $293 million, up 63 percent from $180 million the year before. Revenue this year is expected to be $360 million, up 23 percent. The company produced 2.2 billion tablets and capsules in 2002, and it plans to expand packaging and other operations to a new 177,000-square-foot building on Dungan Road near Cottman Avenue in Northeast Philadelphia, Roberts said.

No matter how good generic-drug companies' scientists are in the laboratory, the real challenge for the industry is in the courtroom. That is where they win or lose getting their drugs to market.

URL/Mutual spends about $5 million annually - roughly half the $10 million it spends on drug research and development - on legal fees to battle patents and get their products to market faster.

Generics-makers are developing chemically equivalent medicines not just for brand-name drugs with expiring patents, but for those with existing patents as well. They are challenging products still under patent, contending that the patent is not valid, or that their lower-cost version of the drug does not infringe on existing patents.

The financial stakes are huge. The first generic-drug company to file an application with the Food and Drug Administration for a specific drug wins a 180-day period of exclusive distribution, and they can charge a higher price before other generics become available. Shutting other generic drugs out of the market translates into higher profits for the first to file.

Within the first year of a generic drug hitting pharmacy shelves, prescription prices typically fall by 50 percent to 70 percent or more. Big drug companies, such as Bristol-Myers Squibb Co., Merck & Co. Inc., and Eli Lilly & Co., are still recovering after some of their major drugs lost patent protection and stock prices plunged.

Sales of Lilly's antidepressant Prozac, for example, plummeted more than 80 percent within the first six months of generic competition in 2001, according to IMS.

Patents are the lifeblood of big pharmaceutical companies. Drugmakers have always obtained an initial patent on the basic chemical, or molecule, which gives them 20 years of protection from the date the patent is filed.

But generic-drug executives say they have seen new legal tactics from their brand-name competitors in the last decade. Brand companies, in an effort to extend sales, typically file additional patents on every aspect of their products - from the stabilizer and filler ingredients, to how the drug is delivered and used, even the shape of the crystals, said Roberts, URL/Mutual's CEO.

"Now almost every product we look at has five or 10 patents," said Roberts, who has a medical degree from the University of Pennsylvania.

"Definitely generic companies are being more aggressive," he said. "But there didn't used to be patents on anything except the basic chemical."

The pharmaceutical industry contends it must keep existing patents in order to get "an adequate return on investment" in new medicines, said Jeff Trewhitt, spokesman for the Pharmaceutical Research and Manufacturers of America, an industry trade group.

"It is very important that we have adequate patent protection at a time when our innovative companies are spending an average of $800 million to research and develop one new drug," Trewhitt said.

Philadelphia patent attorney Robert S. Silver, whose clients include generic-drug companies, said the courts "have become more willing to invalidate a patent. More and more judges seem willing to see that a game is being played by some brand-name companies to extend the life on their products, particularly if they don't have anything new coming down the pike."

In the late 1990s, the biggest generic-drug companies got larger by buying smaller competitors. The more concentrated and financially stronger generic-drug sector is "much more willing to wage expensive legal battles against well-heeled, large pharmaceutical companies," said Wong, who covers the pharmaceutical industry at Standard & Poor's.

Roberts, who joined his father, Albert, and uncle, Theodore, in the family business in 1988, said he spent most of his time figuring out which brand-name drugs to go after, and how to make them without infringing existing patents. He said he had dealt with a dozen patent-law firms around the country.

Roberts and his team look ahead seven to 10 years at drug patents due to expire. The team scrutinizes all supplementary patents, the potential market size and competing products, and the supply of raw materials. Their goal? "Is there a way we can make this product using pharmaceutical technology that will pass all the FDA requirements and will not step upon what the brand says is in their patent?" he said.

URL/Mutual projects sales growth of at least 10 percent a year, but the company said revenue could double, to $600 million, in the next year if it wins some pending patent court challenges.

Brand-name drugmakers have come under increasing pressure from generics since 1984, when Congress passed the Hatch-Waxman Act, creating the modern generic-drug industry. The law reduced the amount of testing that generic drugmakers had to do to market their products. Those requirements previously had presented an almost insurmountable hurdle for generics.

"The generic-drug industry has done very well over the last 20 years since Hatch-Waxman was passed," said Trewhitt of the pharmaceutical manufacturers trade group. "More than 10,000 generic drugs have been approved to go on to the market."

The number of prescriptions filled by generic pills was only 19 percent in 1984. Today, it is over half - 52 percent - including both generic and branded generic drugs, which are sold by generic-drug companies as brand-name medicines.

URL/Mutual's Roberts said: "The political and economic winds of change are behind the generic-drug industry's sails now. With the advent of managed health care, and large powerful corporations now paying for the prescriptions for their employees or their customers, the whole tide has come now in favor of generics."

Contact staff writer Linda Loyd at 215-854-2831 or lloyd@phillynews.com.

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