For Subscribers

Get the complete article now!

TWST: And ADD is not a very crowded market, is it?

Mr. Sanderson: It is not crowded with brand drugs at this point, but it will become more so in the future. The second important milestone in this group was Allergan’s (NYSE:AGN) filing of the LUMIGAN™ NDA in September of last year and the March approval. LUMIGAN should be a very successful, highly visible new product launch. It takes the focused marketing effort one step further. This is a drug that could easily be 300 million or 400 million in glaucoma and Allergan could compete very successfully against the leader in that market space. Most of the advantage is in its convenience. It doesn’t need to be refrigerated and the clinical data shows it to be slightly more powerful than the leading drug.

TWST: A number of health insurers have implemented three-tiered drug plans. Has there been any noticeable, quantifiable change in the patterns of drug usage with consumers having to pay up for the branded product versus the generic?

Mr. Sanderson: We are beginning to see the early stages of that. Generic substitution rates in the US from 1996 through 1999 were flat at about 42% of all new prescriptions. There really was not a financial incentive in the hands of the patient to substitute more generics than that. This 42% was driven by roughly 50% of the market that had been off patent for a long time, where the substitution rates are 80% plus, versus certain therapeutic areas where generic substitution is almost nothing. In 2000, although we don’t have the final data on this, our belief is that generic substitution did creep up a bit to about 44% of all new prescriptions filled. We do anticipate that will continue to ratchet up to about 48% of all new prescriptions filled by 2004, partly driven by a more aggressive formula in management, such as three-tiered formularies that put more of the substitution incentive in the hands of the patients. The third factor would be closing of the technology gap between branded generics via these patent expirations.

TWST: What about the drug delivery stocks? You suggested earlier that you would be cautious there.

Mr. Sanderson: Yes, part of it is that a lot of the drug delivery stocks do not have earnings and probably will not have earnings until 2002 or 2003. In a defensive market, it’s very difficult to justify the valuations of those companies. You need a much more positive stock market backdrop for those stocks to start to perform again. That may occur late this year. That’s when the biotechnology stocks tend to perform better, but in the near term, you’re just going to be very volatile and it’s difficult to really pick a definitive valuation level for an entry point.

TWST: In conclusion, unless there are any other companies that you’d like to mention, and we’ve talked about quite a few, what would your overall message be to investors who are looking at this sector and wondering whether they should jump right in?

Mr. Sanderson: The overall conclusion would be that this sector, again focusing on the specialty pharmas in the near term, is in a period right now where there are a handful of companies that have very highly visible, 20% to 30% earnings growth prospects over the next 18 to 24 months. They also have very strong new product dynamics, particularly Allergan and Elan. The valuations have come down to the point where, on a p/e to growth basis, they look attractive relative to the big cap pharmas. So these are probably the best earnings growth-driven healthcare stocks available on the market right now. We think there is going to be a lot of investment in these stocks over the next 12 to 18 months, as people start to look for better growth ideas.