These are Big Pharma, little (emergent) pharma, biotech (breakthroughs in processes, rather than single new drugs) and, finally, generics. Though less exciting than the other three, cost factors and pressures are increasingly favoring generics.

Estimates are that nine out of 10 prescriptions written when a generic is available are, in fact, generic. Why? Most insurance companies instruct pharmacies to use generics to control costs, and the co-pays out of pocket by the consumer are lower, as well.

There used to be a bias among physicians against generics, but that has disappeared.

Startup pharma companies take a lot of risk developing new drug compounds. They carry these through to a point of proof, and then typically pass the baton to Big Pharma.

Big Pharma takes further risks of shepherding a new drug through final Phase 3 FDA approval and then marketplace acceptance. That, in turn, requires major investment in physician education to get a newer and far more expensive product prescribed over an established cheaper one.

What’s the outcome of this? A few big winners in the market, coupled with significant failures.

Most biotech companies are focused on developing major breakthroughs, most of which take many years to materialize. Some, such as Genentech and Amgen, work out, but many fall by the wayside.

Generics compete on quality, price and deliverability. They don’t have the discovery and market acceptance risks associated with biotech or other pharma companies. It’s like a different industry, albeit one hidden in plain view in pharmaceuticals.

This means there can be hidden value, as well.

There is a company, just seven years old that has achieved all of its growth to date with no outside financing; 100% of the capital invested until 2007 was from management itself.

Now it has snagged an exclusive U.S. license to commercialize and market a generic version of sevoflurane, an anesthetic gas used in almost two-thirds of all medical and veterinary procedures. The company’s generic version was just approved for human use by the FDA in May.

It recently closed $19.6 million in new capital, which will be used for its sevoflurane launch, expansion and acceleration of its current product pipeline, and the development of internal capabilities in product development and manufacturing (that is, to vertically integrate the business by bringing these functions in-house).

If all that weren’t exciting enough, this business is scalable. The company has the infrastructure in place to support more than twice the present volume of business, and its systems, methods and production processes have already been proven expandable beyond that, as well. This should result in a dramatic increase in profitability from less than 5% to as much as 30%.

• It has established excellent distribution strength and market penetration for such a young company…
• Distribution into all of the top 50 U.S. generic buyers that include…
• All three national wholesalers (McKesson, Cardinal and AmerisourceBergen)
• 98% of all regional wholesalers
• Major direct stocking chains (Wal-Mart and Walgreens)
• Several leading home care companies (Lincare and Apria)
• Eight major hospital group purchasing organizations that control 95% of hospital purchasing and with whom the company has approved vendor relationships.

Part of the reason for this is its excellent service capabilities. The company operates its own warehouse and distribution center in Idaho with 50,000 square feet, from which it is capable of servicing 95% of the U.S. via inexpensive ground shipping.

For its flagship respiratory products, it had garnered about 15% of the total market. Further, the company has always seized a minimum of 10% of the respective markets in the first year alone for its last three product launches. That’s remarkable.

If generics really represent 90% of the market when they are available, then this is going to be a trend we should focus more on…

To your profitable future,
Jonathan Kolber
August 15, 2007

P.S.: This company, which I couldn’t name in Penny Sleuth, was just recommended to my Emerging Capital Report readers. As I write this, it is already up 18.9% and has a long way to go.

Penny Stock Pharmaceuticals was originally featured in the Penny Sleuth.