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Biosimilars: Big Pharma's Next Big Thing?

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For decades, biotech medications have enjoyed a perk not awarded to other pharmaceuticals: an open-ended right to be the only purveyors of their branded drugs. These companies managed this special status by convincing the Food and Drug Administration that their products, derived from proteins and other compounds from living cells, were too complex and esoteric to be successfully reproduced by generic drugmakers. For years, this situation was the status quo.

Not anymore.

In line with the health-care reform law, the FDA recently released a list of guidelines for the creation of biologically similar versions of these drugs. Biosimilars, as they are called, will most certainly be a blessing for patients being treated with expensive drugs like the cancer drug Avastin, which costs upwards of $100,000 per year. Financially, a handful of pharmaceutical companies also stand to benefit once the new guidelines take effect.

Companies with experience will stand to profit first
Since the guidelines were created with the input of the biotech industry, the path to biosimilar production is strewn with roadblocks that will likely take deep pockets to clear away. For example, companies involved in generic manufacture will need to turn over reams of testing information to the agency in order to prove that their version is truly a biologically acceptable copy of the drug in question. Also, the FDA may opt to have the drug companies perform additional animal and human studies to make sure that the generic version is truly interchangeable with the original.

All these obstacles cost money, so it seems likely that the largest and most experienced drugmakers will lead the charge into this uncharted territory. Biosimilars have been available in Europe for some time, so companies like Teva (Nasdaq: TEVA  ) , a major generic drug producer, and Novartis (Nasdaq: NVS  ) will have experience on their side. Sandoz, the generic arm of Novartis, already has a branch that specializes in biopharmaceuticals, so getting up to speed should be a no-brainer for them. Hospira (NYSE: HSP  ) , knowing that the day of the biosimilar was fast approaching, got its testing department up and running in order to be ready for the change.

For manufacturers with a bit less heft, partnerships are the order of the day. Baxter International is working with Massachusetts-based Momenta Pharmaceuticals (Nasdaq: MNTA  ) -- and kicking in $300 million -- to produce six biosimilars. Similarly, Amgen (Nasdaq: AMGN  ) and Watson Pharmaceuticals have joined forces to produce biologically acceptable generic versions of several cancer drugs under a Amgen-Watson label.

This Fool's Take
According to Fitch Ratings, the biosimilar market worldwide was worth $311 million in 2010, and is predicted to reach between $2 billion and $2.5 billion by 2015. These are big numbers, and many will want a piece of it. Those companies that already have their foot in the door will most probably profit first, and they'll do it fast. It's a brave new world out there for pharmaceutical investors as well, and this niche looks particularly lucrative to me. After all, 2015 isn't that far away.

Health-care stocks are often smart investments, especially when you consider how medical technology is always moving ahead. Our report "Discover the Next Rule-Breaking Multibagger" will reveal some information you won't want to miss!

Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of Momenta Pharmaceuticals and Teva Pharmaceutical Industries. Motley Fool newsletter services have recommended buying shares of Teva Pharmaceutical Industries, Novartis, and Momenta Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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