There's a healthcare market poised to explode, with sales growing from $1 billion in 2013 to an estimated $17 billion-$20 billion in 2020. That growth won't be on the back of some ridiculously expensive wonder drug, either -- in fact, this market is poised to save the U.S. and EU healthcare systems as much as $110 billion by 2020.
I won't drag out the suspense anymore: This potentially massive market is for biosimilars -- essentially, generic versions of the complex biologic drugs that are at the forefront of medical care in a number of disease areas.
Generic drugs have been around for a long time. (Ever bought acetaminophen instead of Tylenol? They are the same drug, after all, and the off-brand pills are usually way cheaper). Biosimilars, however, are a newer development. This is because biologic drugs are not manufactured via chemical processes; they're made within specially engineered living cells. This makes them more complex than pharmaceuticals, much harder to analyze, and -- most importantly -- far more difficult to duplicate. It's not a matter of reverse-engineering a single chemical with a known formula, but rather creating a similar-enough organism to produce a result that, while not identical to the original, has about the same effect on patients -- hence the name bio-similar.
In fact, the Food and Drug Administration approved the very first biosimilar drug for sale in the U.S. late last year.
Insurers and governments will naturally prefer that patients use the less costly biosimilar versions of biologic drugs, which are driving up already high healthcare costs. Sounds like an investing opportunity to me. And while there are small-cap pure plays out there, new healthcare investors will likely do better by investing in larger pharmaceuticals that are also fighting for a share of the biosimilars market. Here are three (relatively safe) stocks to play the trend.
Slow and steady
When you think "huge investing opportunity," Pfizer (NYSE:PFE) is probably not the first name that comes to mind -- nor should it be. It's a big pharma, an income stock with a 3.5% dividend and a $200 billion-plus market cap. But Pfizer has been aggressively investing in biosimilar research, most notably with its $17 billion purchase of generic drugmaker Hospira last year. Pfizer and partner Celltrion recently won FDA approval for a biosimilar version of Johnson & Johnson's autoimmune treatment Remicade, with marketing expected to begin later this year.
The outcome of Pfizer's fight for market share with Remicade in the U.S. will be a good indication of just how big the domestic biosimilar market can be, so stay tuned over the next year or two to see how that pans out. After all, given that biosimilars are more difficult to produce than standard generic drugs, they're a lot more expensive (although still cheaper than the name-brand drugs they're targeting). In the meantime, Pfizer has a number of biosimilars in phase 3 trials, including biosimilar versions of blockbuster treatment Humira (the highest-grossing drug in the world last year) and cancer treatments Avastin, Rituxan, and Herceptin.
Biogen (NASDAQ:BIIB) is mostly known for its massive multiple-sclerosis drug franchise, which includes Tecfidera, the best-selling oral MS drug worldwide. However, the multiple sclerosis franchise has hit a number of speed bumps, so Biogen is investing hard in a number of high-profile but risky drug prospects -- including nusinersen for spinal muscular atrophy, anti-LINGO to foster remyelination (potentially halting the damage MS does to the nervous system), and aducanumab for Alzheimer's disease.
Biogen has also invested heavily in biosimilars, doubtless in part to give the company a cushion to fall back on if those high-risk drugs don't succeed. In fact, Biogen and Samsung's joint venture, Samsung Bioepis, earned the European Commission's approval to begin marketing Benepali, a biosimilar to Amgen (NASDAQ:AMGN) and Pfizer's blockbuster autoimmune drug Enbrel, earlier this year. And in late May, the EC approved Flixabi, another Remicade biosimilar from Bioepis. On a recent call with analysts, Biogen CEO George Scangos noted that Biogen's management views "[biosimilars] as an important business for Biogen" (this and other quotes courtesy of S&P Global Market Intelligence), and given the market opportunity, it's no wonder.
Playing both sides
Not only is Amgen's Enbrel under biosimilar threat from Biogen and Samsung's Benepali, but its Neulasta is also being targeted by Novartis' Zarxio -- the first biosimilar approved in the United States. Recognizing that biosimilars are here to stay, Amgen's management has pushed hard into the space so it can offset the threat to its branded drugs by threatening others.
Amgen currently has nine biosimilars in development, with three in phase 3 trials -- ABP 501, a biosimilar to Humira; ABP 980, targeting Herceptin; and BP 215, targeting Avastin. Management sees this as a long-term investment that should pay off handsomely in the coming years. As Amgen CFO David Meline recently said, "being on both sides, we feel good about our prospects as [the biosimilar] market develops."
We're still in the early stages
It's too soon to tell which one will be the biggest winner among these three (or other potential entrants). I think all of them are well positioned and have a broad opportunity to make a lot of money from biosimilars. The market will be large enough to support multiple winners, so hopefully, the rising tide will lift several boats.