Image source: via Flickr.

Over $100 billion in annual sales for top-selling biologic medicines will soon be up for grabs, and that's leading to a gold rush to develop biosimilars. With the biosimilar market poised to eclipse $20 billion as early as 2020, many investors are watching this sector closely. Read on to learn more about biosimilars and how they may reshape medicine.

First, some background

In the past, the majority of drugs were small-molecule drugs manufactured using chemical synthesis, or the making and breaking apart of chemical bonds. Because this method of manufacturing medicine is easily repeatable, expiring patents on small-molecule drugs led to a quick flood of generic copycats. 

Today, generic drugs account for 80% of all prescriptions written and they produce tens of billions of dollars in annual sales for drugmakers like Teva Pharmaceutical and Mylan NV.

Increasingly, however, more drugs are being developed using a far more complex process that relies on biologic processes involving living organisms like yeast. These complex large-molecule medicines, or biologics, can't be exactly replicated like small-molecule drugs and as a result, biologics have faced limited competition when their patents have expired.

In 2014, the world spent $289 billion on biologic medicines. In 2019, Deloitte estimates that global spending on biologics could reach $445 billion as biotech's share of worldwide prescription drug and OTC sales increases from 23% to 26%.

Image source: Deloitte's Global Life Sciences Outlook 2016 

Changing times

Advancing technology and regulatory support, however, is breaking down barriers that have kept a lid on drugs that work similarly to biologics but are inexact copies of them, known as biosimilars. That could mean that over time, billions of dollars in spending shifts from biologics to biosimilars.

Pfizer, Inc. (PFE -1.07%), one of the leaders in biosimilar development, estimates that brand-name biologics with sales in excess of $100 billion will lose patent protection in the coming years, and that approvals of biosimilars could result in the biosimilar market growing from only a few billion today to $20 billion in 2020, including $8 billion in sales in the United States alone.

Image source: Pfizer. 

It's anyone's guess if Pfizer's estimate will prove accurate, but investors should start getting more clarity on the market potential of biosimilars soon, as the FDA is already approving them.

In April, the FDA gave Pfizer the go-ahead to market Inflectra, a biosimilar to Remicade, Johnson & Johnson's (JNJ -0.74%) top-selling drug for autoimmune diseases, including rheumatoid arthritis. Remicade is Johnson & Johnson's best-selling drug, with U.S. sales of $4.4 billion last year and $1.2 billion in the second quarter.

Pfizer hasn't launched Inflectra in the U.S. yet because it's been waiting for a key patent decision from Federal courts. However, courts weighed in against Johnson & Johnson last month, and that means a launch should be possible before the end of this year. 

Novartis (NVS -4.10%), Biogen (BIIB -1.35%), and Amgen (AMGN -1.40%) are also leveraging their experience with biologics to craft biosimilars that are -- or will soon -- compete for market share with the planet's best-selling biologics.

Novartis' Sandoz unit won FDA approval for a biosimilar to Teva Pharmaceutical's multibillion-dollar multiple sclerosis drug Copaxone last year. Sandoz has also notched FDA approval for a biosimilar to the anemia drug Neupogen and the rheumatoid arthritis drug Enbrel. Sandoz's Copaxone and Neupogen biosimilars are already available and a launch of its Enbrel biosimilar should happen soon.

Meanwhile, Biogen is teamed up with Samsung Bioepis. In the past year, the two have already secured approval of biosimilars to Remicade and Enbrel in Europe. 

Amgen recently won unanimous support from a FDA advisory committee for the eventual approval of a biosimilar to AbbVie's $14-billion-per-year autoimmune disease drug, Humira. A launch timeline for Amgen's Humira biosimilar, however, depends on the timing of an official FDA green light and ongoing patent litigation between it and AbbVie.

Looking ahead

Investors aren't wrong to think that there's a significant market opportunity ahead for biosimilar drugmakers, but there are risks that still need to be considered. Since biosimilars aren't identical to the brand name drug, pharmacists won't automatically replace prescriptions written for the brand-name with them, which is something they do with generic alternatives to small-molecule drugs. Also, because biosimilars' manufacturing process is complex, it's far more expensive for drugmakers to produce them and that means that they'll carry prices that are higher than some might've hoped. If the cost savings offered by biosimilars aren't great enough, then doctors may continue prescribing the brand-name drugs they've become accustomed to.

Nevertheless, biosimilars' potential is huge and most of the major players are large, diversified multinationals that are somewhat insulated against a possible biosimilar bust. Since the upside associated with biosimilars is great and there are other compelling reasons to own drugmakers, including a larger and longer-living population, I think sprinkling some biosimilar drugmakers into your portfolio could prove to be profit-friendly over the next decade.