The market opportunity for biosimilars is already big, but it got even bigger after the Supreme Court voted unanimously this week to remove a 180-day waiting period that's been delaying biosimilar drug launches. 

The Court's decision clears the way for biosimilars to begin competing for sales sooner, and with tens of billions of dollars in sales at stake, this could be the most important emerging healthcare trend investors should be considering. Are you ready for a biosimilar boom? In this episode of The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes is joined by contributor Todd Campbell to discuss what's at stake for biosimilar drugmakers like Novartis AG (NYSE:NVS), and why these companies ought to be on your radar.

Also, the two discuss what's behind biosimilar pure-play Coherus BioSciences' (NASDAQ:CHRS) recent FDA stumble, how it may be good news for Amgen Inc. (NASDAQ:AMGN), and what this small-cap biotech stock plans to do to get back on track.

A full transcript follows the video.

This podcast was recorded on June 14, 2017.   

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Kristine Harjes. It's June 14, and today I'll be talking healthcare with my usual partner in crime, Todd Campbell, who is calling in from New Hampshire. Todd, how are you today?

Todd Campbell: I'm good. Kristine, do you know any good roofers?

Harjes: I do not. I know of a bar in D.C. called Roofers Union, and that's about it.

Campbell: I think that's where I'm heading then, after discovering that I need to do a lot of roof work.

Harjes: Oh, that's never any fun.

Campbell: No, but all morning, I distracted myself from the crisis at hand to research one of our favorite topics.

Harjes: I'm guessing that wasn't roofs?

Campbell: No, it was biosimilars.

Harjes: Ah-hah, yes, that is today's topic, indeed. And it's something that we mention all the time on the show, but it's been awhile since we actually focused on the space, so Todd and I thought it was time for an update. I figure we will do a little bit of background first, just in case you didn't listen to whatever episode it was where we originally talked about biosimilars and explained what they were, and then we will do said updates, and really get into where investors might want to look in the space. Let's first take a minute to talk in general about how important generic drugs are.

Campbell: Like, why is it that we spend time talking about it on the show? What are they, and what's the market opportunity for investors? And one of the ways I thought it might be helpful to explain this to investors is to take a case study, and look at how big the market for generic drugs has gotten, and maybe that will help shine some light on why we think this whole movement toward biosimilars -- which we'll get into more in depth, but consider them to be like generic versions of biologics, we'll explain that more in a minute.

In 1998, Teva Pharmaceutical, which is the largest maker of generic drugs in the world, was generating about a billion dollars, roughly, in sales. By 2001, their sales had doubled to $2 billion. In 2016, their sales clocked in at nearly $22 billion. So, you've gone from about a billion to, in 2016, about $22 billion. Similarly, their net income has gone from a $70 million annualized run rate back in '98 to over $5 billion today. The reason behind that, of course, has been largely widespread adoption and use of generic drugs, which are copycats of some of the branded drugs that you might be familiar with, or might even be taking, like, say, a cholesterol-lowering drug. What we're talking about with biosimilars is the ability to create, now, for lack of a better term, generic versions of highly complex drugs that, up until now, has not been able to be done. And theoretically, that's going to open up a huge opportunity that could very well be Teva-sized.

Harjes: Yeah. This is pretty cool, and in order to understand it, you need to understand there are two different types of drugs. There are the more simple drugs that you can make a quick chemical generic of, and then you have your biologics. A biologic is a drug that's manufactured inside of a living thing, such as a plant cell or an animal cell. They are enormous molecules, they are very large, very complex. They are very difficult to make. And because of that, they're also very difficult to reproduce. You actually can't get an exact replica of a biologic drug if you don't make it inside that same cell. So, that's why you get the word biosimilar, for these types of generic drugs that are trying to be copycat versions of the larger, more complex biologics.

Campbell: Biosimilars, while not exact copies, the FDA won't approve them unless you can demonstrate in clinical trials that they're as effective and as safe. So, it's not like it's completely the same or completely different, but you still have to be able to prove the efficacy and the safety before you can get them on the market. Again, up until very recently, there was really no pathway, no way of getting a drug through clinical trials to the FDA, having the FDA pass it through its gauntlet, and putting its stamp on the approval. That pathway toward approval didn't even really come into being until Obamacare was passed. 

Harjes: Right, that's in 2010, the Affordable Care Act actually laid out exactly what it company would have to do in order to get approval from the FDA for a biosimilar.

Campbell: And the market potential, what made it so important for these drug makers to focus on biosimilars now that they have this pathway, just to go backwards one step quickly, is that biologic drugs, because of their complexity, they are also very efficacious, they work very well. And because of their complexity, they command premium pricing. So, over the course of the last decade or so, you've seen this shift in drug development away from the simple chemical structured small-molecule drugs to these much more complex and potentially lucrative biologics. And now, with this pathway in place thanks to the Affordable Care Act, you've seen a host of companies -- we're going to talk about a couple of them in a moment -- really ramp up their development of these drugs in anticipation of a flood of patent expirations that are going to be coming in the course of the next five or ten years, as a lot of these drugs that were approved in the early and mid-2000s lose their patent exclusivity.

Harjes: To put some numbers behind that, the United States spent $323 billion in 2016 on prescription medicines, and biologics are estimated to account for 28% of drug spending by 2020. And there was one analysis that predicted that biosimilars could deliver up to $44 billion in savings to the U.S. healthcare system by 2024. When you consider how much saving on drug costs is in the news today, and in people's minds, you can see why there's a lot of buzz around these drugs and the potential that they have for reshaping the way that we do healthcare spending. 

Campbell: That's a great point, Kristine. You look at small-molecule drugs, just thinking about the cholesterol-fighting drugs, maybe they cost a couple hundred dollars per month. These biologics, they can command prices, talking about oncology, $10,000 per month or higher. Biologics, as a result, they may not account for the lion's share in prescription volume, but they represent a third of the drug market, and growing, like you said, with market share of 28%. Market share for biologics back in 2002 was only 10-11%. So, it's been very dramatic growth. And like you said with pricing front and center, if you get a drug like AbbVie's Humira, and it costs $50,000-$60,000 a year, and you have the potential to have another drug launched at 20% less, well you add that up across a million patients and you're talking about significant savings to the system.

Harjes: Exactly. Because those savings are so substantial, you find that timing is actually super important here. That leads us to the news item that we want to share with you guys, which has everything to do with the timing of how quickly the biosimilar makers are able to get their drugs to market.

Campbell: Right. When the Affordable Care Act was passed, it included language which created this pathway that could get biosimilars to market, but they also wanted to get buy-in from branded drug manufacturers. In the language, they included a 180-day window. Up until this week, that window was assumed to begin on the date of the drug's approval. So, you couldn't launch a biosimilar until 180 following FDA approval. That has changed now, because the Supreme Court weighed in unanimously and said, "No, you don't have to wait that extra six months."

Harjes: Right, this case was Sandoz v. Amgen. Sandoz is a subsidiary of Novartis. They were bickering over this 180-day window. How this window works is, the biosimilar company has to tell the original brand-name biologic drug maker that they are planning on launching their copycat drug, and then they have to wait for this window after they've given notice before they can actually start to market it. Sandoz, what they did was let Amgen know, and then assumed that 180 days later, they would be good to go, post-approval. But the thing is, they didn't actually wait until they got the approval to give Amgen the notification. So, then you get these two humongous companies bickering over what, to me, seems like a very small window. But there's so much money and tension behind it, not just for these two drugs, but because of the implications for the broader biosimilar industry.

Campbell: Right. The drug specifically that they're talking about is Sandoz's Zarxio, which is a biosimilar to the anemia drug Neupogen, which is made by Amgen. Neupogen is one of the top-selling biologics in oncology. It generates out sales in the billion-dollar-territory-plus. Following the launch of generic biosimilars, sales have fallen dramatically; they're now tracking less than a billion. In the first quarter, sales came in at $213 million, which was down 31%. So, you're not talking about chump change. That's why, you said earlier, there's a lot at stake. You're talking about drugs that represent billions of dollars per year. And if you can get that drug on the market six months sooner, you're potentially talking about being able to get $500 million, $1 billion, $2 billion, depending on what drug you're talking about, in additional sales. So, yes, while they're talking about this one drug and its competition with Amgen's Neupogen, the implications of this are far bigger, because you're talking about tens of billions of dollars in patent expirations on biologics that are coming up quick.

Harjes: Right. Just for reference, Express Scripts, which is the PBM that we talk about -- the pharmacy benefits manager -- all the time on the show, estimated that the U.S. likely wasted more than $45 million for every month that just this one biosimilar was delayed coming to market. That's $45 million every single month, just for Sandoz's Zarxio. It's just insane, how much money we're talking about here.

Campbell: Right. And that's only with a price tag that's about 15%-20% less than the brand-name drug.

Harjes: Yeah, and that's kind of an interesting detail, as well, because normally generic drugs are priced way, way cheaper than their original branded counterparts. But that's not true with biologic drugs and their biosimilar counterparts. It goes to speak to that complexity. You mentioned earlier that the biosimilar makers need to run clinical trials, and they need to prove all of these things to the FDA, as opposed to just saying, "Look, we chemically duplicated a drug, it's the same, there you go." It's much more complex. So you don't get as heavy of a discount. But in dollar terms, considering how much more expensive biologic drugs are, I would guess it's probably pretty comparable. 

Campbell: Yeah. You know what's also interesting about that is, there's this whole question of, when is it appropriate to use it? If you look at old-style generic drugs entering the market, the brand-drug manufacturer would usually just say, "Yeah, I'm not going to even sell the drug anymore, because you just launched something that's 80-90% cheaper, and frankly it's just not worth it to me. I'm moving on to the next idea, I'm going to focus somewhere else." That doesn't seem like it's going to be the case with biosimilars. It's not like Amgen is going to say, "I'm no longer going to be selling Neupogen." So now, doctors are going to be saying, "Do I keep using Neupogen because I have over a decade of experience in using it, and I feel comfortable with how my patients react to it, or am I going to embrace this lower-cost drug, save my patients some money, even though I don't really have that same level of confidence?" Because, again, you're not talking about the same exact drug. As you noticed, these drugs have two separate names, they're not just going by the generic name, like if you walked into a Rite Aid to get a generic script filled of Lipitor, it all comes under the same generic name. These have different names because they're biosimilars, not exact copies.

Harjes: It's not even just the branded name that's different. When you look at the chemical compound name, that also is a little bit different. It's the original, and then it has a hyphen, and it has SNDZ at the end of it for the biosimilar for Sandoz, it's their version of it.

Campbell: Right, and that's to prevent accidental replacement of that. Before, you would have to request the brand name vs. generic. In this case, you actually have to request both, either/or specifically. I think one of the other questions this raises, not so much maybe in oncology drugs where you're not using it forever like a chronic disease necessarily, but it does bring up the whole question of switching, and maybe that will apply more with autoimmune disease drugs, when we're talking about things like Remicade biosimilars or Humira biosimilars, things like psoriasis, rheumatoid arthritis, where you're receiving treatments throughout your lifetime, will you switch your patient if they're already controlled under the brand name to this new biosimilar? I don't know. I don't know how likely they are to switch patients. Could new patient starts more likely end up on the biosimilar? I think yes. So, I think that the big opportunity initially for biosimilars is new patient starts, with switching being maybe smaller impact than it was historically with the small-molecule drugs.

Harjes: That makes a lot of sense. I also have a hunch that doctors will be more embracing of biosimilars as time goes on, and as it becomes a more common part of the drug universe. I think at first, even the word biosimilar is a little bit daunting. It's "similar"? What does that mean? It's not the same? But, I think as you have more patients on these drugs, doctors will start to embrace them, and see that they do actually have the same mechanism of action and efficacy and safety and all that. So, I would imagine that years and years down the road, they will be accepted at a much higher rate that they are right now.

Campbell: Oh, yeah, absolutely. Maybe the track won't be identical if you overlay them, but if you go back to what happened in Teva with generic drugs in the late '90s through today, it didn't happen overnight, but it was solid, steady growth. You won over more prescription share every year, as you said, as doctors become more comfortable using them and prescribing them.

Harjes: And you're always going to have a holdout of people who demand the brand name.

Campbell: True. We also have to recognize that it may not be smooth sailing for all of these biosimilars that are in development to actually make it to market. From an investing standpoint, you're now excited about the prospect of biosimilars; you want to run out and buy all these biosimilar manufacturers because of this huge market opportunity.

Harjes: And we're about to temper your expectations. [laughs] 

Campbell: Yeah, temper your expectations, because another piece of news came out this week that was also interesting on biosimilars, to show that there is still some risk associated with therapy -- at least in the ones that are in the clinical stages of developing these drugs. 

Harjes: This one is a company called Coherus BioSciences. They received a CRL, which is a complete response letter, that is what all biotech investors should fear when you are invested in a company that has an application outstanding with the FDA -- it's basically more or less a rejection, but it takes different forms sometimes. The CRL contents, you don't have to share them as a company, but in this case, Coherus did share the contents of the rejection letter, and they said it actually had nothing to do with the drug's efficacy, it was just the FDA saying, "We can't approve this yet because we need you to run a little bit more data, and we need some manufacturing issues to be fixed." So, Coherus, which has created a copycat version of a different Amgen drug -- similar but different -- called Neulasta, right now, will not be able to get that drug to market yet. But if you listen to their conference call, they sound extremely optimistic that they will be able to right the minor wrongs that the FDA pointed out, and be able to get the application resubmitted by the end of the year, and hopefully get this drug to market by 2018.

Campbell: That might be optimistic. I'm not sure whether or not that timeline, they'll be able to deliver on it. The reality is, you want to make sure that every single "i" is dotted, all your "t"s are crossed when you submit this information. Some of the bigger companies like Sandoz and even Amgen, which is also developing biosimilars in an odd situation there --

Harjes: We should come back to that, because that's interesting.

Campbell: It is interesting. They have their hands in both pots, or however that saying goes. But, essentially, what we're talking about with Coherus is, this is a pure-play small-cap biosimilar drug maker, which gets you all excited because it's a pure-play, so lots of opportunity. But you also have to say, maybe they don't have the same resources and the same experience dealing with the FDA and getting drugs through the FDA gauntlet. And obviously, some kind of a stumble occurred with this submission. What's really distressing from an investor's standpoint in Coherus is, they had hoped to get an approval this year, and get that drug, now with that removal of the 180-day delay, on the market this year. Now, Neulasta is a long-lasting version of Neupogen, which we talked about already today. So, many more doctors have shifted from Neupogen to Neulasta, and as a result, that drug racks up over $1 billion per quarter in global sales. $1 billion per quarter! So, you're talking about so much money that now, investors have to say, "We were hoping that we would be able to carve away market share this year, now we don't know." Now, like you said, they're going to meet with the FDA, they're going to discuss all this information. But we don't know what timeline specifically yet on being able to turn around and get that data back in front of the regulator for approval. Let's assume that they're able to do that by the end of this year, or maybe early next year, and let's assume then that a decision comes three [or] six months after that resubmission. Then maybe you're getting this drug on the market in the middle of 2018, more likely toward the tail end of 2018. But, again, there's uncertainty, and the market hates uncertainty. I guess the general takeaway here is, Coherus remains a high-risk stock, it's working on some really exciting things that could be very big someday, because they're focused on biosimilars, but there are some question marks today that there weren't last week. 

Harjes: Because this was their most advanced candidate for a drug, they dropped 24% on Tuesday on the news. You mentioned that this is a volatile stock. The stock is, in general, down 44% just from the beginning of 2017. This is, if you compare it to the IBB, that's up double digits, around 11%. So, like you said, a very volatile stock, but an interesting one, because it is a pure play. In addition to this one drug, I believe they have two others that are advancing and a little bit farther behind. So, definitely one to keep an eye on.

Speaking of stock fluctuations, I thought it was interesting that Amgen, despite being involved in both of these news items, their stock was essentially flat. And part of that is because they have so much going on that they're not a pure play in biosimilars. But I think the other part of it is, as you mentioned, they have their hands in both pots, or whatever that phrase is, and they're making biosimilars themselves. So, what is good news for biosimilars could also be good news for Amgen.

Campbell: Right, they have 10 biosimilars in development, and those drugs target some of the biggest selling of the biologics that are losing patent expiration over the coming five to 10 years. So, yes, they will take a hit, I think it's inevitable that a Neulasta biosimilar launches --

Harjes: It's 21% of their revenue.

Campbell: Right. To your point, that's probably why the stock was flat, because you have puts and takes. There's upside associated with the delay and the launching a competitor to Neulasta, but there's also an offset there from the potential to launch their own biosimilar drugs and potentially rack up billions of dollars in sales there, too.

Harjes: Yeah. We will definitely be keeping our eyes on any further updates. Todd, thanks so much for joining me today.

Campbell: My pleasure, thank you, Kristine.

Harjes: As always, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Todd Campbell, I'm Kristine Harjes, thanks for listening and Fool on!