he first rule of investing in pharmaceuticals is that when a drug loses patent protection, the drug maker loses sales. Remsima, a biosimilar version of Remicade, has been on sale in Korea since September 2012. Why haven't Remicade sales there fallen off a cliff?
Consider Eli Lilly's Zyprexa. It's not a biologic, but it lost U.S. patent exclusivity in October 2011. During that year, Lilly recorded Zyprexa sales of $2.17 billion in the United States. One year later, that figure fell to just $360 million.
On the other hand, Amgen's (AMGN 0.22%) blockbuster biologic, Enbrel, was expected to lose US exclusivity in October 2012, but its exclusivity was extended to 2028. For the first nine months of 2013, Amgen's portion of U.S. Enbrel sales actually increased year-on-year from $2.88 billion to $3.17 billion. Analyst consensus compiled by the Evaluate Group suggests worldwide sales of the biologic will remain at or slightly above present levels for years to come.
Terminology primer
The term biologic gets thrown around a lot because it refers to a lot of different things. In a nutshell, it is an isolated form of something that is created by biological processes and composed of sugars, proteins, nucleic acids, or a combination of the three. Red blood cells, insulin, vaccines, and monoclonal antibodies (MABs) are all considered biologics.
What further separates biologics from small molecule drugs is that their production requires the complex machinery within living cells. Defining steps involve the insertion of a specific DNA sequence into a cell, the culturing of those cells, and the isolation of the biologic from the culture.
Just because biologics go off patent doesn't mean companies like Johnson & Johnson (JNJ -0.46%) need to invite biosimilar makers to tour its facilities and hand them the cloned cell cultures used to make Remicade. Creating an identical replica of a standard small-molecule drug is relatively simple. Recreating biologics can be far more complicated. Because of this complexity, there is often a slight difference between the original biologic and the replica; this is why they use the term "biosimilar."
What's at stake
In September 2013, the European Medicines Agency (EMA) authorized Celltrion and Hospira's (NYSE: HSP) Inflectra for use in the EU. This is the first biosimilar MAB to hit the European market . It has been granted rights for all eight of infliximab's (Remicade) marketed indications. It should hit big, but so far its reception has been tepid.
In the first nine months of 2013, Johnson & Johnson and Merck (MRK 0.37%) recorded revenue of $4.96 billion and $1.65 billion, respectively. AbbVie's (ABBV -4.58%), Humira, is another MAB that goes off patent in about three years. It's the world's No. 1 drug by sales, and AbbVie relies on it for more than half its revenue.
Dwindling risk-reward ratio
When developing new drugs, companies take a shoot-the-moon approach to capital management. Generics are exactly the opposite. Risks are minimal, but so are the margins. The burgeoning biosimilar industry is finding itself very uncomfortably in the middle.
Regulators, especially in the U.S., are proving to be an enormous hurdle for would-be biosimilar manufacturers. Requiring large, pivotal trials for biosimilars tacks on enough expense to make generic drug companies rethink their strategies. Furthermore, exact requirements are still a bit of a mystery. Motley Fool analyst Brenton Flynn discusses the lack of a viable pathway in this video.
Even if a biosimilar does win approval, a return on investment is still far from certain. In the U.S., the Biologics Price Competition and Innovation Act, a law bundled in with the Affordable Care Act, includes "an extensive process for the innovator biologic and biosimilar manufacturer to litigate patent infringement, validity, and enforceability prior to the approval of the biosimilar." Most importantly, the law demands that makers of biosimilars disclose their complete dossiers during development.
This gives the originator a big advantage. Originators typically file dozens or even hundreds of patents related to the methods and materials used in their manufacturing processes. Seeing the methods used by biosimilar makers and then filing infringement suits could keep worthy biologics from even submitting a biologics license application for years.
Should a biosimilar make it past expensive clinical trials and lengthy patent litigation, it still faces the scrutiny of physicians and patients. If clinical trials and legal fees don't leave biosimilars unable to compete on price, physician and patient perceptions might. Just imagine how much of a discount you would require to inject a drug that is not exactly the same as the one you are used to.
So relax
The big blockbuster biologics will certainly experience some price erosion from biosimilar competition. It's likely that the losses won't be nearly as dramatic as small molecule drugs like Zyprexa, however. Government regulation, physician adoption, and nature all seem to be working against what would otherwise be a burgeoning opportunity for biosimilar specialists like Hospira. For those of you that own companies facing expiration of their biologic patents, you can rest easy for now.
Editor's Note: A previous version of this article had incorrect information regarding patent expirations for Remicade and Enbrel. The Fool regrets the error.
