Source: Flickr user Bill Brooks.

When drugmaking Goliath Pfizer (NYSE:PFE) recently agreed to purchase Hospira Inc. (NYSE: HSP), a maker of specialty drugs and biosimilars, it sent a signal to investors that biosimilars could be the next big thing in healthcare.

Pfizer's vote of confidence in biosimilars -- the generic alternatives to biologic-based medicines such as AbbVie's megablockbuster drug Humira -- isn't misplaced. According to Frost & Sullivan, the biosimilar market is expected to surge from just $172 million in 2010 to more than $4 billion in 2017. With growth like that, investors ought to pay attention.

Billions at stake
Pfizer's willingness to spend $17 billion, including debt, to acquire Hospira could prove to be brilliant.

Pfizer has struggled to recoup the sales it lost when Lipitor, its $12 billion-per-year cholesterol buster, went off-patent in 2011. Hospira's expertise in injection-based medicine and its early leadership in the making and marketing of biosimilars could turn Pfizer into a growth company again.

According to IMS Health, biologics will account for 19% to 20% of total drug spending in 2017, which would make the biologics market worth $221 billion that year. Since $70 billion in branded biologics are expected to be off-patent by 2018, cost-conscious healthcare payers are likely to embrace biosimilars, which are typically 30% to 40% less expensive than their biologic cousins.

Market leaders
The revenue opportunity for biosimilars could prove bigger than the revenue opportunity for generic small molecule drugs. Biologics typically carry price tags far higher than traditional small molecule drugs, and biosimilars' price discount is far less than the 70% to 90% discount for traditional generics.

Hospira was arguably among the most compelling of the publicly traded companies developing biosimilars, but other large drugmakers are also spending big bucks to create biosimilar businesses.

For example, Amgen (NASDAQ:AMGN) is putting its biologics expertise to work in a bid to carve out a large chunk of the biosimilar market.

Amgen has nine biosimilars in development and expects these drugs could begin making their way to the market as early as 2017. Earlier this month, Amgen reported that ABP 501, a biosimilar to AbbVie's Humira, showed itself to be clinically equivalent to Humira in a phase 3 trial. That trial studied ABP 501 head-to-head against Humira in 526 patients with moderate-to-severe rheumatoid arthritis. Previously, ABP 501 had also proven clinically equivalent to Humira in psoriasis. If those results hold up, Amgen could be positioned to compete for Humira's $12.5 billion in annual sales when the drug loses patent protection at the end of 2016. Amgen also expects this year to report phase 3 trial data for its biosimilar of Roche's top-selling cancer drug Avastin.

Source: Novartis

Novartis' (NYSE:NVS) Sandoz generic unit is also likely to be a big player in biosimilars. Sandoz already has three biosimilars approved abroad, where those three drugs racked up more than $400 million in sales in 2013. Sandoz's three biosimilars serve as alternatives to the blockbuster biologics Epogen, Neupogen, and human growth hormone. In addition, Sandoz has five other biosimilars in phase 3 trials, including alternatives to Humira, Rituxan, and Enbrel.

Looking ahead
Biosimilars are already on the market in Europe, but the FDA has been slow to approve them in the United States. However, a key FDA advisory panel announced in January that it backed approval for Novartis' Neupogen biosimilar. If that product wins an official FDA go-ahead this year, it could mark the dawn of a new and highly profit-friendly era that could deliver billions of dollars to Pfizer, Amgen, and Novartis investors. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.