Source: Novartis.

Following a Court of Appeals decision not to delay its launch, Novartis (NVS -0.50%) will soon begin selling Zarxio, it's biosimilar to Amgen's (AMGN -0.49%) multibillion-dollaar anemia drug, Neupogen; kicking off a new era in biopharma that could include ever-increasing adoption of generic biosimilars and billions of dollars in sales for biosimilar drugmakers.

What is a biosimilar?
Biologic therapies are among the most expensive on the market, because unlike traditional small-molecule drugs, they're manufactured in living cells. Biologics' complexity has kept at bay generic versions of these drugs, many of which are multibillion-dollar blockbusters, but new technology, along with an FDA increasingly willing to approve them, is leading to a flurry of biosimilars R&D activity.

Because biosimilars, like biologics, are created in living organisms, there is no way for them to be identical to the underlying biologic drug, but that doesn't mean biosimilars can't be as effective as their branded counterparts.

For example, the FDA approval of Novartis' Zarxio was based on trials showing that it is as effective and safe as Amgen's Neupogen, a drug that's been on the market since 1991 and is commonly used to boost red blood cell count in chemotherapy patients.

Why biosimilars are important
According to pharmacy benefit manager Express Scripts, biosimilars could save healthcare payers a whopping $250 billion over the next decade if just 11 biosimilars to popular medicines win regulatory approval and those biosimilars are priced at a 30% discount to the brand-name drug.

Neupogen biosimilars such as Zarxio could account for as much as $5.7 billion of those savings, but bigger savings could come from the launching of biosimilars to autoimmune drugs such as Remicade, which racks up around $8 billion annually in sales, and Humira, which was the planet's top-selling drug last year, with more than $12 billion in sales.

Many industry watchers view the ability to create and roll out biosimilars as critical to curtailing the soaring cost of specialty drug medicine. Last year, specialty drugs represented 1% of all prescriptions written in the U.S., yet they accounted for a mind-numbing 31.8% of all drug spending.

Crowding the field
The approaching wave of biosimilars could be as transformative to biopharma as the introduction and growing use of generic small-molecule drugs was in the 2000s.

Generic-drug makers entered this century with sales that were a fraction of what they are today, but steadily increasing demand for cheaper therapies has led generic drugs to represent more than 80% of all prescriptions filled, and that surging script growth has shifted billions of dollars in revenue away from big pharmaceutical manufacturers to generic-drug makers.

For example, Teva Pharmaceuticals, a generics powerhouse, reports sales of more than $20 billion a year now, but sales were less than $2.5 billion in the early 2000s. Annualized sales at Mylan N.V., another top generic producer working on biosimilars, have climbed to over $8 billion from around $2 billion during that same period.

While generic drugs have had a big impact on industry revenue, biosimilars' impact on the top line could be significantly greater. Typically, generic-drug prices are 80% to 90% lower than their brand-name drug, and that's a far steeper discount than we're likely to see for biosimilars. If biosimilars' discount is around the 30% Express Scripts projects, then biosimilars could be incredibly profitable.

That potential isn't lost on Novartis or its big biopharma peers that are lining up to capture biosimilars market share.

This month, Pfizer closed on its $17 billion acquisition of Hospira in a deal that moves it to the forefront of biosimilar development. Biogen and its partner Samsung Bioepis recently announced positive data for biosimilars to Enbrel and Remicade, and Amgen is getting in on the act with a biosimilars program including nine different potential therapies.

Looking ahead
Investors should be watching closely to see how quickly Novartis' Zarxio captures market share and for insight into how profitable Zarxio will be, but given the level of excitement for biosimilars from payers, it appears that biosimilars could prove to be a significant driver of revenue growth in the coming years, and for that reason, investors ought to consider investing in them.