Hold on to your hats, biotech investors, we're officially in uncharted waters.
Biotech behemoth Novartis (NYSE:NVS) announced earlier this week that it has been cleared to begin selling the first-ever biosimilar drug in the U.S. after a court ruling was issued that denied Amgen's (NASDAQ:AMGN) attempt to block it from hitting the market.
While most investors are familiar with chemical drugs, which have faced low-cost generic competition in the U.S. for decades, drugs classified as "biologics" are far more difficult to copy. Biologics are more complex than chemically synthesized drugs, as they tend to be sensitive to heat and are susceptible to microbial contamination, which makes manufacturing them extremely difficult. Up until recently, they have remained free of copycat competition, even long after they lose patent protection, largely because of a lack of clarity regarding the FDA regulatory approval process.
However, that all changed in 2010, after the passing of the Affordable Care Act, also known as Obamacare, as a provision in the bill cleared the pathway for biologics to finally reach U.S. consumers. After a long road, the first biologic knock-off, known as a "biosimilar," is finally here.
The genie is out of the bottle
Sandoz, a division of Novartis, received the green light to begin selling Zarxio, a biosimilar of Amgen's billion-dollar drug Neupogen. Like Neupogen, Zarxio helps to increase the white blood cell count in patients who are undergoing chemotherapy, or who otherwise have a weakened immune system.
This news comes several months after the FDA officially cleared Zarxio for sale, which occurred in March of this year, but the drug has been kept off of pharmacy shelves because of a legal battle between Amgen and Novartis. Amgen claimed Novartis wasn't properly disclosing details about Zarxio, and that it was infringing on Neupogen's patents.
That issue has now been settled, and Novartis plans to sell Zarxio at a 15% discount to Neupogen, which should be a low enough price point to entice switchers. This is right in line with how biosimilars pricing works in Europe, where biosimilar sales have been allowed for nearly a decade.
The outcome of this case has certainly been watched closely by the industry. This ruling now blazes a trail for a tidal wave of other biosimilar drugs that could be coming in the years ahead -- and could be a major threat to almost every big player in the industry.
All is not lost... yet
Many longtime investors who are used to generic drugs wreaking havoc on a company's profits should feel some relief in knowing that a huge drop-off in sales is unlikely for Amgen. Making a biosimilar is still a complicated and expensive endeavor, meaning copycat players only undercut their branded counterparts by 15%-30%, which helps to slow sales decay of the original drug.
In Europe, for example, Novartis launched a Neupogen knockoff in 2009, and it took four years for the copycat to overtake sales of the original. However, that didn't stop competitors from piling in; there are currently eight different Neupogen biosimilars available in Europe, and together, they have stolen 80% of the market from Amgen.
How to play the trend?
So, how big of an opportunity is this biosimilar wave? Citigroup expects it to be a $110 billion opportunity over the coming decade!
While you may be thinking this news will crush Amgen's prospects, the company has actually been heavily investing in creating its own biosimilar products in an effort to capitalize on this trend, and it currently has nine biosimilars in development. The company estimates that worldwide sales of the branded drugs it is targeting to copycat currently exceeds more than $52 billion.
Two other big names in the space that are investing heavily are Pfizer and the aforementioned Novartis. Pfizer purchased Hospira in a effort to beef up its biosimilar presence, and Novartis' Sandoz unit is also looking to cause turmoil in the biologic market.
On the smaller side, investors who are interested in this space may want to take a look at Coherus Biosciences (NASDAQ:CHRS). The company is pushing hard to advance three biosimilars down the regulatory pathway, and it's currently gunning for best-selling drugs like Amgen's Enbrel and AbbVie's Humira. Each of these drugs produces billions in revenue for their owners, so if Coherus is successful in bringing biosimilars to market, it could prove to be a revenue bonanza for the company.
With the last hurdle for Zarxio now out of the way, it's a whole new world out there for big pharma and big biotech investors. Investors would be wise to keep a close eye on this market and perhaps put some money to work to capitalize on the trend.