Biosimilars, which are essentially generic versions of complex biologic drugs, haven't made many headlines in the past few decades. This is because they are very difficult and expensive to manufacture and until recently faced an unclear pathway to approval. In fact, the first biosimilar to be approved in the U.S. just got the green light earlier this year! With billions of dollars worth of biologic drugs coming off patent in the next few years, biosimilar developers now look poised for big profits.

In this clip of Industry Focus: Healthcare, Motley Fool analyst Kristine Harjes and contributor Todd Campbell explain what the segment can expect going forward and discuss one biosimilar manufacturer that looks especially promising for investors in 2016 and beyond.

A transcript follows the video.

 

This podcast was recorded on Dec. 21, 2015.

Kristine Harjes: We mentioned biosimilars a little bit. As a refresher, that's basically at the generic version of a biologic drug, which is what a lot of drugs that are coming off patent soon are. It's a biologic, it's a little bit more difficult to develop, so making a generic version has not been quite as easy. But, this looks like it's going to be a huge market going forward, and that's where the next stock we want to talk about comes in.

Campbell: The last stock we're going to chat about today -- maybe we'll throw another in if we have more time -- is Mylan Labs (NASDAQ:MYL). Mylan is a really intriguing company because shares got really beat up this past year over its plans to try to buy a competitor, Perrigo. That deal has fallen through. They tried to do a hostile attempt to buy the company, they did not get the number of votes that they needed to make that happen.

So now, Mylan's board is looking at it and saying, "Okay, we need to get back to the business at hand, which is building up our market share in generic drugs." Generic drugs are more than 80% of all drugs that are prescribed now. We have a longer-living, older population, and their demand for drugs going forward is not going down. It's going up. So, by most accounts, you look at that and say, "Okay, what does that mean for demand for generic drug makers like Mylan?" It's a tailwind, and a big one.

IMS is a healthcare research company, they track the industry. They think that spending globally on drugs could increase by 30% up to $1.4 trillion by 2020. That's an additional $350 billion or so between 2015 and 2020 that's going to be spent on drugs, and a heck of a lot of that is going to end up being spent on generics.

Harjes: Yeah. You've already seen a huge boom in generic drugs, because the mid-'90s were a big time for generic small molecule drug development. So, over the last six years or so, that's really when all those patents have started to expire. 2012 was the peak of that, you saw $53 billion in branded drugs lose patent that year, it's absolutely still hitting now.

But going forward, when you turn over to the biologic drugs, it's expected that in the next five years, $100 billion in biologics revenue is going to lose patent. So, you look at what's happened already the past five to ten years in the boom of generic drugs, and then you add into that the biosimilar market, and it looks like it could be really savvy to buy a company like Mylan.

Campbell: There are hundreds of drugs that are biologics on the market that'll lose patent protection. There are hundreds more under development now that will be coming to the market, over the course of the next decade, they will eventually lose patent protection.

These are expensive drugs, they're hard to manufacture, and most people believe that the profit margins that generic drug makers will get from selling these drugs is going to be bigger than what they've collected historically from small molecule generic medicines. So, there is an opportunity here that is pretty big, and I think if investors take anyone takeaway away from the stocking stuffer episode, it's that this could be a trend that you want to pay attention to, because it could have multi-decade long legs for the industry.

Kristine Harjes has no position in any stocks mentioned. Todd Campbell owns shares of Mylan and Perrigo Company. The Motley Fool recommends Mylan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.