Earlier this week — prompted by yet-another huge biopharma acquisition — I pointed out how the easiest way to hold a stake in the modern world of medicine may simply be to own a related ETF like the Biotech SPDR (XBI) or the iShares NASDAQ Biotechnology Index ETF (IBB).
Although the recent offer from Amgen (AMGN) to buy out Onyx Pharmaceuticals (ONXX) wasn’t news, most of the deals in this space happen without warning. You can try and figure out which name is the next buyout target — which is little more than a coin toss, by the way — or you can just hold onto a related fund and trust the biopharma sector will remain an acquisition-oriented industry. For that reason, the biotech ETFs will suffice for most investors. Barring that, a true buy-and-hold mentality that’s not focused on M&A will also work with the industry’s primary names.
That being said, I know there are some of you that just can’t help but speculate within the world of biotech stocks. If that’s you, then there’s one idea you’ll need to make sure is in your stock-picking arsenal.
Put This Word in Your Lexicon
The term “biologic” isn’t new, but it’s a term your average investor hasn’t needed to know until recently. However, Big Pharma’s current careening over the patent cliff and subsequent scramble for new blockbuster drugs has specifically pushed biologics to the forefront — they are the future of the industry.
Traditionally, drugs have been manufactured using chemical processes. While most chemically synthesized drugs can take years to develop and refine before entering clinical trials, the inputs of these medicines — as well as the resulting active molecules — are relatively simple and easy to determine, even by competitors. That’s why they’re so easy for most generic drugmakers to copy once their patent protection expires.
Biologics, on the other hand, are neither simple to make nor simple to copy. In fact, sometimes it’s downright impossible for anyone other than the original designer/developer to make the active molecules in question.
That’s because biologics are usually created by a living organisms or plant and animal cells, and manufactured via a very specific and sensitive process. Ergo, that competitor’s drug might never be close enough to the original to be deemed “biosimilar” … an approval status the FDA grants to a competing drug once the patent on the original expires.
See, to become an FDA approved biosimilar, the drug company not only needs to show the key underlying molecule of their efforts is close enough to the original that it effectively achieves the same result as the original drug, but the developer must also largely start from scratch, and complete clinical trials of its own.
At that point, the reward might not justify the risk and expense.
To date, the FDA hasn’t approved any biosimilar biologics, though Europe’s healthcare regulators have. Industry experts don’t see the FDA approving a generic biologic until 2015, but even then, gaining approval will be no easy feat.
It’s possible some of the drugs that have attracted you to a particular stock are biologics, but the underlying company hasn’t made a point of classifying it as such simply because the word had no real meaning to investors up until now.
The breast cancer drug Herceptin, from Genentech, is a biologic. So are Enbrel and Humira, from Amgen and AbbVie (ABBV), respectively. There are a total of about 25 biologics on the market somewhere, most of which you’ve never heard of. Although other companies are developing competing drugs for all of them, true biosimilars aren’t on the horizon.
A couple of large-cap names with underestimated biologic portfolios and pipelines are Novartis (NVS) and Sanofi (SNY), according to Societe Generale’s Stephen McGarry. Either would be an adequate name to add to a stock portfolio in need of some biotech exposure. However, given the difficulty any company is apt to experience in copying another biotech developer’s biologic R&D, the advent of this young class of drugs levels the playing field in favor of smaller biopharma names.
Take a small outfit called CEL-SCI (CVM) as an example. This $60 million organization is developing a head and neck cancer biologic treatment called Multikine, currently in Phase 3 trials. Though other head and neck cancer therapies are on already on the market, and still more are in development, Multikine has shown tremendous efficacy … far better than several other current treatment options, as well as other trial-stage drugs.
More important to investors, should Multikine win the FDA’s approval, it will be practically impossible for another biotech outfit to reproduce a biosimilar of this “complex biologic therapy.” Indeed, CEL-SCI had to walk on eggshells just to build a dedicated manufacturing facility so it could proceed from Phase 2 to Phase 3 trials. Moving the drug’s production anywhere else could have altered the outcome of the synthesis process, even if using the same equipment.
So, for a competitor to build a whole new Multikine manufacturing facility from scratch — without even a clear understanding of the manufacturing process — would be little more than grasping at straws.
Biologic drugs not only have years of patent protection, but are inherently well-protected from generic competition once their patent expires. The size of the company developing the drug means nothing. Meanwhile, traditional chemically synthesized drugs (even new ones) have a known and relatively short lifespan before generics begin to chip away at their revenue.
Just something to bear in mind before becoming enamored with a particular biopharma company’s pipeline and portfolio.
James Brumley does not have a position in any of the aforementioned securities.