A new era begins in the U.S. drug-making space this week as Novartis (NVS) launches the first biosimilar in the U.S. Sandoz, Novartis’s generics arm is preparing to sell Zarxio, a biosimilar version of Amgen’s (AMGN) Neupogen.
Biosimilar drugs promise to help consumers save costs compared to the original biotech drugs, without any clinically meaningful difference in treatment outcomes.
Thus, the influx of biosimilar drugs should mean increased competition in the biologics market. The business landscape of biotech companies will change as the introduction of biosimilar drugs threatens both their top and bottom lines.
Citigroup analysts have predicted that the introduction of biosimilar drugs will pull up to $110 billion in market value from original drug makers to biosimilar drug makers over the next 10 years.
With that in mind, let’s take a look at who is most exposed to this risk of value transfer and if it should change how you invest in such companies.
A Cursory Look at the Biosimilar Drugs Market
While the U.S. only approved its first biosimilar drug earlier this year, biosimilars have been available in Europe, Australia and Japan for nearly a decade. These regions have collectively approved 33 biosimilars so far.
Sales of biosimilar therapeutics have grown from $1.1 million in 2007 to $86.9 million in 2014. That’s quite an impressive growth rate, considering the low number of available biosimilar drugs combined with limited market penetration.
With the breakthrough in the U.S. market, we can expect more biosimilar approvals, and eventually, significant biosimilar sales uptick. This optimism is borne out of the understanding that the U.S. is the world’s largest medicine market, accounting for a whopping 40% of global pharmaceutical sales in 2014.
So, to stay on top of the trend, investors should be looking in the direction of biotech drugs that are nearing their patent expiration.
Amgen seems to be the most vulnerable at the moment. As we mentioned before, the first U.S. biosimilar is going to be compete with Amgen’s Neupogen, and at a 15% discount. In essence, we can expect to see the effect on Amgen as soon as the fourth quarter of this year.
Neupogen brought in $1.2 billion for AMGN in 2014. That figure will increasingly be threatened as other Neupogen biosimilars gain entrance into the U.S. following the Novartis breakthrough. There are already eight biosimilar versions of Neupogen in Europe, all of which account for about 80% of the market.
The other vulnerable drug for Amgen right now is Aranesp.
Even though Aranesp won’t lose its patent until 2024 in the U.S. and 2016 in Europe, there are five biosimilar versions already waiting to compete with it. This means that the $479 million that AMGN recognized from Aranesp in 2014 is set to decline over the next few years.
As I’ve pointed out before, AMGN has a habit of hiking prices, which could become a serious problem if cheaper biosimilars gain entrance to compete with it in the U.S. AMGN might be forced to bring down prices, which again, wouldn’t be positive for its top and bottom lines. I maintain that it’s not a good time to be an AMGN shareholder.
AbbVie (ABBV) is also exposed to the biosimilar effect, with its blockbuster drug Humira coming out of patent in 2016. Humira did $12.54 billion in sales in 2014 — a whopping 63% of AbbVie’s 2014 total revenue of $19.96 billion. That means biosimilars can seriously wreck AbbVie.
If there’s any good news for ABBV, it’s that there’s only one biosimilar version of Humira available in the market — and it is available only in India.
However, investors should note that Merck (MRK), Johnson & Johnson (JNJ) and Amgen are working on their own biosimilar versions of Humira, with AMGN’s version likely to hit U.S. market as early as 2018. If these three make it to the market, the investment case for ABBV won’t remain the same. It’s a tough call, but I’d avoid ABBV on account of its overreliance on Humira.
Roche (RHHBY) has two of its blockbuster drugs exposed to the biosimilar effect: Rituxan and Avastin.
Rituxan did $7.55 billion in sales in 2014, but the patent expires this year. And there are already 20 biosimilar versions either in development or in the market. Six of these biosimilars are being developed for the U.S. market, with Roche expecting the first version to hit the market in late 2017. With that much competition on deck, sales of Rituxan are likely to fall from here.
Meanwhile, Avastin is coming off patent in the U.S. in 2019, after pulling in $7 billion in sales in 2014. There isn’t much move for producing biosimilar versions of Avastin. The most notable move is that of AstraZeneca (AZN) in conjunction with Fujifilm Kyowa Kirin Biologics. The move gives AZN the gives AZN the right to FKB’s biosimilar version of Avastin, which it plans to use to expand its reach in immuno-oncology.
However, Roche seems to be doing a good job fending of competition for Avastin, with the company also working on its own biosimilar version of Avastin.
Bottom Line on Biologics
The biosimilar breakthrough in the U.S. is sure to open the door for other competitors — especially with the government looking to make healthcare more affordable.
Moreover, with Express Scripts predicting that the U.S. economy could save up to $250 billion between 2014 and 2024 if 11 of the most probable biosimilars make it to the market, investors need to understand that the introduction of biosimilars could change the investment case of drug makers.
Amgen and AbbVie are both facing substantial risk from biosimilars and should be sold. However, Roche seems to be the likeliest to cope with in the influx of biosimilar versions of its drugs, and its leading position in the cancer market make it a buy.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.