Join our community of smart investors

Biosimilars: Biotech's big threat

The rise of biosimilars - biotechnology's version of generic drugs - poses the latest threat to this part of the healthcare sector
November 6, 2015

This summer was rough for the biotechnology sector as concerns over sky-high valuations led to a series of stocks derating. Although it's a far larger market in the US, the effect has been felt in London as several start-up drug developers found themselves at the mercy of short sellers. This was compounded by a pricing scandal across the Atlantic, as Hillary Clinton called out Turing Pharmaceuticals' chief executive, Martin Shkreli, for raising the price of Daraprim - a decades old drug often used to treat the side effects of HIV - from $13.50 a dose to $750. The company has since promised to lower the price of the medicine, although it remains unclear whether it has followed through on this commitment.

The knock-on effect of this pricing issue has called into sharper focus the rise of 'biosimilars' - drugs that imitate existing biotechnology-derived treatments but at a cheaper price. Investors in pharmaceuticals might already be familiar with the term 'generics'. When brand-name medicines lose their exclusivity rights and patent protection, unlimited copies of the already established drug flood the market - often at a fraction of the price to undercut competitors and eradicate sales for the original proprietor.

 

 

In recent years pharmaceuticals companies have shifted from chemical-based pills to more complex 'biologic' therapies derived from living cells. Many of today’s important medications are biological products, and their complexity allows for better treatment of conditions such as arthritis, anaemia, bowel disease and various cancers. Biosimilars are named in this way because, unlike traditional chemical drugs, the molecules in biotechnology can only be imitated, rather than exactly copied. That said, biosimilars are often given the green light by the US Food and Drug Administration (FDA) because they bear enough resemblance to an already FDA-approved biological product, so much so that there can be no "meaningful difference" in how they work in patients. The main difference often comes down to price. These types of therapies have been particularly popular in the US, where new Obamacare laws are designed to increase patient access to medicines, while keeping healthcare budgets in check.

The rise of biosimilars was first facilitated under the Biologicals Price Competition and Innovation Act (BCPI) in 2009 and became law through The Patient Protection and Affordable Care Act (Affordable Care Act) in 2010. But it wasn't until September 2014 that the first company - Sandoz, a subsidiary of Swiss behemoth Novartis (CH:NOVN) - filed an application to approve filgrastim, a biosimilar for Amgen's (US:AMGN) Neupogen, which is used to treat neutropenia, a lack of certain white blood cells caused by cancer. Under the brand name Zarxio, the Sandoz biosimilar had already been marketed in more than 40 countries outside the US. In September Novartis officially launched Zarxio as the first copycat of Neupogen in the US, despite a formal protest by Amgen. There's another point worth remembering here: Europe already has a far better established pathway for approving biosimilar drugs, and companies will probably find it easier to get EU regulators to wave treatments through ahead of the US.

 

But what does this really mean for existing biotechnology companies and investors? Essentially, new drug applications under biosimilar laws equates to growing competition for biotechnology companies - a threat previously reserved for pharma groups battling generic competition once treatments fell off the 'patent cliff'. From a clinical standpoint, the new laws are a good thing. It means increased access for patients - particularly in developing markets - and better use of healthcare budgets. Different research groups have tried to place a value on the growing biosimilar market, and consensus falls around $2bn by 2018. The main diseases or illnesses driving growth appear to be diabetes, infectious diseases and oncology; the latter already dominates a 25 per cent share of the market.

But biosimilars could be an opportunity rather than a threat. Amgen, for example, refuses to give up market share without a fight. As well as developing its own original biological products, it's actively pursuing a separate biosimilar strategy, including its adalimumab biosimilar, ABP 501, which is an imitation of AbbVie's (US:ABBV) Humira for the treatment of the skin condition psoriasis. Its partnership with generics giant Actavis (US:ACT) will allow the two to work together on a total of four anti-biosimilar monoclonal antibodies. Each party is thought to have invested around $400m.

Other opportunities could come in the form of high-profile M&A deals. Biosimilars highlight just how fragmented the biotechnology market is. Rumour has it that last year's failed takeover of London-listed Shire (SHP) by AbbVie was motivated by the latter's concerns over biosimilar competition for Humira. AbbVie was also rumoured to be interested in the UK's AstraZeneca (AZN) before it made its approach for Shire. AstraZeneca has been praised by several analysts - both in the UK and US - for its attempt to bulk up its future product pipeline and focus on new, innovative products to offset patent expiry on several high-profile drugs. It's also focusing heavily on oncology, something close competitor GlaxoSmithKline (GSK) appears to have put the brake on.

Even better, AstraZeneca has started dipping its toe into the growing biosimilar market, too. The Anglo-Swedish giant has teamed up with Japan's Fujifilm Kyowa Kirin Biologics through a 50/50 joint venture to work on a copycat version of Roche's (CH:ROG) Avastin, which is used in a range of solid tumours. On that note, Roche - through its subsidiary Genentech - looks like a company with something to lose. It makes the bulk of its money through selling complex biotech medicines and has already warned that two copies of its cancer medicines Rituxan and Herceptin will hit the market in late 2017, with competition to Avastin coming later.

 

 

IC VIEW:

It's hard to tell which way this market will go - the regulation remains quite foggy - but all signs point to it becoming the latest growth segment in the wider biotechnology industry. Those groups with large numbers of original biotech drugs have the most to lose but, in theory, it won't be any more drastic than the threat posed by generic copies of chemically-based pharmaceuticals. For one, the 20-30 per cent discount offered on biosimilars is nowhere near as drastic as the 80 per cent price cuts seen on generics. No one can be quite sure what impact the rise of biosimilars will have over the long run. But investors could buy into a budding growth story if they successfully identify companies eager to exploit this niche - yet potentially lucrative - area of the market.