Drugs fall broadly into two categories: small-molecule drugs and large-molecule drugs. Small molecule drugs are relatively simple to manufacture, and include all the over-the-counter remedies you’d recognize, from aspirin to sleep aids. Aspirin, for example, is a simple molecule comprised of 21 atoms. Large molecule drugs, though, are typically much more complex — having perhaps thousands of atoms. And biologics are larger and more complex still, being tremendously complex organic molecules with perhaps tens of thousands of atoms.
While small molecule drugs are typically manufactured in simple chemical processes, large molecule drugs are far more difficult to make, and involve complex bioreactions and fermentation processes, as well as much more complex and expensive regimens to ensure their identity and purity.
These biologics have been some of the biggest blockbusters and most transformational new drug therapies in the years since Eli Lilly marketed its biosynthetic insulin, the first approved biologic, in 1982. Many that have 6 of 11 been huge revenue generators for the companies that sell them — including Roche’s Avastin, AbbVie’s Humira, and JNJ’s Remicade — will come off patent in the next four or five years.
That’s why it’s extremely significant that the Food and Drug Administration (FDA) just approved the first biosimilar — that is, in essence, the generic equivalent of a biologic drug. The honor goes to Novartis’ Zarxio, a biosimilar for the Amgen oncology drug Neupogen, whose patent has expired.
It’s no picnic to manufacture biologics, and it took regulators a lot of work and negotiation to come up with a framework that could handle these biosimilars. As you can guess from the name, they are not necessarily identical molecules — that might be unattainable — but the FDA can assert that they are functionally identical to the off-patent drugs they are replacing. The approval process will be more extensive and more expensive than for generics, often requiring additional clinical trials, depending on the degree of similarity to the original molecule.
Since biologics have represented such a great share of biotech revenues and profits, the arrival of biosimilars is both a challenge and an opportunity. It means that many incumbents will be faced with competition they’d hoped to avoid once their blockbusters come off patent. It also means that some of them may make lucrative business in the manufacture of biosimilars themselves — since it will be companies with the deepest biologics manufacturing experience who are able to capitalize the most on the potential to produce new biosimilars.
For example, Amgen (NASDAQ: AMGN), which is facing biosimilar challenges on three expired or soon-tobe-expired multibillion dollar drugs, is setting itself up to be a key player in biosimilar manufacturing. It now has four biosimilars in development to move in on the territory of Roche, AbbVie, and Biogen Idec. While it may lose exclusivity on drugs that generate seven billion dollars in revenue each year, it may gain as much as nine billion dollars in revenue from its current pipeline of biosimilars.
In short, a disruptive wave is about to hit the biggest blockbusters of the last generation of biotech development. While biotech moves forward into new territory — gene therapies, immuno-oncology — this dust-up between biologics and biosimilars will generate winners and severely challenge some incumbents.
Investment implications: Be aware of biotechs you may own who have large revenue streams from biologics that are nearing patent expiry, and that will be challenged by biosimilars — they will take a hit. Watch for biotech firms who leverage their experience with biologics to enter the fray as biosimilar manufacturers. And as always, buy strategically, since biotech valuations are often stretched.
For more commentary or information on Guild Investment Management, please go to guildinvestment.com.
