Johnson & Johnson, Merck Facing Biosimilar Threat

Includes: HSP, JNJ, MRK
by: Peter Geschek

In June two developers of biosimilars, South Korean Celltrion and the U.S. company Hospira (NYSE:HSP), won a victory in Europe. The European Medicines Agency's advisory committee recommended the approval of Celltrion's Remsima and Hospira's Inflectra.

Both drugs are copycat versions of Johnson & Johnson's (NYSE:JNJ) and Merck's (NYSE:MRK) blockbuster biological drug Remicade. Remicade is J&J's biggest selling drug.

The EMA's recommendation is the final stage before the European Commission, the European Union's executive arm, approves or rejects a drug for sale to patients in the 27-nation region. Recommendations for marketing approval by the Committee for Medicinal Products for Human Use are usually endorsed by the European Commission within a couple of months.


The recommendation went beyond rheumatoid arthritis and endorsed the look-alike drugs for the same indications as Remicade, covering a range of autoimmune diseases such as rheumatoid arthritis, Crohn's disease, ulcerative colitis, ankylosing spondylitis, psoriatic arthritis and psoriasis.

Goldman Sachs analyst Jami Rubin comments that the wide indication approval was "somewhat surprising since Inflectra had clinical data showing similarity to Remicade in rheumatoid arthritis only."

Both Remsima and Inflectra contain the same active ingredient, infliximab. In the application documents, they have been shown to be similar to the biological medicine Remicade, a monoclonal antibody that has been authorized in the European Union since 1999.

Monoclonal antibodies are structurally complex substances that can locate and bind to specific molecules, in the case of infliximab to tumor necrosis factor (TNF) alpha, a protein promoting inflammatory response, which causes many of the clinical problems associated with autoimmune disorders.

This is the first time that the biosimilar concept has been applied to such a complex molecule. The biosimilar concept in Europe means that a biological medicine can be authorized if it is a demonstrably close copy of a biological medicine that has been approved for use in the European Union.

Approving both drugs would bring the total number of approved biosimilars in Europe to 14 since 2006.


J&J has extended Remicade's patent protection to February 2015 in the majority of European Union countries, meaning that Celltrion and Hospira will introduce their product only in a limited number of markets in 2014. Remicade has patent protection in the U.S. until September 2018, according to J&J.

Remicade is also protected by secondary patents, and J&J and Merck may initiate a patent infringement case against Hospira and Celltrion.

Secondary patents are related to the manufacturing process and the makers of biosimilars have to circumvent these too during the production of the drug.

Since most of Remicade's European patent protections will lapse in February 2015, Goldman Sachs had already forecast that European Union sales would fall 20 percent in 2015 and 30 percent annually after that, before possibly flat-lining at $600 million in annual European sales by 2018.


The new treatments are expected to be sold at a significant discount to Remicade.

"The price of Remsima will be more than 30 percent cheaper than those of the original drugs," Kim Hyoung Ki, senior vice president and chief financial officer at Celltrion said in an interview.

However, analysts caution about the acceptance by doctors and patients. Some physicians are skeptical of biosimilars. Shibani Malhotra, an RBC Capital Markets analyst comments:

"Hospira will need to price at a discount to the brand and market the drug, lowering its profitability. Johnson & Johnson and Merck are also likely to counter-market against Hospira's biosimilar, and could potentially alter pricing in response."


According to Fitch Ratings, the global biosimilar marketplace is set to rise to $4-6 billion over the next few years from $2 billion at present. Eight of the current 20 top-selling biological drugs are going to lose patent protection by 2020. In 2012 these drugs collectively generated worldwide sales of $56 billion.

Currently, Europe is the bulk of the biosimilar business because it has a regulatory framework in place. There are 12 biosimilars presently sold in Europe. Biosimilars followed the introduction of regulatory guidelines, the latest one for monoclonal antibodies ((MAbs)) in December 2012.

In the U.S., Fitch estimates, the first biosimilar will come to market in 2015. In the U.S. biosimilar drug makers have yet to file applications with the FDA.

Fitch believes that copies of human proteins such as ESA (erythropoietin-stimulating agents) and G-CSF (granulocyte colony stimulating factors) will be the first to appear. The brand name ESAs, Epogen and Procrit and the G-CSF, Neupogen are Amgen (NASDAQ:AMGN) products.

After that, the greatest opportunity lies with the blockbuster Mabs, such as Rituxan, Remicade and Herceptin. These are meaningful targets as they are set to lose patent protection in Europe by 2015 and in the U.S. by 2020. These biologicals generated a combined sales in Western Europe of approximately $7 billion in 2012.

Investor summary

Johnson & Johnson and Merck currently share Remicade sales. J&J now has the lion's share of the drug's income, following a settlement in 2011.

J&J's original marketing partner for Remicade was Schering-Plough. When Merck merged with Schering-Plough, a dispute erupted with J&J.

As a settlement of the dispute, Merck agreed to pay J&J $500 million and concede some of its sales territories and profits. Merck relinquished exclusive marketing rights to the drug in Canada, Central and South America, the Middle East, Africa and the Asia-Pacific area, while keeping rights in Europe, Russia and Turkey.

The deal did not affect the U.S., where J&J has exclusive rights. In areas where Merck kept the rights, J&J's share of the profit was raised to 50 percent from the previous 42 percent. The deal runs through 2024.

So far, Remicade sales have dropped for Merck, but it remains J&J's biggest drug, accounting for 9.1 percent of the company's total revenues for 2012, with sales of $6.1 billion. The company said it would even move production of Remicade to Puerto Rico from a plant in Switzerland.

As to the acceptance of Remicade by the medical community, BioTrends Research Group finds that the drug is the market leader for the treatment of ulcerative colitis in the EU5 (France, Germany, Italy, Spain and the United Kingdom), even after Humira is approved for the indication. According to a survey conducted nearly one year after the European approval of Humira for ulcerative colitis, 69 percent of gastroenterologists named Remicade as their most preferred biologic, while 27 percent of respondents indicated Humira.

Goldman Sachs analyst Jami Rubin predicts that Hospira's Inflecta could hit $284 million in sales by 2016. Derrick Sung at Sanford C. Bernstein & Co. thinks that biosimilar Remicade could capture 30-40 percent market share in Europe following its launch.

The Korean company Celltrion invested KRW 300 billion ($270 million) in developing Remsima, yet since it was launched in Korea in November 2012, it has reportedly only generated sales of about $200,000.

Jung-jin Seo, president of Celltrion, previously announced that he would sell his stakes in the company to an undisclosed multinational pharmaceutical company once Remsima received approval in Europe. The company hired JP Morgan to advise on the sale.

The green light for these biosimilars is just the beginning. Governments in Europe and elsewhere are anxious to reduce the costs of drugs, and Mabs represent a major expense.

Big Pharma is trying to delay the process. Legal fight over secondary patent rights is one option. AbbVie Inc. (NYSE:ABBV), for example, asked the FDA last year to reject any biosimilar of its rheumatoid arthritis drug Humira because approving a copy would require the FDA to disclose Humira-related trade secrets.

If everything else fails, reducing the prices of the originator drugs may also be an option.

All in all, if market forecasters turn out to be right in their prediction that lower prices will lead to a dramatic expansion of the global biological drug market, this could mean that all participants, patients, doctors and investors will end up as winners.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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