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Biologic medications are injectable medications that are produced from living sources. They are used for a variety of disease states including cancer, clotting disorders, and diabetes. Biologics have seen tremendous growth in the past couple decades. Over 135 have been developed and approved for use since 1995 in the United States and many more are in the clinical trial phase. Blockbusters such as Remicade, Avastin, and Humira have provided billions of dollars in revenue for drug companies. In the next few years the first of these biologics will be coming off patent presenting a great opportunity for drug manufacturers. Due to the complexity of biologic medications, making a true generic is technically impossible; however the BPCI act gives the FDA the power to approve "biosimilar" products. Currently there are no biosimilars on the market but generic manufacturers such as Teva (NYSE:TEVA), Mylan (NASDAQ:MYL), Watson (WPI), and Momenta (NASDAQ:MNTA) have all been investing millions of dollars in research so they will be able to take advantage of the upcoming patent expirations. However the generic manufacturers are not alone. Amgen (NASDAQ:AMGN), Pfizer (NYSE:PFE), Novartis (NYSE:NVS), and Lilly (NYSE:LLY) are also looking into the possibility of manufacturing biosimilars.

Potential

In 2010 the market for biologic medications was over 108 billion dollars and is projected to continue growing. While generic chemical compounds like Norvasc and Metoprolol usually sell for less than 20% the cost of the brand product, biosimilars are expected to sell for 60 to 80% of the cost of branded biologics. The difficulty of producing and gaining approval for biosimilars will provide manufacturers increased pricing power and larger margins compared to traditional generic medications.

Challenges

The most pressing issue in manufacturing biosimilars is the sheer complexity of the drugs themselves. Producing biologic medications can involve more than 5000 steps compared to less than 100 for regular medications. There are also a lot of uncertainties in the biosimilar market. As of now the FDA still has not released their biosimilar approval pathway. There are no tests to determine whether a biosimilar is the same as the brand product many believe that the FDA will require companies to conduct clinical trials to get their biosimilar products approved, similar to the European Medicines Agency. This could add many years and millions of dollars to the already difficult process of producing biosimilars. Another cause of concern is how quickly physicians will be willing to integrate biosimilars into their practice.

Best companies

Momenta (MNTA) and Novartis appear to be two of the best positioned companies to profit from the production of biologics. Momenta already produces a generic form of Lovenox in partnership with Sandoz. While Lovenox is not a pure biologic medication, it is a step in the right direction for Momenta. Momenta is also working on a biosimilar version of Teva's Copaxone, and I believe the company offers the best pure play of the biosimilar market. Sandoz which is owned by Novartis should be prepared to move in to the U.S. market quickly. They already have a few biosimilars available in Europe and up to 10 in their development pipeline.

Disclosure: I am long PFE, MNTA.