Don't Miss Out on Upcoming Boom in Biosimilars

Includes: RDY, RHHBY, SPPI
by: Wyatt Investment Research

On Wednesday I wrote an article about biosimilars entitled, "Overlook this Sector and It Could Cost You."

The article was about biosimilars and how for the first time in history (Patient Protection and Affordable Care Act) the generic alternative to name brand biologics would be available to patients.

Small-cap investors don't want to miss out on the boom in biosimilars, so today I'll delve into the market research a bit and suggest two stocks to put on your watch list.

According to research group Datamonitor, the global market for biosimilars should grow from $243 in 2011 to an astounding $3.7 billion in 2015, a growth rate of 1,422% over just four years. And the growth doesn't stop in 2015. Sandoz, the current leader in biosimilars, expects that the entire biosimilars market could reach $20 billion by 2020.

That means the market could grow by more than 8,000% in 10 years. Now you understand why this is something you want to pay attention to.

As I stated on Wednesday, one of the catalysts of such staggering growth in the biosimilar arena will be the inevitable patent cliff that some of the largest name brand biologics will fall over in the next few years. With biologic patents running out, biosimilars are likely to sweep in and grab market share.

What's more, there is a dearth of replacement biologics in the development pipeline over the next few years. And with generic biosimilars eating away an average 75% of profits from brand name biologic counterparts, you can quickly see the adverse effect the "patent cliff" will have on the brand name biologic industry.

But the patent cliff isn't the only concern among the brand name pharma companies that manufacture biologics.

Brand-name biologics are some of the most expensive drugs in the world. The cost of some treatments can reach upward of $100,000 annually.

With generic biosimilar alternatives cutting the cost of treatment by up to 75%, you can quickly begin to understand the economics behind the move to biosimilars.

Finding ways to keep costs low will be a priority, and will likely be a boon to companies that make lower cost, generic biosimilars.

With upcoming healthcare reform on the way, sales of biosimilars will be supported by all developed nations in an effort to keep costs low for insurance companies (remember those co-pays) and patients alike.

The boon in biosimilars will happen first in the U.S., and come at the expense of Europe. So the U.S. is where we want to focus our investment research.

I'll return to data provided by Datamonitor which stated that "the U.S. will account for 72.2% of the worldwide biosimilar market in 2013 and 82.9% in 2014. Europe will see its share plunging from 76.3% in 2012 to 26.4% in 2013 and 16.3% in 2014."

This divergence in growth is because Europe is typically more lenient with its approval process, so it typically has drugs that are available to the European market several years before they are approved for use in the United States.

Given all the information stated, how can we profit from this inevitable upcoming boom in the biotech industry, and more specifically in biosimilars?

A few companies are currently interesting, however I'm not yet aware of any pure plays on biosimilars. My research indicates that companies that will thrive in the new industry will be ones with lots of resources to bring biosimilars to market.

Here are a few of the companies I like in the biosimilar space.

Dr. Reddy's Laboratories (NYSE:RDY)

This is an India-based, mid-cap stock with a market capitalization of $5.8 billion. Dr. Reddy's has proven itself as a quality generic drug manufacturer. More importantly, it can manufacture generic products at a 25% discount to U.S. companies. This capability will help it gain market share in the upcoming cost-driven, healthcare industry.

Spectrum Pharma (NASDAQ:SPPI)

Spectrum is a $570 million market cap company that recently jumped into the untapped and growing market of biosimilars. The market has responded favorably as the stock has nearly doubled since it announced it has plans to be one of the first biotechs to develop a biosimilar version of Rituxan. Rituxan is the second biggest selling product, nearing $6 billion in sales, for brand name pharma manufacturer Roche Holdings AG (OTCQX:RHHBY).

This could indeed be a huge opportunity for small-cap investors over the next few years, and one that we should be watching closely.