Generic Competition: The $100 Billion Biologics Arena

by: ScriptVolume

In 2010, sales of biologics reached $100 billion worldwide with the top 12 biologics generating $30 billion. By 2015, biologics responsible for $20 billion in annual sales will go off patent by 2015. The amount of money that can be made in this space is great and as a result, a number of companies, big and small, have entered the generic-biologics arena hoping to capture significant market share. There is a strong push for biosimilars or follow-on biologics (FOBs) as it can add substantially to the balance sheet and income statement for those with approved FOBs. The competition is fierce as recently seen with the fight over generic Lovenox between Momenta Pharmaceuticals (NASDAQ:MNTA) and Watson Pharmaceuticals (WPI).

The doors to FOBs have opened up wider with the recently released FDA draft rules/guidance for biosimilars pathway. This long awaited guidance follows the passing of the Biologics Price Competition and Innovation Act (BPCIA) in 2010 after advocation from biosimilar manufacturers that wanted a piece of the action and third party payers such as Medicaid and Medicare - two government entities that cover a significant number of biologics - that wanted to realize the cost savings. The passage of BPCIA provided the framework for the FDA to approve and allow generic manufacturers to market FOBs.

Producing FOBs is a difficult and complex process as living organisms are used. The generics that are on the market now are predominately small molecule drugs that are synthesized and do not undergo the same arduous process as FOBs. The complexity associated with FOBs create a high barrier to entry as manufacturing and proving that it is similar or equivalent to the current branded biologic presents a challenge for many.

This challenge for some is an opportunity for others that have the intellectual properties, manufacturing abilities, and experience in producing FOBs. The financial rewards are great and the risks and time commitment is less than producing a novel biologic. On average, it will take 8-10 years and cost $100-$200 million to bring a FOB to market. This cost and risk of failure is significantly less than bringing a novel compound to the market.

The pricing profile of a FOB is extremely favorable when compared to current non-biologic generics. For a small molecule generic, the price drops an average of 80 percent from the branded price after one year of generic introduction and commoditization is inevitable. However, in FOBs, as seen in the EU, the price drops only 25 percent from the branded price after one year of generic introduction and the products do not commoditize.

Discussed below are small to mid-cap companies that already have a presence in the FOB space and should have a first-mover advantage.

Hospira (NYSE:HSP)

Known for their generic injectables, Hospira has the knowledge to develop, manufacture, and market FOBs. Hospira has one of the biggest pipelines of FOBs in the market with Retacrit, a generic erythropoietin or EPO, approved and marketed in more than a dozen European countries and Australia. Epogen and Aranesp, branded EPO products, by Amgen (NASDAQ:AMGN) each had sales exceeding $2.5 billion dollars in 2010. Another branded epoetin, Procrit, by Johnson & Johnson (NYSE:JNJ) had sales of $1.9 billion in 2010. EPO is used to treat patients with renal failure who have anemia.

In 2010, Hospira launched Nivestim, a generic filgrastim, in Europe and in Australia last year. Branded filgrastim, Neupogen and Neulasta, had combined sales of over $4.8 billion in 2010. Filgrastim is a substance called granulocyte colony stimulating factor used to treat neutropenia and boost white cell counts in cancer patients receiving treatment.

Hospira recently announced the initiation of phase III clinical trials for generic EPO in the United States. This is significant news as a successful phase III trial will allow the company to manufacture and market generic EPO in the United States and grab market share from the EPO programs at Amgen and Johnson & Johnson.

Watson Pharmaceuticals

Watson, a global leader in the generics business has entered the FOB market with their announcement of a biosimilar collaboration with Amgen, a branded-biologic powerhouse. With branded biologics such as Epogen, Aranesp, and Neupogen, Amgen had sales of over $15 billion in sales in 2010. In this pact, the two companies will collaborate to develop and commercialize several oncology biosimilar products. The synergism between the two companies is great as it pairs Amgen, one of the leaders in the biologics market, with Watson, a leader in the generics business. This agreement with Amgen can potentially transform Watson into a formidable force in the biosimilar market.

The terms of their agreement from their press release are as follows:

Amgen will assume primary responsibility for developing, manufacturing and initially commercializing the oncology antibody products. Watson will contribute up to $400 million in co-development costs over the course of development, including the provision of development support, and will share product development risks. In addition, Watson will contribute its significant expertise in the commercialization and marketing of products in highly competitive specialty and generic markets, including to help effectively manage the lifecycle of the biosimilar products. The collaboration products are expected to be sold under a joint Amgen/Watson label. Watson will initially receive royalties and sales milestones from product revenues. The collaboration will not pursue biosimilars of Amgen's proprietary products.

Furthermore, on January 26, 2012, the United States Court of Appeals for the Federal Circuit granted a request from Watson, and partner, Amphastar Pharmaceuticals a stay of the preliminary injunction preventing the two from marketing and selling a generic version of Lovenox from Sanofi-aventis (NYSE:SNY). The two companies plan to launch enoxaparin sodium, generic Lovenox, immediately. Although not truly a biologic, the molecular complexity of Lovenox has some classifying it as such.

Momenta Pharmaceuticals

The first to market and sell generic Lovenox, Momenta is the smallest of the three companies, but has a big partnership with Baxter. Under the partnership agreement between the two companies, Baxter will make an upfront payment of $33 million and additional milestone payments over the next several years to Momenta for a collaboration that will generate up to six FOBs. Furthermore, Momenta's Copaxone ANDA is currently under review. An approval and launch will be significant as Copaxone brought in sales of $3.3 billion for Teva (NYSE:TEVA) in 2010.

Shares in Momenta have lagged recently due to the announcement of the federal appeals court to stay a decision preventing Watson and Amphastar from selling generic Lovenox. Although this is not the final decision on the litigation, it may have a material impact on Momenta as the company along with partner, Sandoz, was the sole provider of generic Lovenox for over 18 months. Generic Lovenox brought Momenta over $372 million in revenue and helped build a cash hoard that will exceed $400 million by the end of the first quarter. At a market capitalization of $740 million, more than half of that is in cash. Watson and Amphastar have started marketing the generic enoxaparin, but it is important to realize that the launch is at risk and Momenta can receive monetary damages if successful in their litigation.

Other Notable, Large Players

The significant amount of money in the FOB space has not gone unnoticed for big pharma. Pfizer (NYSE:PFE), entered the biosimilar-insulin space in the 2010 partnership announcement with Biocon Ltd, an Indian biotech company. Pfizer will pay up to $350 million - $200 million upfront and $150 million in milestone payments - for the development of Lantus, Aspart, Lispro, and recombinant human insulin biosimilars. Pfizer expects to launch insulin biosimilars in developed countries in 2014-2015. The company also has big plans to develop its biosimilars of monoclonal antibodies and estimates that it will arrive in the next five years.

Merck (NYSE:MRK) has a division called Bioventures to make and market biosimilars. From strategic alliances with Parexel to paying $720 million for licensing Hanwha's version of etanercept or generic Enbrel, Merck is committing a significant amount of money to ensure it is competitive in the FOB market. A biosimilar of Enbrel is key to Merck's strategy in the FOBs space as it is one of the best-selling biologic in history and the U.S. patent is set to expire.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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