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There is no doubt that generic drug makers will thrive in the upcoming cost-driven environment of U.S. health-care reform.
Generic drugs already make up 70% of prescription sales in the U.S., but that percentage will undoubtedly increase when health care reform begins to roll out. The government will place significant cost pressures on pharmaceutical companies to keep prices low. Lower-priced generics mean lower costs to government programs, private insurance companies and most importantly, the patients.
But there is one area of generics that will thrive more than any other. In fact, this market is expected to grow by more than 8,000% by 2020.
Biosimilars are the generic equivalent of brand-name biologics. Biologics are brand-name products created by biologic processes, rather than being chemically synthesized. Biologics are used heavily in the treatment for various cancers, rheumatoid arthritis and adverse cardiovascular conditions.
According to research group Datamonitor, the global market for biosimilars should grow from $243 million in 2011 to an astounding $3.7 billion in 2015 – a growth rate of 1,422% in just four years. And the growth doesn’t stop in 2015. Sandoz, the current leader in biosimilars, expects the entire biosimilars market could reach $20 billion to $30 billion by 2020.
That means the market could grow by more than 8,000% in 10 years. Now you understand why this is an industry to pay attention to.
One of the catalysts of such staggering growth in the biosimilar arena will be the inevitable “patent cliff” facing some of the largest name brand biologics. With biologic patents running out, biosimilars are likely to sweep in and grab market share.
What’s more, there is a dearth of replacement biosimilars in the development pipeline.And with generic biosimilars eating away an average of 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 easily reach $100,000 or more annually. 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 health care 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. In fact, the U.S. should account for more than 80% of the world market by 2014, according to Datamonitor. So the U.S. is where we want to focus our investment research.
So how can we profit from this inevitable upcoming biotech boom, and more specifically in biosimilars?
While I am 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 is my favorite company in the biosimilar space.
Mylan (Nasdaq: MYL) – The company should outperform its peers due to cost controls under health care, as well as the firm’s EpiPen allergy treatment and huge strides in the biosimilar space. Mylan is by far, the purest play in the industry, with more than 80% of sales coming from the manufacture and sale of generics. Mylan has established aggressive growth targets over the next six years and has achieved early milestones. The balance sheet has improved dramatically over the past several years. Furthermore, successful investors such as Paulson & Co. are significant shareholders.
This could indeed be a huge opportunity for investors over the next few years, and one that we will continue to monitor closely.
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