The biopharmaceutical market, estimated to be about $40 billion annually, is one of the fastest-growing segments of the life sciences industry. It is growing four times as fast as the small-molecule market, and biopharmaceuticals are expected to represent 30% of all marketed drugs within the next five years. By 2010, as many as 13 blockbuster biopharmaceutical drugs with annual sales of $10 billion to $18 billion will lose patent protection. This, coupled with increasing downward pricing pressures for biopharmaceuticals and biologics, has created an enormous commercial opportunity for companies interested in developing biosimilars — also known as follow-on biologics (FOBs) — or lower-cost, generic versions of many blockbuster biopharmaceutical products.

Commercialization Hurdles
While the biosimilar/FOB market is expected to grow substantially in the next two years, it is important to note that many commercialization hurdles must be overcome before this industry can be transformed into a profitable business opportunity. First, the costs associated with developing and manufacturing biosimilars will be much higher than those for traditional small-molecule generics. Further, it is likely that almost all biosimilar products will require some form of human clinical testing before being granted regulatory approval or marketing authorization. This, in turn, will drive up development and production costs. Consequently, the margins on these products might be substantially lower than previously anticipated. Today, biosimilar manufacturers estimate that development costs can range from $40 million to $100 million depending upon the complexity of the biosimilar protein being developed. This means large, well-established drug makers with significant financial resources are likely to be the only companies capable of successfully bringing these products to market. Indeed, many of the early leaders best positioned to penetrate and dominate the biosimilar market include pharmaceutical giants Sandoz (Novartis), Merck, and Teva, which is the largest generic manufacturer in the world.

Second, because of high clinical development and manufacturing costs, the price difference between biosimilars and corresponding originator products will likely be less than previously thought. Originally, 50% to 80% price reductions (as compared with branded products) were envisioned for these molecules. However, over time, it’s become evident that 20% to 25% cost savings for biosimilars is more realistic. Accordingly, when Sandoz launched Omnitrope, its biosimilar version of human growth hormone (HGH) in Germany two years ago, the price was discounted 20% as compared with Eli Lilly’s Humatrope brand. Also, in Australia biosimilar versions of HGH are sold at a 25% discount as compared with their branded counterparts.

Third, while a 20% to 25% cost savings offered by biosimilars may be attractive to insurers and healthcare payors, it isn’t clear whether these discounts will be sufficient to induce physicians to switch from innovator brands to biosimilars. For example, despite approval of 13 biosimilars in the EU, the reception to biosimilars by European physicians has been decidedly lukewarm, and only small numbers of patients are currently being treated with biosimilars. The slow uptake of biosimilars in Europe is in part due to the newness and lingering safety concerns about these products. “These molecules are very new, and we estimate that 50% of physicians don’t really know what they are,” says Gillian Cannon, executive director of Merck BioVentures (MBV), a new division of Merck developing a portfolio of biosimilar molecules. “It is going to take a lot to educate physicians and healthcare providers about FOBs,” she adds. Further, and perhaps more importantly, current European guidelines (and impending U.S. legislation) prohibit product substitution or interchangeability of branded products with biosimilars. This will force biosimilar manufacturers to heavily invest in brand development to differentiate their drugs. Ameet Mallik, head of Sandoz Biopharmaceuticals, insists that branding is critical for the success of biosimilars. “This is a new field based on a new regulatory pathway, and biosimilars are in direct competition with some very large, well-established innovator companies with powerful brands and enormous budgets.” He added that biosimilar manufacturers that lack branding and marketing experience and don’t have an existing sales force in place might have trouble competing in the highly competitive biosimilar market.

Fourth, many innovator companies already have second-generation biopharmaceutical products on the market with improved safety and efficacy, less frequent dosing schedules, and more convenient administration technologies than original first-generation products. Because second-generation products have extended patent protection, biosimilar manufacturers can make biosimilar versions of only the original and generally inferior first-generation products. Consequently, most physicians will be unwilling to prescribe biosimilars (despite the cost savings), if they know that superior second-generation innovator products are also available. Moreover, because innovator companies control pricing for first- and second-generation products, they can charge the same price or less for second-generation products, thereby forcing biosimilar versions of first-generation products to essentially compete for market share against superior second-generation innovator products. This potential pricing scenario has already induced some of the savvier biosimilar manufacturers to begin to develop so-called “second-generation biosimilars.” For example, MBV’s Cannon says that “Merck’s first FOB will be a PEGylated-erythropoietin [PEG-EPO].” While PEG-EPO isn’t technically an FOB (it’s really a new molecular entity that will require conventional regulatory approval), it will likely be clinically superior to first-generation EPO biosimilars that are currently being sold in Europe and elsewhere. Other biosimilar manufacturers, including Sandoz and Prolong Pharmaceuticals, are exploring the use of protein PEGylation and other technologies to develop improved biosimilar products capable of competing with first-generation biosimilars/FOBs and second-generation innovator products.

Finally, the commercialization potential of this new class of molecules is still uncertain because of the current small size of the biosimilar/FOB market. The small size of the market is due to the lack of a U.S. regulatory approval pathway for FOBs. This is because the United States is the largest biopharmaceutical market in the world, and more than 50% of all biopharmaceuticals are sold in America. Therefore, it should come as no surprise that the global biosimilar market will remain small until legislation for approval of these products is enacted in the United States. However, it is important to note, that if the 12-year period of data exclusivity is included in the impending biosimilar legislation, biosimilars won’t likely appear in the U.S. market until 2020. Inclusion of the 12-year period of data exclusivity in final FOB legislation will not only delay U.S. approval of biosimilars/FOBs, it will allow American biosimilar companies to develop similar FOBs which will then compete with foreign biosimilars for U.S. regulatory approval.

Companies to Watch
There are a large number of companies already jockeying for position and competing in this space. These companies range in size from small startups to major generic manufacturers, and most of them are located in Europe and India. In Europe, Biopartners, Hexal, Ratiopharm, Sandoz, Stada, and Teva have emerged as early industry leaders. Other smaller European companies include CT Arzneimittel, Hospira, and Medice. In India, large companies like BioCon, Dr. Reddy’s Laboratories, and Ranbaxy have taken the lead — although several smaller companies, including Intas and Zydus Cadila, are also developing biosimilar products. Noticeably absent from the mix have been American big pharma and biotechnology companies. However, this has begun to change with drug makers AstraZeneca and Eli Lilly & Company expressing interest in FOBs and the recent launch of MBV.

Despite the growing number of players in the biosimilar/FOB space, most industry insiders expect the larger, more established, and better capitalized companies to ultimately dominate the market. All indications suggest that MBV, Sandoz, and Teva may be the early frontrunners.

Switzerland-based Sandoz was the first company to enter the biosimilar market. The company already has approved products in Australia, Europe, and the United States. Binocrit (epoetin alfa) and Zarzio (filgrastim) have received marketing authorization in the EU, and Omnitrope (somatrophin) is approved in both Europe and the United States (although Omnitrope, which received FDA approval in 2008, isn’t legally considered a biosimilar). Sandoz is a generic division of the pharmaceutical giant Novartis and is relying on its parent company’s experience in R&D, biomanufacturing, and marketing to help develop a portfolio of biosimilars. To meet commercial demand, Sandoz recently designed and completed construction of a multiproduct GMP-certified biosimilar manufacturing facility in Kundl, Austria.

While the company’s early focus has been on developing biosimilar therapeutic proteins, Sandoz’s Mallik believes that major opportunities exist in the monoclonal antibodies (mAbs) field and that the company is “looking forward to developing biosimilar mAbs as soon as possible.” Most biosimilar manufacturers view emerging markets in China and India as important components of their global commercialization strategies. However, all agree that the real key to commercial success of biosimilars is the U.S market. “The United States is the world’s largest biopharmaceutical market, and therefore, success there is critical to global success,” says Mallik. “Unfortunately, the U.S. market is currently not open, but there are clear signs that this is changing.”

Merck’s MBV is a surprising new entrant to the biosimilar market. The decision to create a biosimilar division at Merck was announced in late 2008. “We saw a significant business opportunity in the biosimilar market and decided that it made sense both financially and from a healthcare perspective,” says MBV’s Cannon. Although Merck has substantial experience in vaccine development and manufacturing, it has little experience in biopharmaceuticals. Cannon contends that Merck’s 2006 purchase of Glycofi’s humanized yeast platform and its recent acquisition of Insmed, a small Richmond, VA-based biosimilar start-up, provide MBV with the technical capabilities and a product portfolio to be competitive in the biosimilar market. The Insmed purchase also included a small biomanufacturing facility that will be used to develop MBV’s biosimilars. Although Sandoz and other companies have been developing biosimilars for the past five to seven years, Cannon believes Insmed’s portfolio coupled with Glycofi’s humanized yeast platform will help to improve protein quality, reduce biomanufacturing costs, and allow MBV to catch up with its competitors.

MBV is pursuing an ambitious development timeline and expects to have as many as 10 FOBs in development by 2017, although Cannon concedes that biosimilars won’t likely appear on the U.S. market until 2020 — mainly because she believes the 12-year data exclusivity period will appear in final U.S. biosimilar legislation. Although MBV wants to commercialize its FOBs as quickly as possible, Merck publicly supports the 12-year period of exclusivity that has been proposed for biosimilars. While this might seemingly be at odds with MBV’s ambitious commercialization plans, Cannon strongly asserts that the “12-year data exclusivity period for biosimilars is essential to preserve innovation in both the pharmaceutical and biotechnology industries.” Opponents contend this is a stalling tactic that will allow U.S. biosimilar manufacturers to catch up and compete with foreign biosimilar manufacturers for U.S. market share.

Generic giant Teva was one of the companies to recognize that biosimilars represented a lucrative business opportunity. Since the early 2000s, the company has strategically acquired small biosimilar companies and is quietly building a portfolio of biosimilar products. Teva received European approval of a generic version of filgrastim called TevaGrastim in 2008 and also has several other products in development. However, unlike Sandoz and many of its competitors, Teva lacks expertise in biopharmaceutical drug development and biomanufacturing. Recognizing these limitations, the company entered into a joint venture agreement earlier this year with Lonza to develop, manufacture, and market a portfolio of biosimilars. Lonza’s biomanufacturing expertise coupled with Teva’s strong marketing experience and distribution channels should enable the company to be a player in biosimilars/FOBs. While Teva also has an eye on emerging markets in Asia, the Middle East, and South America, it understands that ultimate success of the biosimilar market hinges on creation of a regulatory pathway for approval of these products in the United States.

Although MBV, Sandoz, and Teva appear to be early leaders in the emerging biosimilar/FOB industry, some smaller European companies like Hexal and Ratiopharm and several Indian companies including BioCon, Dr. Reddy’s Laboratories, and Ranbaxy, shouldn’t be counted out. Many of these companies already have approved products on the European market (or are being sold on the “gray unregulated markets”) and will almost certainly seek U.S. regulatory approval once FOB legislation is finalized. Ron Rader, a biopharmaceutical consultant, believes there will be a flood of applications once U.S. biosimilar legislation is enacted, and he warns that this may overwhelm the FDA and unwittingly slow approval of some biosimilars. He also thinks that once U.S. legislation is finalized, many pharmaceutical companies are likely to announce their intention to get into the biosimilar market. “There’s too much money to be made for them to remain on the sidelines,” he adds.

What To Expect
After an almost decade-long debate, biosimilars/FOBs are finally a reality. The last hurdle to be overcome before the full commercial potential of these products can be realized is legislation that allows approval of FOBs in the United States. While passage of FOB legislation is almost certain, Bruce Mackler, Ph.D., a lawyer and FDA consultant, cautions that no matter what the final legislation looks like, it is important to remember that “Congress crafted the statutes, but it will be left to the FDA to interpret them.” In other words, there will be a sufficient number of loopholes and ambiguities in the legislation that will be left to FDA regulators to adjudicate. What this means is that all U.S. biosimilar applications will be evaluated individually on a case-by-case basis (similar to the European process), and the agency will determine the criteria that must be met to ensure product efficacy, quality, and patient safety. Put simply, the impending U.S. legislation will not be the “one-size-fits-all” solution that many biosimilar/FOB manufacturers wanted.

The biosimilar/FOB market is shaping up to be extremely competitive, and the barriers to entry might be higher than previously anticipated by some biosimilar/FOB manufacturers. Further, innovator companies have already demonstrated that they are willing to employ all available means and tactics to defend their multibillion dollar biopharmaceutical franchises from generic encroachment. Finally, despite a sizeable number of early entrants, the companies that are likely to emerge as dominant players in the biosimilar/FOB marketplace are larger, more sophisticated manufacturers that have the infrastructures and financial resources to compete with innovator companies.