How Biosimilars Can Impact Pharma Company Valuations

An inflexion point in the pharmaceutical industry has loomed with the approval of Hospira’s biosimilar version of Remicade in Europe and the subsequent approval in the U.S. of its first biosimilar, Novartis’ Zarxio (which targets Amgen’s Neupogen).   So far, the industry has encountered patent cliffs due to generic versions of small molecule drugs hitting the market, with biologics remaining well protected due to lack of appropriate approval guidelines. Biosimilars are comparable to generics in the sense that they are approved substitutes for specific bio-engineered therapies, or biologics. However, while generics are exact chemical copies of the small molecule therapies they replace, biosimilars include only the therapeutically active portion of large molecules biologics. Biosimilars are large molecule therapies that are generated through biological processes in so-called bioreactors containing specialized ecosystems.  As such, they are harder to manufacture and require a greater deal of  technical expertise.

So what happens now?

While we believe that a lot of stake holders will benefit from the advent of biosimilars, some will be adversely affected. Some of the big firms — including Abbvie, Roche and Pfizer — will be highly impacted by how this market shapes up in near future. There are around 11 biosimilars under development to compete with Abbvie’s Humira alone, which loses its patent exclusivity in the U.S. in 2016. ^[1]

See our complete analysis for Bristol-Myers Squibb

How Do Various Stakeholders, Apart From Pharma Companies, Get Impacted?

The U.S. government, private payers, patients and the taxpayers will definitely benefit as biosimilars take off.

There will be significant savings for the U.S. Medicare and Medicaid programs. Congressional Budget Office estimates savings of roughly $25 billion between 2013 and 2020 due to enactment of Biologics Price Competition and Innovation Act. ^[2] The estimates suggest that there could be potential savings of roughly $45 billion over the next decade. Parsing the original estimates from the CBO, others suggest about half of these could be for private payers, or roughly $20 to $25 billion.  Also, the lower cost for payers could translate into more competitive premiums, thus benefiting U.S. citizens. There will be clear benefit to patients who have to pay out-of-pocket. Lower Medicare and Medicaid costs will imply that tax money can be spent for other development or welfare purposes, thus benefiting taxpayers.

Assessing Valuation Risk Of Big Pharma Companies

Given these portentious changes, let us take a look at how the pharmaceutical companies under our coverage will be impacted by Biosimilar market growth.

Johnson & Johnson’s Remicade Revenues May See Significant Decline

Johnson & Johnson’s primary biologic drug is Remicade. However, most of the revenues that the company derives from Remicade come from the U.S. A biosimilar version of the drug has been approved in the Europe.  So as of now, J&J faces relatively low risk. However, given the recent Novartis biosimilar approval in the U.S., J&J will ultimately be battling against biosimilar version of Remicade domestically too, as a number are at various stages of review, including that of Hospira (noted above and below). We currently assume that a version may be launched in the U.S. in the year ahead and may push down the drug’s revenues to half of what they are now by 2019. In addition to Remicade, Janssen Biotech (a subsidiary of J&J) has also developed other biologics such as Simponi and Stelara, which are growing fast and can help offset the lost revenues. The combined revenues from these two drugs may exceed $4 billion by 2020 as they will be patent protected. At this point, the additional valuation downside from stiffer competition to Remicade seems limited to less than 5%.

Merck May Actually Be Well Off In The Near Term 

Merck has relatively low exposure to biologics and hence, limited risk from biosimilar competition. However, that’s changing as the company has put in R&D efforts to beef up its biologics pipeline.

The company possesses marketing rights for Remicade in Europe, and we have already priced in the decline in the drug’s revenues due to biosimilar competition. We forecast Merck’s Remicade sales to fall from $2.3 billion in 2014 to $1.2 billion by 2019. It must be noted that its big ticket biologic drug Keytruda was launched recently and will have patent protection for several years.

However, the company is developing around five biosimilars in partnership with Samsung Bioespsis and is likely to file the application for them over the course of next couple of quarters.  There is a chance that this can help it offset the decline in Remicade revenues. In fact, we believe that Merck doesn’t face much downside risk at this point and there may in fact be upside potential in the medium term depending upon execution.

Bristol-Myers Squibb’s Risk Lies A Few Years Ahead

In 2014, more than 30% of Bristol-Myers Squibb’s revenues, or around $5.2 billion, came from biologics. These primarily included its oncology and immunology drugs such as Sprycel, Yervoy, Opdivo, Erbitux, Orencia and Nulojix. However all of these are patent protected for now, with $2.3 billion in revenue becoming open to biosimilar competition in the next 2-3 years.

Roche Might Be Vulnerable, But Will Fiercely Defend Its Turf With Combination Therapies

More than 60% of Roche’s revenues come from biologics. This exposes the company to significant risk should the competition from biosimilars intensify in the next few years. Currently, our forecast assumes that biosimilars will be priced roughly 30-40% below the regular prices for patented biologics, and that Roche will be able to defend its primary franchises (Rituxan and Herceptin) to some extent by targeting adjuvant (i.e. , combination) therapies. Using combination adjuvant therapies, Roche could potentially transfer pricing power to newer drugs and stay competitive against biosimilars, as far as Rituxan and Herceptin are concerned.

But it is possible that we are underestimating the future impact from biosimilars and overplaying Roche’s competitive position, which is very strong right now. The evolving competition may bring the prices further down. In fact, some competitors are offering discounts of as much as 70%. Also, as noted above, there are around 11 biosimilars under development to compete with Abbvie’s Humira, which loses its patent exclusivity in the U.S. in 2016. ^[1] Needless to say, if a few of these come to the market in the next couple of years, competition can drive down biosimilar prices more than we expect. If the discounts extend to as much as 60%-70%, Roche can potentially lose $5 billion in annual sales by 2021, which would imply a downside of about 10%.

Pfizer Seems To Have Upside Possibility

Pfizer has several drugs in phase 2 and phase 3 trials. Phase 3 status is interesting as Pfizer is testing some biosimilars for Remicade, Rituxan/MabThera and Herceptin. All these three drugs are blockbuster biologics. While Remicade clocked $6.65 billion for Johnson & Johnson in 2014, Herceptin earned close to $6.9 billion for Roche and Rituxan/MabThera brought more than $7.54 in revenues. If biosimilars are approved worldwide, Pfizer could be looking to target a market of more than $15 billion with its phase 3 biosimilars. This assumes that biosimilars will be priced 30% below patented drugs. However, at present, only Europe has an established process to approve biosimilars, though there has just been a single approval in the U.S. As such, the timeframe for approvals is even less clear than normal. Additionally, we need to consider the evolving competition which may bring the prices further down, as we discussed above.

If Pfizer’s biosimilar efforts are successful, it can potentially add $5 billion in revenues over our current forecasts. Of course this requires very strong execution. However, it doesn’t seem out of hand considering the growing market for biosimilars, which could be as big as $20 billion by 2020. Pfizer’s recent acquisition of Hospira, which already has an approved biosimilar for Remicade for Europe, will also help the company speed up the process. Please note that we have not incorporated this acquisition in our model yet but will do so once the deal closes.

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1. Big Pharma’s Unfamiliar Biosimilar Threat, The Wall Street Journal, Mar 22 2015 [↩] [↩]
2. http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/94xx/doc9496/s1695.pdf [↩]