BIG PHARMA: THE MOMENT OF DREAD IS HERE / THE WALL STREET JOURNAL

Big Pharma: The Moment of Dread Is Here

The impact of biosimilars in the U.S. will be gradual, but drug-company investors should still be wary

By Charley Grant


The initial stakes are low for the imminent launch of the first U.S. biosimilar drug.

Pharmaceutical companies that develop branded drugs shouldn’t expect them to stay that way.

Sandoz, the generics arm of European pharmaceutical giant Novartis, NVS 1.79 % announced on Thursday that it will begin selling Zarxio, its biosimilar answer to Amgen AMGN 5.13 % ’s Neupogen, in the U.S. The launch begins after a U.S. appeals court denied Amgen’s latest request to block the drug’s sale.

Zarxio’s launch will mark the first commercial offering of a biosimilar in the U.S. These are like generic drugs, but differ in an important regard. Generics copy chemically made drugs, while biosimilars imitate ones typically derived from living organisms. Until now, those were largely immune from generic competition in the U.S. So biosimilars will change the competitive landscape.

For Amgen, Zarxio’s launch is only a modest setback. Neupogen sales world-wide amounted to $1.1 billion in the last four quarters—only 5% of total company sales.

And Novartis will be pricing Zarxio at a 15% discount to Neupogen. That is on the light side of expected discounts for biosimilars, which are generally forecast to be in the 20% to 30% range.

Beyond Zarxio’s launch, the stakes will get higher as discounts get larger. Likewise, competition will intensify. In aggregate, drugs with biosimilar competition on the way—such as AbbVie ABBV 1.34 % ’s Humira or Johnson & Johnson JNJ 2.88 % ’s Remicade—totaled more than $25 billion in U.S. sales in 2014.

What’s more, some reference drugs face five or more biosimilar-product candidates under development. This threatens to accelerate sales declines for branded drugs as drug patents expire.

And pricing power has been a critical driver in this bull market for branded-drug developers. The price per prescription of branded drugs has grown by more than 250% since July 2007, according to analysts at Citigroup citing IMS Health data. Tellingly, the price per prescription has grown just 28% over that time if generics are included. So the introduction of biosimilars could further mute price increases.

Because biosimilars are difficult and expensive to manufacture, changes to industry economics are likely to be gradual. That doesn’t mean they won’t be significant, though. Citi’s analysts predicted in February that innovative drug developers will likely lose an aggregate $360 billion in revenue.

And with major consolidation among insurance companies and pharmacy-benefit managers under way, pricing power for payers is improving. The development of biosimilars could tilt things even further in their favor.