Tickers in this Article: RDY, TEVA, AMGN, SNY, MNTA, NVS, PLX
Generic drugs are certainly a significant part of the landscape in the healthcare world. Not only do they save healthcare consumers (and their insurance companies) millions of dollars a year, but they are a thriving industry in their own right. Companies like India's Dr. Reddy's Laboratories (NYSE:RDY) and its nearly ten-fold larger rival Teva Pharmaceuticals (Nasdaq:TEVA) have certainly produced ample rewards for long-term investors. Now, though, there is a whole new window of opportunity opening for the generics companies - the opportunity to sell what amount to generic versions of biopharmaceuticals. Though the path will be difficult and expensive, this market represents a major opportunity for the generics industry and potentially a major threat for many large pharmaceutical companies.

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The Story So Far
To be clear, the opportunity in biosimilars is not exactly "new", but prior rules (and the uncertainty of how the FDA would apply those rules) largely kept this market empty. Now, though, with the Pathway for Biosimilars Act of 2009 and the Patient Protection and Affordable Care Act of 2010, there is more clarity than before and a reasonably clear mandate from the U.S. Congress for the FDA to act more openly and decisive.

The Problem
In simple terms, biosimilars are generic versions of biologic drugs. While many drugs used to be developed and produced through chemical processes, biologic drugs are produced through biological processes that generally involve recombinant DNA technologies. Famous examples include Amgen's (Nasdaq:AMGN) Epogen and Enbrel, Abbott Labs' (NYSE:ABT) Humira, and the insulins produced by companies like Sanofi-Aventis (NYSE:SNY) and Novo Nordisk (NYSE:NVO).

Although copying a traditional pharmaceutical is a relatively straightforward affair for chemists (though not all drugs are easy by any means), the process of copying biologics is more complicated. Would-be competitors are not going to get access to the original cell lines, nor are branded pharmaceutical companies going to share the particulars of their fermentation or purification processes. What that means, then, is that it is more difficult for the generics company to establish that their candidate is identical to the product it purports to copy.

Consequently, there has been a great deal of discussion and debate about just what sort of standards the generic competitor must meet. Large drug companies, fearing the loss of lucrative markets, have agitated fiercely for rigorous safety and equivalency trials, and some doctors and patient safety advocates have certainly joined them in this. On the other hand, representatives for generic drug companies and those who pay for the drugs (including insurance companies) have argued that the process are unnecessarily cumbersome and difficult - so much so that a company will not make the substantial upfront investments needed to produce biosimilars only to be jerked around by the FDA.

Change Is Coming
Change may be coming quickly, though. Momenta Pharmaceuticals (Nasdaq:MNTA) saw a breakout in its stock when the FDA announced approval of its generic Lovenox - the first such approval in more than 10 years. While this was a major step forward, it looks like Momenta's time in the sun will be brief as Teva too is looking to roll out its own version of the drug.

Lovenox is not the only target - not by a long shot. Generics of Amgen's Epogen and Neupogen are entering the European markets, as Novartis' (NYSE:NVS) Sandoz division appears committed to being a significant player in biosimilars. Moreover, companies both large - Hospira (NYSE:HSP) - and small - Protalix Biotherapeutics (AMEX:PLX) - are looking to get into the game and challenge leading biologic drug companies like Roche, Sanofi and even Teva itself (which sells the very successful MS drug Copaxone).

The Bottom Line
I do not want to leave the impression that biosimilars are going to be a free-for-all in the pharmaceutical space. There are still legitimate debates underway as to just how to fairly assess the similarity of a would-be generic to its branded target. What seems clear to me, though, is that these questions are going to come to some resolution relatively quickly - there is simply too much momentum to reduce drug costs and to be "be fair" to the generics industry. While this is far from the death-knell for the biologics industry, it is an emerging risk factor for investors in companies that rely upon biologics, as well as a new opportunity for investors in the generics sector. (For more, see Pharma Patent Trolls: Cheap Drugs At A Steep Price)

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