3 Biosimilars Stock Picks

This article was originally published by Zacks.com.

Generics dominated headlines in 1984 when Congress approved the landmark Hatch-Waxman Amendments. At the time, the idea of biologics was far away.

Three decades later, the first batch of biosmilars is nearing approval in the US. And like generics before them, they are opening up new avenues of growth and generating new challenges at the same time.

Biosimilars vs generics

Generics are drugs comparable to existing small molecule drugs. In other words, they are drugs that can be recreated under laboratory conditions following standardized procedures. Biosimilars are approved versions of biologics, which are far more complex drugs.

Biosimilars are proteins generated by living cells and are much larger molecules. The most common example used to illustrate the difference between a biologic and its biosimilar is a family recipe passed onto a new chef. In other words, the effects of a biosimilar may not be absolutely identical to those of the original biologic.

Regulatory and clinical hurdles

Since 2006, biosimilars have been available in the European Union. The US defined the regulatory roadmap for biosimilars only in 2010. According to a draft guidance document released in 2012, the FDA said approval for biosimilars will be on the basis of “data derived from analytical studies, animal studies and a clinical study or studies.”

This is much tougher than the requirements for approving a generic. On the user side, a large amount of clinical data must be made available to physicians to convince them to prescribe such drugs. Adding to costs, pharmaceutical companies must invest significant amounts in communicating the drug’s efficacy.

Bright prospects

According to a report from Frost & Sullivan, the global biosimilars space generated $1.2 billion in 201

3. This is expected to touch $24 billion in 2019. Another study forecasts that the global biosimilars market will expand at a compound annual growth rate of 27.58% over 2013 to 2018.

The major reason for this high level of growth is the large number of patents expiring. Another reason is that costs incurred in the discovery of such treatments are falling. This is because manufacturing is increasingly being outsourced to emerging markets.

On the next page are three pharma companies present in the biosimilar arena or quickly increasing their presence in this space.

Dr. Reddy's Laboratories Ltd.

Operating in the generics, active ingredients and pharmaceutical services segments, Dr. Reddy's Laboratories Ltd. (RDY) is present in the biologics space and is expected to be a key player in biosimilars. The company has already released four large molecule products.

Dr. Reddy's Laboratories Ltd. holds a Buy rank and has expected earnings growth of 12.60%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 22.26.

Actavis plc

Manufacturing, developing and distributing pharma products in the US as well as in global markets, the Actavis plc (ACT) biosimilars pipeline has also made good progress. Actavis has collaborated with Amgen Inc. (AMGN) to develop biosimilar versions of Herceptin, Avastin and rFSH. All three medications are in phase III trials.

Currently, the company holds a Buy rank and has expected earnings growth of 16.90%. It has a P/E (F1) of 17.04.

Biogen Idec Inc.

Finally, Biogen Idec Inc. (BIIB) is involved in drug discovery, manufacturing and marketing in the US as well as abroad. In 2012, Biogen and Samsung Biologics announced they were setting up a biosimilars joint venture. In December 2013, Biogen announced that it would commercialize certain biosimilar products in Europe as per the terms of this joint venture.

Besides being a Strong Buy, Biogen Idec has expected earnings growth of 28.50%. It has a P/E (F1) of 29.38.

Despite regulatory hurdles and user level challenges, biosimilars are quickly emerging as products of the future. This is why each of these stocks would make good additions to your portfolio.

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