Changing The Face Of Biotech Investing [iShares NASDAQ Biotechnology Index (ETF), Market Vectors Pharmaceutical ETF]

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June 1, 2015 2:20pm NASDAQ:IBB NYSE:PPH

biotechLawrence Meyers: If you’re interested in seeking out investments in new biotechnology and pharmaceutical advances that could change the face of health care, then you may want to look at some ETFs that may take advantage of the advance in biosimilars.

According to the U.S. Food and Drug Administration, a biosimilar is “highly similar to an FDA-approved biological product … and has no clinically meaningful differences in terms of safety and effectiveness.” Biological products,  also known as biologics, are drugs that are made using living cells and are not synthesized from chemicals like typical drugs.

To date, however, there are no biosimilars on the market. That needs to change, because it means making life-saving cancer and autoimmune biologics available at discounts.

According to IMS Health, U.S. biologics spending hit $92 billion in 2013. The Rand Corporation collated estimates suggesting that consumers would spend as much as 40% less on biosimilars over time, putting as much as $44 billion back into citizen’s pockets.

There’s more than just affordability at stake. Aside from making these drugs more affordable, biosimliars represent a desperately new source of revenue for biotech and pharmaceutical companies.

The Financial Equation

Revenues for biosimilar manufacturers have tremendous potential. A 2012 McKinsey study indicated that the market for the top five patented monoclonal antibodies is over $30 billion, suggesting an $18 billion to $20 billion biosimilar market just for those five products.

IMS Health already projects $1.9 billion to $2.6 billion in biosimilar sales this year. The U.S. has the potential of $11 billion to $25 billion in biosimilar sales by 2020, a mere 4%-10% of the biologics market. Indeed, total biosimilar penetration in the off-patent biologics market could hit 50% in 2020.

For manufacturers, the 10-year internal rate of return (IRR) on research and development costs is particularly attractive. The top 12 pharamaceutical companies enjoy an 11.5% median IRR. Biosimilars could hit as high as 15%.

There are unreasonable regulatory obstacles to these IRRs, however. According to one study, a biosimilar would just break even after about $900 million in sales if regulatory obstacles are removed. If obstacles aren’t removed, the break-even point increases to $1.3 billion. Even the largest biotech firms in the world are going to think twice about manufacturing something that will cost an additional $400 million in order to break even.

Regulatory Issues

The FDA hasn’t specified how biosimilar clinical trials are to be performed, and won’t even accept a standardized process, leaving manufacturers exposed to a whimsical approval pathway. A single choice, made because the FDA refuses to even provide guidance, could torpedo years of work, and flush millions of R&D dollars away.

There’s also a roadblock regarding how biosimilars are named. When you buy ibuprofen, you may buy it under the name Advil or another generic name. Either way, you are buying ibuprofen, which is an “international nonproprietary name,” or INN. It’s a common name that doctors, pharmacists and the public look for.

Biosimilar manufacturers want the FDA to approve biosimilars using the same INNs for their products and the biologic drugs they reference, just as happens with generics and the pharmaceuticals they reference. That way everyone uses the same word for essentially the same product.

However, if the name of the biosimilar and reference biologic are required to be different, it could create confusion. Doctors and pharmacists may not be certain they are prescribing or filling the intended biosimilar.

Europe has been using the same INNs for biosimilars since 2006. The FDA hasn’t decided about nomenclature yet. It’s time for this to change.


With the above issues in limbo, how are doctors, pharmacists, and insurance companies supposed to react? How can they embrace biosimilars in this environment? How can insurance companies create coverage and reimbursement strategies when nobody can even agree on what to call a drug?

The bottom line is that the FDA and policymakers need to get out of the way. There are people who need these drugs. There are enormous revenue opportunities for biosimilar manufacturers that could jump-start their businesses and provide more jobs.

Investor Angle

There are obviously risks with biosimilars. I think the prudent approach is to use ETFs that cover the biotech and pharmaceutical companies, so that all the big names that are most likely to develop biosimilars are covered.

The iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) gives you great coverage of the entire sector. The top 10 holdings are all big names and they represent 55% of the index, so you’ll be overweighted in the most likely candidates.

On the pharmaceutical side, you may want to look at Market Vectors Pharmaceutical ETF (NYSE: PPH), which has every Big Pharma company out there. Its top 10 holdings account for 60% of assets.

This article is brought to you courtesy of Lawrence Meyers from Wyatt Investment Research.

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