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Biocon and the Brave new world of

Biosimilars

Note: The story will largely focus on the U.S market because of the potential
opportunity it provides and the increasing focus of Biosimilar companies to
gain a foothold in the market

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 Innovators and Copycats

In 1989, P zer chemists (pharmaceutical giant) in East England were trying to

synthesize a simple molecule drug that they thought might treat high blood
pressure and chest pain. The low priority project had pretty disappointing
results initially and showed little to no promise. In 1993, during a clinical trial,
researchers were trying to study the e ects of the drug on a group of Welsh
Mineworkers. After a disappointing review, the researcher nally asked if the
participants noted anything else they might want to report. One of the men put
up his hand and said, "Well, I seemed to have more erections during the night
than normal," and everybody else kind of nodded and said, "So did we." On
that gloomy evening in South East England, the world had nally chanced
upon Viagra, the miracle drug. It took another 4 years for the FDA (Food and
Drug Administration, USA) to approve the magic pill, but at the end of it all
P zer had in its hands what is often touted as a "blockbuster drug."

The point here is that success in this market is deeply intertwined with the
research and development process that characterizes the pharmaceutical
industry. It might take 5 years for you to develop a new drug and you might
still need another 10 years to clinically test the product and gain approval from
the regulatory agencies. This is an extremely capital intensive process and the
only way to remunerate the investment of the pharma company is to protect
the investment through patent protection. Viagra's product patent lasts a
whole 20 years (US) and no other company can sell the same compound during
that time. This way the companies can be incentivised to invest more in
research thereby ensuring a steady supply of new innovator drugs.

Once the patent expires, however, copycats can market their own version of
the drug. These copycat drugs are called generics and companies can replicate
the manufacturing process with relative ease. In order for a company to
market a generic, the FDA must agree that the generic is interchangeable with

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 the innovator product and that it contains the same active ingredient. Because
of the relative simplicity involved in manufacturing generics, the industry also
breeds intense competition. This increasing competition has interestingly
spun o a new proxy war of its own with its own cast of complex characters.

The Need for Complexity

Ever since modern medicine started to emerge post the Industrial Revolution,
simple molecules have been used to treat most diseases. While these
formulations were highly e ective against some illnesses, it was proving
particularly ine ective against more complex diseases like cancer. Our
immune system has evolved over millions of years to speci cally defend
against intruders by nding and destroying anything that's not supposed to be
inside our bodies. But cancer isn't like most diseases. It's not caused by an
invasion of a foreign pathogen. Instead, it's a byproduct of rogue cells within
our body that don't necessarily act the way they should. To this end, using
simple molecules to defend against a barrage of mutating versions of our own
cells is an exercise in futility. In the process of killing the bad cells, these drugs
will simultaneously annihilate the healthy cells too. So the cut-slash-kill
method isn't particularly e ective. What we instead need is a 'biologic' or a
complex protein isolated from natural sources that can mimic our immune
cells.

Although initial attempts to replicate and genetically modify antibodies failed

quite miserably, the eld of biologics has begun to show considerable promise
since the turn of the century. Also, the advent of biologics isn't a particularly
new phenomenon. We have had vaccines for a good half century now and
considering most vaccines are complex living agents that resemble a disease-
causing microorganism, they t under the ambit of biologics pretty well.
However, it's only in the last 25 years that new developments in genetic
engineering/recombination techniques and targeted therapies have begun to

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 open up new opportunities and this, in turn, has breathed new life into the
eld of biologics and with it, its copycats — biosimilars.

Similar but not same

Unlike small molecule drugs like Viagra that can be chemically synthesised
using a straightforward approach, biologics are harvested from living cells and
are often produced using complicated manufacturing processes. Most modern
biologics are assembled inside vats — or bioreactors — that house genetically
engineered microbes or cell cultures and can often take a whole decade of
research to perfect. So replicating the process isn't exactly a cakewalk and
often times the copycat version (biosimilar) can di er from the innovator
biologic.

Michael Yang, President of Immunology at Janssen Biotech described it this

way — "biologics are living proteins, and living proteins can't be copied, in the
same way, that one oak tree is di erent from another, even though they are
both classi ed as oak trees." A biosimilar is not equivalent to the original
biologic, instead is highly similar in the way that it interacts with the human
body. The design and creation of a biologic drug is complicated enough that a
biosimilar isn't going to be precisely the same as a biologic. So the FDA has to
be extremely meticulous whilst approving the drug and ensure that it acts the
same way as the reference(innovator) biologic would. So in addition to the
lengthier, more expensive development process, biosimilars also entail a more
time-consuming approval process characterised by several phases of clinical
trials. While multiple Indian companies have forayed into manufacturing and
marketing generics in developed markets, only one Indian player seems to be
trying to make a dent in the biosimilar space.

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 Biocon's Biosimilar Gambit

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 Biocon's Biosimilar segment has shown growth of more than 100% for 9
months ended, FY19. The segment's operating margin, which was in the red
until last year, has now moved up to 30%, buoyed by the launch of its rst
biosimilar in the US market

Biocon is an Indian pharmaceutical manufacturer that is gradually

transforming itself into an innovation-led biosimilar developer. Although
85% of it's existing revenues (FY 18) are attributed to other segments
including generics and research it's made large strides in the eld of
biosimilars and is increasingly looking towards consolidating its position as
one of the market leaders. To this end, it has collaborated with a UK based
pharmaceutical giant Mylan to form a joint venture to bene t from its strong
commercialization penetration across the globe. The partnership sets up an
arrangement for jointly developing, manufacturing, supplying and
commercializing biosimilars. While Mylan holds the
marketing/commercialization rights for the developed markets like the US,
Canada, Japan and EU. Biocon holds the exclusive rights to market the
products in emerging countries.

While Biocon has been investing in developing and re ning its global
biosimilar pipeline for the past few years it's only recently that investors
began to take notice of all the underlying potential. The product pipeline is
characterised by di erent stages of the research and development cycle and
the further ahead a drug is in this pipeline the more valuable it becomes.
Interestingly, the product pipeline also forms the cornerstone of the
investment thesis most people ascribe to pharma companies.

The Almighty Biosimilar Pipeline

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 This thought is also an extension of the e cient market hypothesis wherein
proponents believe that all available information is already re ected in the
stock price. With pharma stocks, investors don't necessarily wait for drug
companies to market and sell their product. Instead, they closely monitor the
pipeline and the movement of drugs across various development stages. In the
event that a drug moves from clinical trials to regulatory approval, investors
start bidding up the price of the stock to re ect this new information. When

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 Biocon (in partnership with Mylan) became the world's rst biotech company
to receive US regulatory approval for a particular biosimilar (Trastuzumab),
the stock rallied close to 40% almost instantaneously. So even before the drug
is marketed, even before a single penny is ever earned, even before it becomes
fully apparent that the drug will, in fact, receive regulatory approval, investors
will have already ramped up the prices to re ect the anticipated earnings and
this o ers insight into another riddle — as to why Biocon trades at such
premium valuations. While one might venture that this particular feature is
exactly what is telling of an overvalued stock it's also quite possible that the
valuation currently re ects the robust pipeline that Biocon boasts.

This isn't a feature unique to Biocon. Another comparable biosimilar player,

Celltrion, a South Korean company that ventured into this space much earlier
has seen its value compound by as much as 6 times. This compounding
translated over a period of 8 years as when its product pipeline showed
incremental developments

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 However, the market poses its own unique set of challenges. First, the U.S
market is notorious for its slow regulatory process. Second, there has been
very little systematic e ort to educate physicians and patients who are
concerned about biosimilar safety and e cacy. Finally, originator companies
have honed their patent litigation and preemptive competition skills, so much
so that lawyers have a new name for it now — The Patent Dance

Let's Tango

"[It's like a] a riddle wrapped in a mystery inside an enigma," — A frustrated

District Court judge while interpreting the various provisions of the US
Biologics Price Competition and Innovation Act of 2009 (BPCI Act), which
among many things also o ers patent protection

In a bid to sort out any potential patent disputes, the US BPCI act devised an
elaborate exchange mechanism for both the innovator and the biosimilar to
resort to a formal process of dispute resolution. As they engage in the Patent
Dance, both parties exchange information about their formulations and
manufacturing processes to ensure that the biosimilar applicant does not
infringe on any patents of the originator and the originator, in turn, promises
not to sue the biosimilar for infringements in the future. Although in theory,
this should have alleviated much of the legal concerns surrounding biosimilar
launches, things haven't exactly worked out that way.

Companies that are overly reliant on a small portfolio of blockbuster drugs go

to extreme lengths to protect their intellectual property by ling several
patents that might last well over the average 20 years. In one notorious case,
AbbVie, a pharmaceutical giant has secured more than 100 patents to prevent
anyone from attempting to copy its innovator biologic and has warned
copycats of expensive litigation fee in the event they don't pay heed to the
warnings. While companies are usually only ever accorded a single product

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 patent, they get around this inconvenience by patenting the formulation and
manufacturing processes as well. So when a biosimilar applicant decides to
[patent] dance with the originator in good faith and exchange sensitive
information, the originator begins to use this new information to further
strengthen his patent claim and litigate anyway. And this brings us to the
second question. If the process is so detrimental to a biosimilar applicant why
dance in the rst place?

After the Supreme Court Judgement con rmed that innovators cannot force
biosimilars to engage in the patent dance, pharmaceutical companies have
resorted to another technique — Blind litigation. In March 2018, Amgen, a
pharmaceutical giant sued Adello Biologics, a US-based biosimilar maker, for
patent infringement in connection with a proposed biosimilar of Amgen's
innovator drug. Adello elected to skip the patent dance entirely and did not
provide any information to Amgen regarding its biosimilar or how it is
manufactured. Absent any information from Adello about its biosimilar,
Amgen asserted 17 patents against Adello blind. The patent dance protects
biosimilars from such frivolous litigation by severely limiting the scope. If
Adello would have danced, Amgen in all likelihood would have limited its suit
to a few patent assertions and this, in turn, would have provided more clarity
to the biosimilar company on how to best tackle the issue. Its also becoming
increasingly clear that despite the obvious downside of providing a potentially
litigant with ammunition by exchanging patent information, more biosimilar
companies are in fact participating in the dance, albeit by still keeping some
information proprietary thanks to the loose wording of the BPCI Act.

So why should you care?

All of this is important because Biocon (through its partner, Mylan) is at the
precipice of launching its rst wave of biosimilars in the developed markets.
On July 2018, Biocon launched its rst biosimilar, Fulphila in the U.S market

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 and in the process became the rst company to market a biosimilar for the
famous innovator drug Neulasta(Peg lgrastim). There was however very little
fanfare in the Indian stock markets but it's a noteworthy development for 2
reasons. First, there are only 4 biosimilars currently sold in the US market,
(although many others are awaiting approval). Second, in its 3rd quarter
earnings update, Mylan stated that the drug already (within 3 months) had an
8% market share in the pre- lled syringe segment which forms close to 50%
of the entire Peg lgrastim market. This is noteworthy because previous
biosimilar launches have had mixed reactions in the US. While some
biosimilars (Sandoz's Xarxio) have captured close to 35% of the US market
with as little as 15% discounts (over~ 3 years), others have failed to make any
dent in the market despite resorting to deep discounts. This is further
complicated by how an innovator company chooses to respond in the face of
biosimilar competition.

In some European countries the market size has shrunk by about 70% after the
launch of biosimilar owing to steep discounts and rebates

In a bid to protect its blockbuster innovator drug Remicade, J&J decided to

o er rebates to insurers and essentially locked out biosimilars from the
market. This move, while limiting entry for potential biosimilars
simultaneously reduces the market size and does not really bene t anybody.
Others have simply decided to litigate and bog down biosimilar companies
from even trying to market their product. But perhaps what has eluded most
investors is that despite Biocon's (Mylan) successful launch of Fulphila, it was
an at-risk launch, meaning Mylan is still involved in a patent dance with
Amgen over two patents claiming methods of purifying proteins used in
manufacturing biologics. Although Mylan and Amgen are trying to resolve the
litigation through court-sponsored mediation, this story is far from over and
that's why we had to tango with you as we struggled to explain the complex
dynamics of the Patent Dance.
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 Looking ahead

It's not just one drug. Biocon also became the rst company to receive
approval to market another drug, Trastuzumab, in the U.S. This time, instead
of engaging in expensive court proceedings, they decided to arrive at a
settlement and licensing agreement with the innovator company, thus
providing a clear pathway for a global launch of its biosimilar. The product
patent for the innovator drug expires in mid-2019 and you will likely see
Biocon launching its biosimilar version soon after, hopefully without a hitch.
So, all in all, it seems that the larger theme that's currently emerging in the
biosimilar space is that the revolution is here to stay and it's no longer a
matter of 'if' but 'when'. The success of most companies will perhaps be built
on the backs of strategic partnerships and alliances that companies build and
Biocon de nitely looks like a promising opportunity.

How promising? We don't know.

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 But the company has stated its goal loud and clear. 1 Billion Dollars in
Revenues from its Biosimilar division by 2025.

So Fellow reader, Where is your bet?

The company also recently entered into a strategic alliance with Sandoz, the
generic and biosimar branch of the drug major Novartis. The details of the deal
are still con dential

...

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Review & Analysis by Pawan, IIM Ahmedabad

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