1. Biosimilars: A New Wave of Generic Drugs
Thus far in the 21st
century, the rise of biologic drugs has been a major theme in the
global pharmaceutical industry. According to IMS Health, global biologic sales
increased from nearly $46 billion in 2002 to $160 billion in 2012 with expected sales
in 2017 of $221 billion (20% of total global pharmaceuticals sales. The rise of
biologics has coincided with increasing healthcare costs on governments worldwide.
On average, biologic drugs are 22 times more expensive than traditional drugs, and it
is expected that biologics will account for 50% of US prescription drug
expenditures by 2018. As a result, regulatory authorities are focused on contain
spiraling healthcare costs and capturing a “generic drug” savings premium, and have
started laying the groundwork for generic biologics, generally called biosimilars.
Unlike Europe and Japan, the US only adopted universal healthcare (via the
Affordable Care Act, also known as Obamacare) in 2010, which explains the delay in
establishing a regulatory pathway for approvals of biosimilars in the US. With the
major US presidential candidates of both political parties publicly calling for
controlling spiraling drug prices, biosimilar cost savings represents a very simple way
to cut costs. According to various estimates, healthcare savings from the use of
biosimilars range from $25 billion to $250 billion over the period 2014-2024.
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As a result, biosimilars have become one of the fastest-growing segments of the global
pharmaceutical sector. According to allied research projections, global sales of
biosimilars are conservatively expected to rise from $2.5 billion in 2014 to $26.5
billion by 2020 reflecting an annualized growth rate of over 48%. A key trigger for
the growth biosimilars is expected to come from the expiration of patent protection for
blockbuster biologic drugs. According to estimates by EvaluatePharma, biologics with
aggregate US sales of $79 billion will lose patent protection between 2013 and 2018.

2. The European Experience
Although a significant majority of EU members do not allow for the interchangeability
of biosimilars with original biologics, biosimilars have still experienced reasonable
success in Europe. If one categorizes biologics into broad categories, biosimilars have
remained limited to EPO and GSCF products, but have still managed to capture nearly
25% of the EPO and 50% of GCSF markets, by monthly volume, within the first seven
years of launch. Overall, the adoption of biosimilars has been much slower than
generics, which typically capture 90% of volumes with a few months of introduction.
This can be attributed to the fact that biosimilars are typically sold at discounts of
15%-25% vs. biologics, compared to an average discount of 40% for traditional
generics vs. their brand-name competition, as well as restrictions in the EU regarding
the use of biosimilars as direct replacements for the original biologics.
There does seem to be direct relationship between biosimilar adoption rates and
pricing, as evidenced by the success of the biosimilar drug Remsina in the EU. At a
global level Remsina, developed by Celltrion (068270: KOSDAQ), became the first
approved biosimilar MAB when it was approved by the European Medicines Agency
(the EU equivalent of the FDA in the US) for sale in the EU. Remsina currently sells
at nearly a 45% discount (70% in the case of some Nordic countries) to its brand-name
biologic competitor, Remicade, which has allowed it to capture big hospital drug

3. mandates in Europe. Many European governments have commissioned studies
focused on promoting the biosimilar replacement of Remicade among physicians,
payers and patients. In fact, the impact of discounted pricing can be gauged by the fact
that according to Merck & Co. (MRK), which has international marketing rights for
Remicade, international sales for Remicade dropped by nearly 25% in 2015 on a YoY
basis. According to analyst estimates, Remicade sales should keep dropping, and could
drop 50% below 2014 levels by the end of 2017.
Biosimilars in the US
The approval of biosimilars in the US could have a significant impact on industry
dynamics as, unlike in the EU, US guidelines allow for the interchangeability of
biosimilars with the original biologic. In addition, as the US currently accounts for
more than 50% of biologic usage, large numbers of biosimilar approvals in the US is
expected to create strong opportunities over the next 5 years. As an example of this,
Zarxio, launched by Novartis (NVS) in September 2015, became the first ever
biosimilar to be launched in the US, and is selling at a 15% discount to its biologic
competitor, Neupogen. Together with Granix (sold by Teva (TEVA) as a biosimilar
to Neupogen), these two biosimilars had already taken 25% of Neupogen’s market
share in terms of volume by the end of 2015.
There also appears to be strong interest in the adoption of low-cost biosimilars by a
key group in the US: doctors. In a recent survey of 150 doctors by InCrowd, 83%
indicated a preference for a biosimilar in the event of a 25% discount to the biologic,
and 33% indicated a preference for a biosimilar even if the discount was just 5%.
Despite strong interest and favorable political support in the US from presidential
candidates, regulatory guidelines still lack clarity in terms of the biosimilar approval
process. For example, Zarxio was approved by the FDA, but is still not
interchangeable with its biologic reference drug. That said, it is expected that the
biosimilar Remicade will be approved by the FDA this year and that the process will
become clearer. If the FDA goes along these expectations, it would not only make
biosimilars more mainstream and bring clarity to regulatory guidelines, but could also
be extremely favorable to the biosimilar drug market due to the sheer size of the US
drug market.
How to Invest in Biosimilars
The biosimilar drug segment is still growing and evolving, and there is no investable
product that currently provides pure-play exposure to the space. That said, leveraging
its extensive research into the space, Indxx has developed the Indxx Global Generics

4. & New Pharma Index to provide access to the companies in this industry. The index
includes exchange-listed companies, on a global basis, that derive a significant
proportion of their revenues (or that have the potential to derive a significant
proportion of their revenues) from the generic drug industry, or that have a primary
business focus on the generic drug industry. The products of these companies are
pharmaceuticals that are identical, or bioequivalent in the dosage form, safety,
strength, quality and intended usage to brand name pharmaceuticals.
The index currently provides significant exposure to the biosimilar space, and pure-
play biosimilar drug companies are nearly 15% of the total index weight. In addition,
most generic drug companies (which are also included in the index) are focused on
biosimilars as their next growth opportunity. The index is fairly representative of the
global biosimilar opportunity, with nearly 10% of the index weight allocated to
biosimilar companies based in South Korea, Japan, Taiwan and India. 14 of the 20
biosimilar companies in the index belong to these countries.
As of December 31, 2015, the index included 78 securities of companies with a
minimum market capitalization of $1 billion and a weighted average market
capitalization of nearly $14 billion.