Is This How Drugmakers Will Kill Biosimilars?

Markets Motley Fool

Pfizer (NYSE: PFE) has filed a lawsuit accusing Johnson & Johnson (NYSE: JNJ) of strong-arming insurers into excluding its Remicade biosimilar, Inflectra, from their reimbursement lists. If drugmakers start to employ this strategy widely, it could have big implications on the peak market potential for biosimilars industrywide.

Continue Reading Below

In this clip from the Motley Fool's Industry Focus: Healthcare podcast, analyst Michael Douglass and contributor Todd Campbell offer some insights into Pfizer's dispute with Johnson & Johnson, and discuss more broadly what the suit may mean to investors.

A full transcript follows the video.

10 stocks we like better than Wal-Mart
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, the Motley Fool Stock Advisor, has tripled the market.* 

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Wal-Mart wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

Continue Reading Below

*Stock Advisor returns as of September 5, 2017
The author(s) may have a position in any stocks mentioned.


This video was recorded on Sept. 27, 2017.

Michael Douglass: But let's start with some background. Pfizer got into biologics, which are these complex medicines created in living organisms, they got into biosimilars specifically. That's this idea of getting something that's similar to the original biologic, but not precisely the same because these are living organisms -- they can't be precisely the same. They got into this in a really big way with the purchase of Hospira in 2015.

Todd Campbell: Yeah. I think, we have some definitions, we'll try to make sure that, if you're a new listener, we try to keep you up to speed on it. Michael already mentioned the fact that you've got biologics, they're complex medicines that are created in living organisms. They're not easily copied. They're also some of the most expensive, top-selling medicines in the world. Biotech companies invest a lot of money in developing biologics. One of the reasons was, because of their complexity, they couldn't be easily replicated. So, their thinking was, if they can't replicate it exactly, maybe I have more protection on my sales that stretches beyond the expiration of the patents. Well, maybe not. Once Obamacare passed, it included provisions that allowed for an FDA pathway to approval for biologics that were similar to but not exact replicas of these reference drugs -- so, essentially creating a marketplace for biosimilars, drugs that can produce the same outcomes with the same safety, but they're not exact replicas. Pfizer came to the forefront of the research into biosimilars with its $17 billion acquisition of Hospira back in 2015, once it knew it had that pathway available to it to be able to get biosimilars to the markets, compete against these biologics for all that money that was at stake.

Douglass: Right. And a little bit more background on biologics and biosimilars; as Todd mentioned, there really hasn't been a regulatory pathway for biosimilars until very recently in the United States. However, there has been one in Europe for longer. So, essentially what happens is, when small-molecule drugs, when non-biologic drugs go generic, usually generic drug companies will come in, they'll hack 80% to 90% off the price, and they will sell the generics. Then the main company will either have to figure out whether they're going to exit the market or try to compete based on branding or lower prices, all of that. With biologics and biosimilars, because it's so much more difficult to create a biosimilar for that reference drug that's similar, although not precisely the same, usually the markdown is something more like 10% to 30%, is what we've seen in Europe. So, the expectation is that comes to the United States.

Campbell: Let me jump in for a second and provide listeners with two quick numbers. I've read studies that say that to develop a typical, traditional, small-molecule generic drug, it may cost someone $10 million to do the research and get that to the market. On biosimilars, it could be $100 million to $200 million.

Douglass: Right. So, that's why that markdown is a lot less. Although, it's still a markdown. It's still savings for the health system.

Campbell: Absolutely. And the idea was, just like with traditional generics, if we can undercut on pricing, once those patents expire on the brand-name biologic, then free market takes over, and demand will flow to the provider of the good with the lowest price.

Douglass: Right, basic economics.

Campbell: However, maybe that's not happening.

Douglass: Yeah, and that's what's interesting, and that's what's at the core of Pfizer's lawsuit against Johnson & Johnson, which they filed on Sept. 20, so a week before we filmed today. Essentially, there have been seven biosimilars approved in the United States. The second one approved was Pfizer's Inflectra, which is a biosimilar to J&J's Remicade. Now, Remicade is an autoimmune disease drug: It's for rheumatoid arthritis, Crohn's disease, plaque psoriasis, a lot of those autoimmune diseases. In 2016, it had $4.8 billion in U.S. sales. That's a lot.

Campbell: Yeah. And it's not just a lot in absolute terms. It's a lot in terms of Johnson & Johnson's total sales, too.

Douglass: Right, 19% of pharma revenue, 9% of revenue company-wide. So, it's a big drug for J&J.

Campbell: Unquestionably, the stakes were high, right?

Douglass: Right. So, what's happened is, Inflectra launched last November after the patents expired, and J&J's legal strategy to delay things ran out of options. Yet even though it's priced about 10% below Remicade, it hasn't made that much headway. It's only accounting for 4% of Remicade scripts.

Campbell: Yeah, and sales last quarter were only about $23 million in the United States. To put that into perspective, Remicade sales last quarter in the U.S. were over $1 billion.

Douglass: Right.

Campbell: So, is the free market at work? And if it isn't, why?

Douglass: Right. So, the interesting thing is, Pfizer is going after J&J's biosimilar readiness plan strategy, which basically involves cutting deals with insurers and Remicade prescribers to exclude Inflectra and other Remicade biosimilars from their formularies and reimbursement.

Campbell: I tell you, Michael, on last week's show, Kristine and I talked about patents, and the way that drug makers can use patents to insulate themselves against the threat of generic upstarts. At the time, it didn't even dawn on me to think about the fact that these companies could do something ... nefarious? I don't know, but, redo their contracts in such a way that it would force an insurer's hands to say, "We're not going to even cover this drug because we don't want to jeopardize our relationship with J&J."

Douglass: Right. So, what's interesting about J&J's strategy is, what they basically said is, J&J offers insurers rebates on Remicade. A lot of folks don't pay full retail price on drugs. And they've tied that to, "Only if you exclude Inflectra." Now, with most patients, about 70% of Remicade users being satisfied with the drug, doctors probably don't want to switch them off anyway unless the insurer forces them to. So what they've essentially done is say, "Yeah, sure, you can have Inflectra on your formulary, but if you do, Remicade is going to cost you, the insurer, a ton more money. It's going to more than balance off the cost savings of having Inflectra on your formulary, and doctors won't want to switch it anyway, so you're just going to tick everybody off and probably lose money in the process."

Campbell: And it's obviously been very successful. Over two-thirds of the covered lives that are covered by insurance plans, commercial insurance plans, so private citizens, have embraced these contracts with J&J. And it wasn't even that they said, "We're going to tie the rebates only on Remicade to your excluding it." They tied it to other drugs in their pipeline, too. J&J is a Goliath. You're talking about tens of billions of dollars in pharmaceutical sales over any given six-month period of time. And those rebates can total in the tens of millions of dollars to some of these insurers. So, you look at it and say, "Yeah, Inflectra is 10% cheaper. But how long would it take me to get to scale in the Inflectra patient population to offset this lost revenue from the rebates?"

Douglass: Right. It's interesting, because we're talking about the U.S. specifically. When you go abroad, Merck sells Remicade for J&J. And Remicade sales are down 40% year over year because of the increase in all these biosimilars. So, this isn't an issue internationally, it's specifically in the United States where this pricing and exclusionary formulary tactic is being used, and to great effect for J&J.

Campbell: What's interesting, too, about that -- you just made me think of something here. I think investors have to recognize that there are very, very different markets for biosimilars between the rest of the developed world and the United States. And I think one of the things that you have to recognize is that in other countries, biosimilars can be substituted much more easily for the brand-name drug than they can be in the United States. In the United States, because they consider the differences of biosimilars to be more significant than these other nations, the doctor has to specifically write the script for that. It's not like you're going to go to the pharmacy with a Lipitor script and they're going to automatically fill it with the cheap $4 generic. This is something that the doctors have to prescribe. And what makes it even more complex is, these drugs in the U.S. are infusion-based drugs, which means that they are dosed to patients in the provider's facility. That means the providers have to pre-buy these drugs, and then file a claim with the insurer afterwards for reimbursement. Now, I don't know about you, Michael, but if I'm running a company, and I have to put out a ton of money for these very expensive drugs, and I'm not sure I can get a reimbursement on Inflectra, but I absolutely know I can get reimbursed on Remicade, which drug am I going to stock in my facility?

Douglass: Particularly, if I also have patients who are generally saying that they're very pleased with the Remicade drug, and, frankly, there's a lot of confusion about biosimilars still. It's still a very new development here in the United States. It's pretty darn clear what you're going to do there.

Campbell: Pfizer went back to these insurers -- listeners, if you get a chance, go out and get a hand on the complaint so you can read it, and then go out and search for Johnson & Johnson's response to it. Two very different stories being told there, I'll let you come to the conclusion on which one you believe to be correct.

Douglass: Even one better: Email us at, we'll send them to you. Again, that's We've got them, if you don't want to spend time Googling around, I get that. Just to drop us a note and we'll send them along.

Campbell: Awesome. They're extremely interesting reads. And this has major implications on biotech and healthcare spending overall, and on total drug spending, and the path and trajectory of prices over time. Because the other thing that Pfizer says in their complaint is that not only have they denied us access to compete fairly in the market through these tactics, but at the same time, they're raising their price on Remicade. So, the price of Remicade has climbed, despite a lower-cost provider entering the market.

Douglass: Right.

Campbell: So, there's definitely a lot at stake for biosimilars. I think investors shouldn't assume this tactic is going to successfully keep all biosimilars from gaining traction. I think, you go back and look at what happened with small-molecule generics, it took a while for them to reach the tipping point of widespread use. I think, about 10 or 12 years ago, they represented about 50% of prescription volume. Today, they represent closer to 90% of prescription volume. There's going to be some bumps along the way here as these market players figure out how to navigate the rules here in the United States. I still think this is a very big market opportunity. I think investors need to be paying particular attention to it, because there's a lot of money that can be made for investors by owning biosimilar companies like Pfizer. But you're going to want to watch this and see what happens with the court system -- if they weigh in, how they weigh in.

Michael Douglass owns shares of Johnson & Johnson. Todd Campbell owns shares of Pfizer. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.