Pfizer and Johnson & Johnson's Brewing Brawl Gets Real

Pfizer (NYSE: PFE) took direct aim at Johnson & Johnson (NYSE: JNJ) last year when it won FDA approval for Inflectra, a biosimilar to Johnson & Johnson's multi-billion dollar per year autoimmune disease drug, Remicade.

Remicade's market size made Inflectra's approval arguably the most significant approval yet for biosimilars, however, Inflectra's sales have been growing more slowly than expected, and based on a suit just filed by Pfizer, it's Johnson & Johnson that's to blame for its sluggish start.

What's at stake

Remicade is prescribed to patients with a variety of autoimmune diseases, including rheumatoid arthritis, colitis, and Crohn's disease. It's also Johnson & Johnson's best-selling drug. Remicade generated $6.9 billion in revenue for the company last year, including $4.8 billion in the United States, and that means it represented 20% and 14%, respectively, of Johnson & Johnson's total pharmaceutical revenue in 2016.

Undeniably, Remicade's an important drug to Johnson & Johnson's financials, and unfortunately for investors, that's a problem because patents protecting Remicade from biosimilars have expired, clearing the way for competitors to launch copy-cats in Europe and, more recently, America.

Pfizer's big biosimilar bet

Biologics are made in living organisms and that makes them incredibly complex to copy. In the past, no pathway existed for drugmakers to develop biosimilars that work similarly to but are inexact copies of biologics. The passage of Obamacare, however, changed that because it included provisions mandating that the FDA come up with a set of rules allowing for biosimilars to make it to market.

Since the FDA unveiled those rules, there's been a flood of research into biosimilars, and that research is starting to bear fruit in the form of FDA approved drugs, including Inflectra.

Pfizer got its hands on Inflectra in its $17 billion acquisition of specialty drug company, Hospira, in 2015. The deal instantly transformed Pfizer into a major biosimilars player with a half dozen biosimilars in development, and, at the time, Pfizer explained its reason for buying Hospira in part by estimating that the biosimilars market could be worth $20 billion by 2020 because of expiring patents on biologics.

Angling for market share

Unlike traditional generic drugs that are easy to mass produce, biosimilars are complex and expensive drugs to make. As a result, they're not launching with prices that undercut brand-name drugs as deeply as traditional generic drugs do. Nevertheless, Inflectra is still cheaper than Remicade and, therefore, its widespread use could save the healthcare system a lot of money.

However, Inflectra first needs to be included on private health insurance drug formularies, and, so far, winning inclusion on these reimbursement formularies hasn't been easy. Despite average selling prices that are 10% lower than Remicade, over 70% of lives covered by private insurance don't have access to Inflectra.

According to Pfizer, Johnson & Johnson's anticompetitive tactics are the reason why it's not getting greater traction with insurers. In a complaint filed with the U.S. District Court, Pfizer alleges Johnson & Johnson has used its might with payers to compel them to ink contracts excluding Inflectra from reimbursement formularies, except under certain circumstances.

Pfizer maintains that Johnson & Johnson was able to negotiate these contracts by threatening to discontinue rebates to insurers on refills of Remicade prescriptions unless insurers gave Inflectra a cold shoulder. Since doctors aren't likely to shift patients off Remicade if it's working, most of Inflectra's demand early on is from newly diagnosed patients. Because new patients represent a smaller patient population than existing Remicade users, any cost-savings associated with Inflectra's use could be more than offset by higher costs if Remicade rebates were eliminated.

Because of the obstacles to access created by insurers because of Johnson & Johnson's efforts, Inflectra's sales totaled just $94 million last quarter, including sales of only $23 million in the United States. That's a far cry from Remicade's recent sales, which remained stubbornly high at $1 billion last quarter, despite the competition.

Fool-worthy thoughts

It's anyone's guess how this suit shakes out, but it could have long-lasting implications on the entire biosimilar industry, which is still in its infancy. If biosimilars continue to be reimbursed less-favorably than reference drugs, their peak sales could wind up being a fraction of what they might be otherwise.

That would be a disappointment for biosimilar drugmakers, payers, and patients eager for competition to help drive down drug costs. In Europe, where biosimilars have enjoyed more widespread support by payers, they're having a much bigger positive impact on drug spending. For example, Merck & Co. (NYSE: MRK) sells Remicade in Europe and its sales have fallen significantly following the launch of Remicade biosimilars. In the second quarter, Merck & Co. reported $208 million in Remicade sales, down nearly 40% year over year. Only three years ago, Merck & Co. hauled in $607 million in Remicade sales in Q2.

Clearly, there's a lot at stake for these companies. Johnson & Johnson is fighting tooth and nail to prevent a steep drop in Remicade revenue, while Pfizer needs Inflectra to succeed to help justify the money it spent buying Hospira and developing biosimilars. Though it may be a while before the court weighs in on this suit, I think the court of public opinion will award round one of this match to Pfizer.

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Todd Campbell owns shares of Pfizer. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.