Pfizer Inc.'s (NYSE:PFE) plans to launch its biosimilar to Johnson & Johnson's (NYSE:JNJ) multibillion-dollar rheumatoid arthritis drug Remicade before the end of 2016, but that's not the only biosimilar on its way that could reshape the drug market. Biosimilars of top-selling biologic drugs Neulasta, Enbrel, and Humira could all become available soon, too, and if they're successful, then investors will want to know more about how to profit from this emerging industry.

In this clip of The Motley Fool's Industry Focus: Healthcare podcast, healthcare analyst Kristine Harjes and contributor Todd Campbell explain what it is about biosimilars that makes them so intriguing.

A full transcript follows the video.

This podcast was recorded on Sept. 7, 2016.

Todd Campbell: There's two ways that drugs are made. They're either made through the process of chemical synthesis, where chemical bonds are broken or formed over and over, and that's fairly repeatable and very easy to duplicate. And then, there's the other way of making drugs, which is through a biological process, where those drugs are actually created or derived from living organisms. They can come from human cells, animals, microorganisms, whatever. Those are far more complex. You have the less complex small molecules and the more complex biologics. The way that I like to explain that is, think of small molecules as kind of the widget you produce at a factory. Once you know how to produce that widget in a factory in Detroit, you can produce the same exact widget in a factory in Mexico or in Asia. It's much harder to do that with biologic drugs because of the living organism aspect.

Kristine Harjes: Exactly. There are some other important differences that arise because of how much more intricate your biologic drugs are. For one thing, they're much more expensive to develop. That being said, this is an interesting part of the story when you get over to creating generic versions of them. We have this whole field of biosimilars that has only recently started to take some of the spotlight in the healthcare sphere. These biosimilars are essentially generic copycat versions of biologic drugs, but they're a whole different class than your normal small-molecule drugs that has been around forever. And cost is really important here, too. Because it's so much more expensive to make a biologic drug, it's also much more expensive to make a biosimilar drug. With that, you're getting less competition from these biosimilars.

Campbell: Right. Think about this in the '90s. small-molecule drugs, at the time, biologics really hadn't come onto the scene the way that small-molecule drugs had. The technology for biologics was really advanced in the '90s and 2000s. So, most of the drugs at the time were small-molecule drugs. Easily replicable, just like the widget. So, when patents were lost on those small-molecule drugs, generic drug makers were able to go out and open up a factory in India or somewhere else, and be able to create generic versions of those drugs that were, essentially, identical. Because of their ability to create those as identical drugs, they were able to leverage all of the research that had been done by the brand-name drug, as far as efficacy and safety and everything else, to be able to get to the market faster without all of those costs you mentioned that are associated with development.

Now, fast-forward to the biologic drugs, where so many more drugs, a larger proportion every year, that are in development are these more complex biologic drugs. And because when you flip the switch and the patents expire, and you want to try and start making copycats of them, because you can't copy them identically, you need to actually do efficacy and safety studies, which are pricey, before you can win FDA approval. And that has kept a lid and slowed the access to them here in the U.S.

Harjes: So, if you were a drugmaker, do you think you would prefer your lead drug to be a small-molecule drug that is maybe a little cheaper to make, but will be exposed to competition faster and at a cheaper price, or would you rather have it be a biologic with a little bit less competition risk?

Campbell: You'd argue that's one of the reasons that so many of the drugs that are in development now are still biologics, because they are more complex. They are harder to create. That could provide you with more insulation against competition down the road when patents finally do expire. You have to remember that biologic drugs, because of their complexity, are some of the most expensive and pricey drugs in the world.

Oftentimes, these drugs are used to treat very common and conditions, autoimmune disorders like rheumatoid arthritis, and those kinds of things. And yet, they carry these $50,000-60,000 per person in annual cost. So, these drugs rake in billions and billions of dollars per year. They're obviously very big moneymakers for drug companies. You have drugs like Humira, for example, pulling in $14 billion a year as, arguably, the planet's best-selling drug.

Harjes: But they're also extremely effective. That's another thing that's worth pointing out here. You mentioned rheumatoid arthritis. That disease was transformed from one in which you were just managing the symptoms to one in which you can actually shoot for disease remission, because of the capabilities of biologic drugs. So, we also have, on the other hand, psoriasis. You have Amgen's Enbrel and Johnson & Johnson's Stelara. These are two biologics that treat psoriasis. But most biologics cannot be taken in pill form. In fact, I don't think any of them can, that I can think of, anyway. That's because they're proteins. If you were to take them as a pill, it would be digested just like any other protein. So, they're largely infused or injected. But, if you can have a pill that treats the same indication, that's going to be preferable. You will get Celgene, which has a small-molecule drug called Otezla, that's taken via pill, and that's going to steal market share.

Campbell: Yeah, it absolutely will and it is. Projections for Otezla are for it to be a multibillion-dollar drug, and sales are growing at triple-digit annual year-over-year growth rates. Without a doubt, people would prefer to take a pill, then have to get the drug infused or injected. That being said, there's still a massive market for these drugs, and many of them are coming off patent. Pfizer estimates that $100 billion in branded sales will come off patent in the next five to 10 years for biologic drugs. As a result, they spent $17 billion last year buying Hospira so that they could become one of the leaders in this burgeoning or emerging biosimilars market.

Even if you start losing some amount of sales to these other small-molecule drugs that are coming on the market, there's still a tremendous opportunity for biosimilar drug makers to go out and be able to hopefully win over FDA support. It's starting to happen. We've had a few different drugs, now, win FDA approval. We have a biosimilar to the multiple sclerosis drug Copaxone that's won approval. We have a biosimilar to the anemia drug Neupogen that's won approval. And we've also seen a drug from Pfizer that is a biosimilar of Johnson & Johnson's top-selling Remicade win approval. It hasn't launched yet. So, there are a lot of approvals that are starting to flood in, and that has some people thinking that this could be a $20 billion global market in the next five years.

Harjes: So, as an investor looking at this blossoming, early-stage market, what do you think is the best way to play it?

Campbell: There's a few different interesting ways to play it. I guess I'm not sure which one is necessarily the best. You could go pure play with a company like Momenta, which is a relatively small company that's working on biosimilar drugs -- the symbol there is MNTA -- but you're exposing yourself to a lot more risk. You could go the other side of the coin, you could say, how about Pfizer, $50 billion in sales, and global distribution, and with Hospira now, potentially a leadership play in biosimilars. That's an option. Then, you also have to consider that a lot of the companies that are working on biosimilars are actually the producers of these biologics in the first place. You've got companies like Amgen and Biogen that are also developing biosimilars, because, obviously, they have the know-how, over the last 20 years, of being able to create these drugs relatively efficiently. Those companies are going to be involved in it, too.
