Overlook this Sector and It Could Cost You


When President Obama's healthcare reform bill passed in late March 2010, name- brand pharmaceutical companies immediately scrambled. The timing could not have been worse. Most branded pharmaceutical companies were already nervous about the lack of branded drugs in the pipeline.

They were all privy to the fact that during 2011 and 2012 several best-selling, brand name drugs were losing their patent protection. They knew several of the industry's cash cows, including Lipitor, Plavix and Seroquel were coming off patents over the next two years.

So, the announcement of an upcoming healthcare reform coupled with a loss of patents led to the inevitable - a sharp increase in the price of brand name drugs.

Brand pharmaceutical companies know that the upcoming healthcare reform will severely eat away at their profits - so they are trying to get as much profit out of their current pipeline as possible. Blue Shield of California Vice President Nancy Stalker agrees, "...because of the increased number of drugs going generic, they profit more from the brand drugs on the market by increasing prices.'

Generic drugs already make up 70 percent of prescriptions in the U.S., but that percentage will ultimately increase when healthcare reform begins to roll out. The government will place significant cost pressures on pharmaceutical companies to keep prices low. Lower priced generics mean lower cost to government programs, private insurance companies and most importantly, the patients.

There is no doubt that generic drugmakers will thrive in the upcoming cost-driven environment.

But there is one area of generics that will thrive more than any other - biosimilars.

Biosimilars are the generic equivalent of brand-name biologics. Biologics are brand name products created by biologic processes, rather than being chemically synthesized . Biologics are used heavily in the treatment for various cancers, rheumatoid arthritis and adverse cardiovascular conditions.

For the first time in history, Congress has passed legislation through the new healthcare reform, more specifically the Patient and Protection and Affordable Care Act that will allow generic drug companies to work towards creating an equivalent to its branded biologic.

Prior to the healthcare reform, branded biologics, manufactured by the likes of Amgen (Nasdaq: AMGN) , etc. had 20 year, data exclusivity patent protection.

Now, under the new legislation, brand name products will only have 12 years of data exclusivity - this will certainly speed up the approval process of creating biosimilars.

The new law will  bring in more competition as well and most importantly, create a new multibillion market. There are very few players in the biosimilar arena. And, biologics and their biosimilars offer some of the highest product margins.

But there are a few well-established small cap generic drugmakers that will have an overwhelming advantage in this new market.

These are companies that could be big winners in the biosimilar space going forward.

Before I get to specific names I want to delve further into the financials of biosimilars and show you how big the potential is for the future of this brand new market in the United States.

My space is limited, and with so much more to discuss I will save it for Friday's edition of Small Cap Investor Daily . Believe me, this is one that you will not want to miss.

Stay tuned!

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Stocks

Referenced Stocks: AMGN

Wyatt Investment Research

Wyatt Investment Research

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