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The Biosimilar Threat: Which Companies Are at Risk?

Karen Andersen, CFA

Karen Anderson: Biotech stocks have been among the best-performing stocks since 2011, driven by faster and more successful drug development, the FDA's efforts to expedite approvals, and the fact that larger drug firms need to acquire biotechs to boost their growth as they face generic competition to their own blockbusters. But generics of the biotech industry called biosimilars are just beginning to receive approval in the U.S. Patents on these biologics are beginning to expire, and we now have a regulatory pathway for approval of biosimilars. This does put pressure on the moats of both Big Biotech and Big Pharma firms.

There are really three firms that we think will be hit hardest by biosimilars. They all have more than 40% of their sales coming from products that are among the top 10 targets for biosimilar makers. But we have different views on the valuations of these three firms.

First, wide-moat Amgen (AMGN) looks the most undervalued. We think the firm's very strong cost-cutting efforts and their advancing pipeline more than offset biosimilar pressure. Amgen is positioned to be one of the top three biosimilar players globally as well.

Second, wide-moat Roche (RHHBY) also looks undervalued. The firm has a very strong strategy for replacing sales from their older cancer therapies like Rituxan and Herceptin with more innovative ones.

Finally, we think narrow-moat AbbVie looks overvalued and the most exposed. They have one drug, Humira, which accounts for 60% of the firm's sales. Many firms, including Amgen, are vying to bring biosimilar Humira to market.