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Entrepreneurs are all about disruption. As crowded as many industries have become with thousands of startups competing for market share, one area still has a curiously high ratio of opportunity to competitors: biotechnology. Even more interesting, the advent of biosimilars and the wave of patents on their production set to expire before 2020 — worth about $67 billion — indicate that biotech startups are about to have a lot more room to expand.
What Are Biosimilars?
Biosimilars are price-friendly versions of biologics — drugs used to treat a range of diseases, such as cancer, arthritis, and diabetes. Most nonbiologic drugs have generic versions that sell for a fraction of the brand-name price, but the complexity (and patents) of biologics have prevented off-brand versions from entering the market until now.
Biosimilars are not generic versions of biologics in the strictest sense, however. Because biologics are composed of actual living cells, they are orders of magnitude more complex than standard drugs and are, therefore, much more difficult to copy. Biosimilars are like biologics and work the same way, but they are not true generics as we currently understand them.
This has naturally led to one of biosimilars’ most daunting obstacles in America: approval from the Food and Drug Administration. While biosimilars have been gaining traction overseas the past few years, the strictness of FDA standards prevented biosimilars from entering the US until last March, when the first American biosimilar earned approval.
What Does This Mean for Startups?
Biotech startups are licking their chops to have a go at the soon-to-expire patents. When the intellectual property behind biosimilars releases to the public, startups will quickly descend into a free-for-all to see which business strategy comes out on top.
Poorly run (and poorly funded) startups will fail quickly as the heavy hitters use their funding advantage to gain market share and rake in immense profits. The rapid growth of biosimilar products in China is a testament to the volatility and potential of this biotech submarket.
What Biotech Investors Need to Know
Before diving into the biotech industry, there are a few things investors must keep in mind:
- The biotech market is preparing for a boom. But only a few startups will reap the benefits, so investors must choose wisely or risk losing not only money, but also the opportunity to get a piece of what promises to be a very lucrative pie.
- Startups founded solely on biosimilars will take on enormous risks. The biosimilars market is volatile, so focusing only on biosimilars is risky for startups. The majority that pursue this strategy will not succeed for long. The emerging biosimilars market is perfect for short-term business development, but these new offerings alone do not make a good long-term plan. The biotech startups that do succeed will not stake their companies on creating biosimilars but will add the new products to their lines as one of multiple options.
- To succeed, startups must attack the market gap quickly and have robust processes. The companies that successfully incorporate biosimilars will outpace competitors because of two distinct advantages. First, the high price of biosimilar production will limit the scope of what smaller companies will be able to accomplish, leading to higher profit margins for companies that can attack the upcoming market gap quickly. Second, the highly technical, highly scrutinized manufacturing process for biosimilars will eliminate companies that make a mistake in production, setting back their timelines and opening the door for companies with more robust manufacturing and testing processes to succeed.
Investors must be cautious in choosing which startups to fund, but backing the right startups as these patents expire will prove to be one of the most lucrative biotech investments in decades. Selecting the right one will be a challenge, but savvy investors who identify startups that are ready to include biosimilars — but not exclude other pharmacological products — will eventually find themselves on top of a very tall mountain.