La lucha por la tierra continúa

The inevitable rise of biosimilars and its equally inexorable demise

Having predicted the inevitable rise of biosimilars worldwide, we end this report by charting the course of what we see as its equally inexorable demise. Growth of the biosimilar industry will end abruptly near 2020, for the very simple reason that beyond Avastin in 2019 (US/EU), patent expiry of blockbuster biologics comes to an end. There are other drugs, such as Vectibix, Lucentis, Actemra, Simponi, but their sales potential is limited. Many competitors will have entered the market, making price erosion

increasingly common. The malaise that we see earlier afflicting the oral small molecule generics in 2015-2020 will also come to haunt biosimilars by 2020. A decade is a very short time in the pharmaceutical industry: it is basically the time required between IND and approval of exactly one innovative molecule. It is our opinion that the long-term cash flow, and with it, the actual enterprise value of Celltrion will depend heavily on the actions taken by management within the next five years.

Fig. 45: Three phases of the biosimilar industry: Phase one (2010-16), Phase two (2016-20), Phase three (2020-)

Source: Nomura

In the end, it is always innovation

All industries based on emulation are unsustainable because there will always be new entrants. The only path forward for Celltrion or any other biosimilar player is to find a path toward innovation. We believe that Celltrion already has the right long-term view. The company after all was founded ultimately to develop innovative therapeutics. Biosimilars are merely a source of cash flow that can be reinvested in future R&D.

2012

2016

2020

Biosimilar Phase One

(2010～16)

Early entrant advantage

Biosimilar Phase Two 

(2016～2020)：

Competitive entries

Biobetter competition

2016 

Turning 

Point

Biosimilars

Biobetters?

2020 

Turning 

Point

Competitive Entry: Pfizer, Merck, 

Amgen, Sandoz, Teva, Samsung, 

Fuji, etc.

Biosimilar Phase Three 

(2020～)：

Dwindling pipeline

Fierce price erosion

Innovation

Dwindling Pipeline and 

Increasing Price Competition

So what should Celltrion do? Five pointers

To maximize the long-term value, we believe that Celltrion should take the following actions:

• Learning from big pharma’s mistake: The ever-dwindling returns of in-house R&D over the years is a tired subject in large-cap pharmaceutical companies in

US/Europe/Japan. Korean pharmaceutical companies, however, are still fresh to pharmaceutical R&D. They already exhibit all the same warning signals of their ill-fated predecessors: an overreliance on in-house R&D. We believe that Celltrion should learn from the mistakes made by their larger peers and aggressively in-license/acquire technologies rather than attempt to invent everything themselves. In this view, a sure sign of worsening returns is a sustained large increase in R&D personnel without a clear focus of therapeutic area, or direction of R&D. We believe that this is unlikely at the moment, since Celltrion is still preoccupied with biosimilars

• Be global: Because of its highly regulated nature, pharmaceutical industries tend to be more domestic in mindset than other industries such as consumer electronics or automobiles. Asian pharmaceutical companies are especially prone to navel-gazing complacency. For example, because Japan had a large pharmaceutical market and saw continuous approvals of small-molecule blockbusters, Japanese companies failed to see the rise of the biopharmaceutical market. Now Japan is far behind US/Europe; Japan currently has just two companies with a successful history of innovative biologics (Kyowa Hakko Kirin and Chugai), and two biologic CMOs of middling size. Although accessing Korean biotechnology is good, Celltrion should look far and wide for investment very early on.

• Investing and in-licensing novel methods of antibody production: The biggest long-term threat to bioreactor-based antibody production is the rise of novel antibody production technology. Though antibody production from bio-engineered cattle, mice, chickens and vegetables has long been studied with little success, there is a chance that within the next 10 years a successful alternative to bioreactor-based antibody production might emerge. Investment into transgenic animal/plant production is a plus. • Be careful with bio-betters: As we discuss in Appendix III, most brand-name

biologics companies’ biosimilar defense strategies involve the development of next- generation antibody therapeutics. Some (Roche’s TDM-1 and Biogen-Idec/Roche’s GA-101) are bio-betters in the sense that they are slightly modified antibodies. As is also discussed in the same section, none shows significant improvement. If

Roche/Genentech with 20+ years of biological experience is not able to create viable bio-betters, biosimilar companies may have even more issues tackling the problem. • In the end there is always a big tank: The most important factor in the long term for

Celltrion is that the company has a very large manufacturing capacity, possibly as large as 240,000L in 2013-14F. If biosimilar pipelines dwindle and innovation stalls, the company can always opt for the CMO option and make antibodies for other companies.

Appendix I: Market dynamics and