For sufferers of Rheumatoid Arthritis, Crohn’s Disease, psoriasis, colitis and other auto-immune diseases, AbbVie, Inc.’s (Nasdaq: ABBV) Humira has been an utter godsend. The drug has proven so successful in reducing inflammation associated with these maladies that it is now the world’s third-largest best-seller.

#-ad_banner-#But success doesn’t come cheap. AbbVie charges thousands per dose, which can have a costly impact on insurers and their clients’ insurance premiums.

AbbVie, which makes more than $12 billion a year from sales of Humira, is able to charge so much for a simple reason — at least in the United States: It has limited competition.

Humira is in a class of drugs, known as biologics, which are drugs that can’t be simply synthesized in a lab, but instead must be genetically engineered with living cells.

The Food & Drug Administration (FDA) has always known that such biologic drugs are hard to engineer and as a result, has historically kept the door closed to generic competition. When the FDA established the ground rules for bioloigic production, it was a niche market. Such drugs now account for roughly 30% of the entire U.S. pharmaceutical industry.

In light of the meteoric growth for these pricey drugs, the FDA has had a change of heart. A number of rival drug companies have made the case they can effectively produce these drugs in a generic way, known as “bio-similars.” And the FDA, cognizant of the fact that drugs like Humira are wreaking havoc with the economics of our nation’s healthcare system, are set to open the floodgates. In coming years, look for bio-similars to grab a huge slice of the market for genetically-engineered drugs.

How big a market opportunity are we talking about? Analysts at Citigroup predict that companies such as AbbVie will lose a cumulative $360 billion in revenue over the next 10 years. They figure that generic bio-similar drug makers will generate roughly $110 billion in sales to fill that void. The represents a net savings of $250 billion for our nation’s healthcare system and a profound hole in the income statement for firms like AbbVie, which have seen profits swell from high-margin drugs such as Humira.

Although the drug industry has been bracing for this massive change for several years, the action is only now heating up. In early January 2015, a group of FDA advisors unanimously voted in favor of a bio-smiliar application by Novartis AG (NYSE: NVS). If the FDA gives full approval, as appears increasingly likely, then the company may take a hefty slice of the $1.4 billion market for Amgen, Inc.’s (Nasdaq: AMGN) Neupogen, which helps boost white blood cell counts.

It helps that Novartis has already proven its ability to produce a generic form of Neupogen for many other global markets. Indeed European drug regulators have been approving biosimilar drug applications since 2006, and there are now more than a dozen bio-similar versions of AbbVie’s Humira being sold in other markets as well. The growing global market appears to be paving the way for the FDA to finally act here in the United States. Once Novartis gets the green light, expect a wave of further bio-similar applications to land on the FDA’s doorstep.

Will Physicians Make The Switch?
Doctors that have seen their patients greatly benefit from drugs such as Humira and Neupogen may be reluctant to switch to new drugs. But they likely won’t have much of a choice. Pharmacy benefit managers (PBMs) such as Express Scripts Holding Co. (Nasdaq: ESRX) and CVS Health Corp. (NYSE: CVS) wield a tremendous amount of influence these days and are expected to apply a great deal of pressure on doctors to pursue these cost-saving alternatives.

The U.S. government, through Medicare and Medicaid, is expected to take a similar stance. $250 billion in economy-wide savings is just too large a figure to ignore. What kind of prices will these bio-similars carry? The generic versions “will need to offer net prices of at least 50% discounts to the brand list price in order to offset the rebating power of the innovator product,” predict Citigroup’s analysts.

Winners And Losers
As this transition plays out, clear winners and loser will emerge. For example, Citigroup recently downgraded their rating on AbbVie to sell (with a $48 price target, representing 20% downside), noting that they “expect empowered PBMs to aggressively incentivize rapid bio-similar adoption in both naïve and established patients.” Roche Holdings (Nasdaq: RHHBY) also appears vulnerable as it has four key drugs (Herceptin, Rituxan, Avastin and Lucentis) that are also threatened by bio-similar competition.

The changing landscape helps explain why Pfizer just announced plans to acquire Hospira, Inc. (NYSE: HSP) for a hefty $16 billion. Pfizer noted that the move will rapidly expedite its ability to develop and sell bio-similar drugs.

Sooner Rather Than Later?
Although major changes in the drug industry landscape can take several years to unfold, the door for bio-similars may swing open faster than many realize. That’s because a range of legal challenges to the existing regulatory framework for biologic drug patents, known as IPR (inter partes review), are expected to come before the courts in coming quarters. Analysts at investment bank Leerink, Swan & Co. believe that “the IPR mechanism is an important tool for bio-similar developers to bust open patents prior to commercialization.”

By the time the U.S. bio-similar market is fully open, look for generic drug firm Mylan, Inc. (NYSE: MYL) to also play a key role. That company has the financial resources required to scale up biologic production, and is already gaining production knowledge through its existing biologic production of various versions of insulin. Unlike Big Pharma companies, Mylan is not saddled with a high-priced salesforce nor a massive R&D drain. That has enabled the firm to generate rising amounts of free cash flow, which should approach $1 billion this year. Opening the door to bio-similars should push Mylan onto an even higher plane of cash flow.

Risks To Consider: The FDA may slow the transition to bio-similars in order to ensure that manufacturing processes are identical to existing ones deployed by brand drug manufacturers.  

Action To Take –> Drug distributors, generic drug makers (with sufficient financial strength) and consumers stand to be the key beneficiaries of this transition. Pfizer has also stated its intention to play a major role in bio-similar production. Meanwhile, companies with massive biologic drug franchises such as AbbVie and Roche appear poorly positioned, and will be hard-pressed to replace lost sales that the industry changes will likely reap.

As I mentioned above, Pfizer recently bought Hospira in order to pursue bio-similars. Our premium advisory Maximum Profit picked up Hospira’s momentum and earned 57.5% in less than six months. Academic studies have shown that momentum is one of the only indicators that has consistently outperformed the market. In fact, two of my colleagues have been quietly testing the Maximum Profit system, which is making a small group of investors a lot of money. It flags exactly which stocks are about to jump double, even triple digits in the coming days, weeks and months. And it recently tagged a few more stocks that could do the same. After nearly two years of beta-testing they are finally revealing this system. To learn more, click here.​