Merck’s announcement this month that it is forming a separate business, Merck BioVentures, for developing follow-on and novel biologics is an interesting decision for a pharmaceutical major seeking to jump-start its growth prospects.

In forming Merck BioVentures, Merck says it is leveraging its expertise in glycoengineering, a position it enhanced in 2006 with its $400-million acquisition of GlycoFi, a company specializing in yeast glycoengineering. Although Merck says the new business will focus on novel biologic drug development, it will also focus on biosimilars. Merck’s first follow-on biologic program, MK-2578 for anemia, is in clinical development, and the company hopes to launch the product in 2012. Merck says it anticipates having at least five follow-on biologic candidates in late-stage development by 2012.

In making a play for the biosimilars market, Merck is not alone among Big Pharma. Novartis’s Sandoz unit is one of the leading players in biosimilars, with two approved products in the European Union and one recently recommended product by European regulatory authorities. In late November, Sandoz received a positive opinion from the Committee on Medicinal Products for Human Use of the European Medicines Agency for its third biosimilar product, filgrastim. The product is now under review by the full EMEA. In April 2006, Sandoz received EU approval for “Omnitrope” (human growth hormone). In August 2007, Sandoz received EU approval for “Binocrit”/”Epoetin alfa Hexal,” a follow-on erythropoetin product.

But how attractive is the biosimilars market? For sure, it is a niche and nascent market. Consider this. Global sales of prescription biotech drugs were $75 billion in 2007, representing only roughly 10% of the global pharmaceutical prescription drug market of $712 billion, according to IMS. IMS projects that follow-on biologics produced by companies other than the originator are likely to have only a modest impact on the pharmaceutical market for the next 5 to 10 years. It points to biosimilar omnitrope, introduced in 2006, which has captured less than 1% percent of the somatropic human growth hormone market.

But unlike the small-molecule generic drug market, the entry requirements for the biosimilar market are higher. Although a clear regulatory pathway for biosimilars has yet to be established in the US, it is generally considered that the time to develop a biosimilar is longer and more expensive compared with generic small molecules because of the cost and time required for additional clinical and analytical testing. Estimates for developing a biosimilar product may be between $10 million and $50 million compared with between $1 million and $2 million for developing a generic drug using chemically synthesized active pharmaceutical ingredients, according to a recent analysis by the Chemical Pharmaceutical Generic Association.

So given the limited market for biosimilars, is Merck pursuing a sound strategy in trying to enter this market? The real value for Merck is not in short-term or seemingly limited financial gains for a biosimilar product, but rather in intensifying its focus on biologics and building internal expertise in this area. Absent its vaccine business, Merck’s position in biologic-based products is considered weak, something the company has to improve as it faces difficult growth prospects.