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Samsung Invests in Drugs After Outselling Apple’s iPhone

Samsung Group transformed its electronics unit into the world’s largest smartphone maker by outselling Apple Inc. Now it’s setting sights on the drug industry.

South Korea’s biggest company is investing at least $2 billion in biopharmaceuticals, including the growing segment of biosimilars, which are cheaper versions of brand-name biotechnology drugs that have lost patent protection.

Samsung, with $327 billion annual revenue, aims to become a major force in biotechnology, an industry expected to generate sales of more than $220 billion in five years. With the electronics market reaching saturation, billionaire chairman Lee Kun Hee has been investing in new areas that might shore up growth for the family-controlled company.

“We are in an infancy still,” Christopher Hansung Ko, chief executive officer at the Samsung Bioepis unit, said in an interview. “We are a Samsung company. Our mandate is to become No. 1 in everything we enter into, so our long-term goal is to become a leading pharmaceutical company in the world.”

At the heart of those plans are biosimilars. Samsung plans to sell its first biosimilar version of Amgen Inc.’s arthritis therapy Enbrel in 2016 in Europe and a version of Johnson & Johnson’s Remicade treatment for autoimmune diseases in 2017, according to Ko. A separate unit called Samsung Biologics Co. has contracts to manufacture biologic medicines for branded pharmaceutical companies.

Lee, currently hospitalized, is in stable condition after surgery following a heart attack, according to Samsung.

Larger Competitors

As it expands in biosimilars, Samsung faces competitors including Pfizer Inc. and Amgen, regulatory hurdles and an undeveloped market. While Europe and Japan have allowed biosimilars, the U.S. has yet to set specific guidelines or approve any drugs in that class.

U.S. regulators are considering a variety of issues, including what research will be required to permit the cheaper therapies to be substituted at pharmacies for the original drugs. Producing exact copies is harder than making traditional generic pills because factors including temperature can affect the product.

Companies haven’t made much money with biosimilar drugs because most products remain under development and the U.S. market is untapped, said Giles Somers, an analyst at Datamonitor Healthcare.

$24 Billion

The industry’s sales may expand to $24 billion in 2019 from $1.2 billion last year, and markets including the U.S. may grow “exponentially” after regulations are set, consulting company Frost & Sullivan said in January.

Samsung plan to bring a fresh perspective, be bold and make quick decisions, Ko said. Its two biologics units together employ about 800 people, making the group South Korea’s largest biotechnology company, he said.

The company’s history highlights Samsung’s competitive spirit. Founder Lee Byung Chull started with 40 employees in 1938, exporting rice, noodles and produce. His son, chairman of Samsung Electronics Co. and South Korea’s richest man, pushed the unit to become Asia’s biggest technology company.

Over the years, Samsung invested heavily in mastering manufacturing processes. In the 1960s, engineers at its electronics subsidiary pulled apart Sony televisions to see how they were made. Its flat-screen TVs then struck a blow against Tokyo-based Sony Corp., Panasonic Corp. and Sharp Corp.

Mobile Phones

Samsung introduced its first Android-powered Galaxy S phone in 2010 and flooded the market at different prices before taking the top place from Apple.

Biosimilars are often follow-on versions of expensive drugs for conditions such as cancer or arthritis, and are big revenue generators. Amgen’s Enbrel, for instance, treats autoimmune diseases including arthritis and the skin condition psoriasis.

Samsung Biologics, set up with Quintiles Transnational Corp., agreed in October to make proprietary biologic medicines for a Roche Holding AG unit. It also has a partnership with Bristol-Myers Squibb Co.

Samsung Bioepis, a venture with Biogen Idec Inc., is developing other biosimilars, including versions of Roche’s Herceptin breast cancer treatment and Sanofi’s Lantus diabetes drug, according to Ko.

Always Open

While Samsung is “always open” to making deals, Ko said companies usually have to develop their own biosimilars.

“I can’t simply go and buy a biosimilar product,” he said. “It’s something that you have to do on your own, so it’s difficult. In my particular work, it’s hard to acquire a company and grow that way.”

Lee Jin Woo, a Seoul-based senior fund manager at KTB Asset Management Co., isn’t convinced the group can succeed in health care because the industry is highly specialized and requires deep scientific knowledge.

“It’s not something you can do easily just by speeding up manufacturing with big cash on hand,” he said.

Samsung has compensated through partnerships, including with Merck & Co., that bring in manufacturing, regulatory, and marketing clout, said Asthika Goonewardene, pharmaceutical analyst at Bloomberg Industries.

Government Help

South Korea’s government is encouraging local companies to expand in biosimilars by offering programs to support exports and providing guidance for overseas licensing and regulations.

Celltrion Inc. won European approval to sell copies of Johnson & Johnson’s Remicade last year. Hanwha Chemical Corp.’s version of Enbrel is expected to be reviewed by South Korea regulators and commercialized by a multinational company, Paul Coleman, CEO of its biologics unit, said in an interview.

Any impact to the industry from biosimilars will depend on factors including the level of clinical data required, local reimbursement decisions and whether or not interchangeability is permitted, J&J said in an e-mail.

Amgen, which is working on types of biosimilars, said in an e-mail that development can be a “scientifically challenging and capital intensive process.”

Samsung said it expects to generate more than 1.8 trillion won ($1.8 billion) a year from biopharmaceuticals by 2020.

“We have an outstanding pedigree of being able to innovate an old process to a new process in order to improve in another sector, so we apply that principle,” Ko said. “I can’t see a reason why we aren’t going to be successful.”

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