Biosimilars offer less of a savings than traditional generics (as expected)

A recent Wall Street Journal article addresses the fact that biosimilars won’t be replicating the savings generated by small molecule generics anytime soon. None of this should come as a surprise.

Manufacturing biologics is substantially more complicated and more expensive than is the case for small molecule drugs. Often, the production process has to be tailor-made for each product: what works for one won’t work for another. Adding another layer of complexity is the fact that biologic manufacturing processes are themselves protected by numerous forms of intellectual property and trade secrets. To replicate the characteristics of the final product, biosimilar manufacturers must, to a greater or lesser extent, re-create the production process using other means. So, while a biosimilar company can avoid a good portion of the R&D costs, it still has to create what amounts to proprietary manufacturing methods.

Not that biosimilar hopefuls are completely off the hook for R&D either. Bioequivalence studies don’t satisfy the FDA’s current thinking of what it takes to approve these copycat products for use, where the standard is that “there are no clinically meaningful differences between the biological product and the reference product in terms of the safety, purity, and potency of the product.” Demonstrating equivalence for biosimilars may necessitate data from new clinical studies.

All this is illustrated by a 2013 article from the National Library of Medicine and a study by the IGES Institute that estimated developing a biosimilar takes an average of seven to eight years and costs $100 million to $250 million, while bringing traditional generics to market only costs between $1 million and $4 million.

Then there is the matter of who is allowed to replace the brand product with the biosimilar. With generics, the doctor or pharmacist can make the switch and, at present, this is almost always done automatically via IT systems at the pharmacy or other dispensing location. Substation rights are another hotly contested area with biosimilars and, since this is a regulatory area that is largely governed at the state level, the result is an emerging patchwork of inconsistent rules across the country – many creating barriers to getting a biosimilar to the patient. Automatic substitution creates a guaranteed demand for generics that, for the foreseeable future at least, will not be present for biosimilars.

In this environment, modest discounts are to be expected. Classical economic theory tells us that price declines towards the marginal cost of production as more competitors enter. This is certainly the case in traditional generic drug markets where prices tend to fall from around 90% of pre-generic brand price with only one entrant to 10% or less as the molecule becomes fully commoditized. Given the need to master complicated manufacturing, to conduct some level of R&D, and to carve out a profitable market share in the absence of automatic substitution, it seems unlikely that any biologic drug will attract the number of entrants necessary to create a commodity-pricing situation. Even if this were the case, the pricing floor established by the cost of marginal production will be higher with biosimilars than with traditional generics.

The WSJ also reports that “pharmaceutical companies have been raising prices on biotech drugs about to lose patent protection to squeeze out more revenue before competition arrives…And makers of the knockoffs are setting their prices just below those marked-up ones.” A run-up in brand price at the time loss of exclusivity (LOE) is also a familiar tactic among small molecule drug makers. In fact, the phenomenon of brand drugs raising prices in the period before and after LOE is so common that economists have given it a name, the “generic paradox.” Ultimately, it is competition from other generics that will drive cost down (or lack of such competition that will keep prices high). As long as the competition is between a biosimilar and the reference drug, neither party will undermine the combined value of the market by starting a price war.

Again, none of this should come as a surprise. The relatively modest discounts associated with biosimilars as compared to their small molecule predecessors have been anticipated for some time (and demonstrated in Europe where these products have been on the market for approximately ten years). As we wrote in our 2009 report, Biosimilars: Problems, Prospects and Projections, “biogeneric producers will need to recoup R&D investments that far exceed what is required for traditional generics – and, as a result of limited competition, they are likely to have some degree of pricing power that allows them to do so…Litigation risk will also need to be considered and insured against by all parties…As a result, biosimilars are unlikely to achieve the types of societal savings provided by ANDA generics.”

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