Biosimilars & Generics: Are The Market Comparisons Valid?

By Erwin A. Blackstone, Ph.D., Temple University, and Joseph P. Fuhr Jr., Ph.D., Widener University and Thomas Jefferson University

The U.S. biosimilar market is in its infancy, with only four products approved by the FDA and only two currently on the market. Passed over 30 years ago, the Hatch-Waxman Act, which allowed generic competition for branded drugs, has proven successful in decreasing drug prices while still encouraging innovation. Will the availability of biosimilars have a similar effect on the biologics market? There has been much debate in the industry concerning the future of biosimilars and how analogous they are to the generic market.

The Differences Between Biosimilars And Generics

Before delving into market projections, it’s important to unpack the differences between the generic and biosimilar markets. One is that generics are considered chemically identical to the originator, whereas biosimilars are only considered highly similar to the reference biologic. This is because biosimilar are cell-based, which means no two molecules can be entirely the same.  The differences between the molecules is also reflected in R&D costs, which are estimated to be in the range of $100 to $200 million for biologics, versus $1 million to $5 million for generics. In addition, manufacturing for biosimilars is more complex and expensive, and the FDA requires clinical trials to garner biosimilar approval. (Similarly, biosimilar companies seeking an interchangeability designation will need to fund switching trials to meet FDA standards.)

Also, the competition between biosimilars and biologics initially will be more like brand-to-brand than brand-to-generics. This would involve more marketing costs than generics, adding to entry barriers. On the other hand, many biosimilars are being produced by brand-name companies which, because of their reputation, should be at less of a competitive disadvantage than early entrants into the generic market.

Another factor that differentiates the biosimilar market from the generic market is the response of the originator.  With generics, the originator typically does not price compete with generic competitors. In fact, in many cases the originator does the opposite in the U.S., actually increasing prices when generics enter the market.¹ In the European Union, however, some biologic originators have decreased prices in an attempt to retain market share after the introduction of biosimilars. Thus, biosimilar success cannot accurately be measured by market share; reference product price decreases following biosimilar launch are a much more informative metric.

The generic market took a while to mature and didn’t start to gain market share until automatic substitution occurred at the pharmacy level. Under current law, only biosimilars that achieve interchangeability status will be automatically substituted at the pharmacy level. However, many biosimilars are physician administered, and thus automatic substitution under these circumstances is not an issue. There is little reason for a biosimilar company to obtain interchangeability for a purely physician administered biologic.

Biosimilar Pricing Considerations

Among the questions a biosimilar firm must ask is whether payers are willing to pay a premium for an interchangeable biologic. If a non-interchangeable biosimilar is on the first tier of a payer’s formulary, and thus the co-pay is lower, will the consumer purchase the higher priced interchangeable biologic? Consumer costs can be considerably higher if the interchangeable biologic is not on the insurance company’s formulary or is on a higher tier. So, does the biosimilar firm have any incentive to assume the added risk and cost of developing an interchangeable biologic? There seems to be little competitive advantage in achieving interchangeability status, and as a result, interchangeability seems to be a non-issue.

Biosimilar uptake in the EU has been successful when stakeholders have the right incentives. High biologic prices are leading to pressure by U.S. payers to switch to lower priced biosimilars. For example, CVS has put Zarxio (biosimilar) on its formulary and removed Neupogen (originator).

EU countries that have seen the greatest uptake are those that have allowed switching — when patients who were originally on the reference product are switched to a biosimilar. Originally, only new patients were prescribed biosimilars in many EU countries; established patients were kept on originator biologics. This made the available market for biosimilars much smaller and greatly diminished uptake. Switching will be key to uptake and is already occurring in U.S.² Thus, one would expect acceptance of biosimilars to be faster in the U.S. than it was in the EU. However, for this to occur, U.S. courts must address many legal issues before the market can truly evolve. These legal issues will become less of a factor as the market matures.

Given the higher costs of developing, marketing, and manufacturing biosimilars, prices are not expected to decrease as much as the 80% to 90% that has been seen in the generic market. In the EU, biosimilar competition initially resulted in price decreases of around 20 to 30 percent, and the first two biosimilars in the U.S. each entered with a 15 percent discount. This is not surprising, since big discounts only occur for generics when more competitors enter the market. Further, many biosimilars are being produced by originator companies of other biologics, which should improve their competitive position compared to early entrants into the generic market.

Biosimilars Market Outlook

Success depends on perspective: From a consumer point of view, the market will develop and billions of dollars in savings will result. Biosimilars seems to be the current industry buzzword, and many companies are jumping on board without due diligence. For example, over 30 firms are developing Humira biosimilars, and many will lose money. Some companies have already abandoned certain biosimilars — or biosimilar development altogether.

Potential savings in individual markets are greater than in the generic market. A $10 billion market with even a 30% discount can save $3 billion.  The biologics market is increasing, and as the market gets larger potential savings increases. A biologic priced at $100,000 for a year’s treatment with only a 20 percent reduction yields savings of $20,000 annually.

Savings on generics are typically much less. For example, consider the popular statin Crestor, which lost patent protection in 2016. Given an annual cost per patient of about $3,400, even a 90 percent price reduction will yield only $3,060 in annual savings. The biosimilar market will develop faster than the generic market did, given the current emphasis on value-based pricing and the desire to control costs — the high price of biologics leads payers to look for comparable outcomes at lower prices. Prior to 1984, only 35 percent of off-patent drugs had generic competition; by 2006, generics comprised 63 percent of all prescriptions, and they currently comprise over 85 percent. Access will increase as prices decrease.

The prospects for biosimilars look promising. Prices should decline at least 20 to 30 percent and possibly more. Indeed, in the EU prices have dropped as much as 70 percent on occasion. Access to these life-saving drugs should clearly increase. However, many firms will exit the market as it moves toward a long-run equilibrium. Individual markets should eventually include five or six biosimilar providers, a situation likely to produce strong competition. Even innovation may increase, as originator firms strive to replace profits lost to biosimilars and payers have greater ability to pay for new biologics because of lower prices on originators. Entry costs may also decline somewhat as experience occurs with biosimilars.

References:

1. P. Kanavos, “Generic policies: rhetoric vs. reality,” Euro Observer, Vol. 10, No. 2, Summer 2008.
2. Surya Singh, “Basics About Biosimilars,” Insights Executive Briefing, CVS Health, No. 6, 2016.

About The Authors:

Dr. Joseph P. Fuhr Jr., Ph.D., is a lecturer at the Jefferson College of Population Health, part of Thomas Jefferson University, and professor emeritus of economics at Widener University. He currently serves as a senior fellow with the American Consumer Institute and ambassador for the Internet Innovation Alliance. Dr. Fuhr received his M.A. and Ph.D. from Temple University and his B.A. from LaSalle University. His primary research areas are antitrust, health economics, pharmacoeconomics, telecommunications, and sports economics. In healthcare, he has written on accountable care organizations (ACOs), hospital mergers, specialty hospitals, exclusive arrangements, health insurance, bundling, and doctor’s fees. In pharmacoeconomics, he has written on cost benefit analysis, biosimilars, and predictive modeling. He has published more than 60 journal articles. He has taught graduate classes in health economics, pharmacoeconomics, and pharmaceutical ethics. Dr. Fuhr has been an expert witness on numerous cases and has worked on various consulting projects.

Erwin A. Blackstone, Ph.D., has taught economics for over 40 years. Prior to coming to Temple University in 1976, he taught at Dartmouth College and Cornell University. His research areas and publications include the economics of industrial organization, health economics, and privatization. He has published on a variety of antitrust topics including mergers, dominance, reciprocal buying, collusion, and damages. His publications include over 50 articles in major economics and public policy journals, chapters in books, two edited books, a monograph on private policing, and a book on the electronic security industry. In the health area, Dr. Blackstone has published articles on physicians, hospitals, and pharmaceuticals. He was given the Clark Award for distinguished teaching at Cornell in 1976, the Andrisani-Frank Award for Excellence in teaching at Temple in 2001, and the Musser Excellence in Leadership Award for teaching at Temple in 2006.  Dr. Blackstone holds a Ph.D. from the University of Michigan.