Biosimilar Entry and the Pricing of Biologic Drugs
Biosimilars vs. Generics
An important feature of prescription drug markets is the entry of generic versions of branded drugs. The Hatch-Waxman Act of 1984 helped facilitate the entry of generics, Generic penetration typically reaches 90% or more for most drugs after the branded version loses exclusivity.
Recently, complicated drugs known as biologics, grown from organic tissue, have become more prominent in approvals and as a share of overall drug spending. Due to their complexity, biologics cannot be exactly replicated, and are therefore immune from generic competition. The US passed the Biologics Price and Competition Act (BPCIA) in 2009, in order to facilitate the entry of biosimilars, (inexact) copies of biologic drugs. Because biosimilars are not identical copies, many have wondered if biosimilars can be effective competitors, and how reference biologics will react to biosimilar entry.
List and net price trends of reference biologics around biosimilar entry
What happens after biosimilars enter?
We combine data on list prices (measured by Wholesale Acquisition Cost, or WAC), net prices (measured using average net revenue per unit and Average Sales Price, or ASP), units sold, and formulary coverage of biologic drugs and examine how these quantities react to biosimilar entry. We find that originator biologics react to biosimilar entry by keeping list price constant but offering larger rebates.
Perhaps because of the larger rebates, we also find that biologics only suffer a slight decrease in units sold and formulary coverage after biosimilar entry.
A model of pricing strategy
We rationalize our empirical findings by building on the canonical model of generic entry by Frank and Salkever (1992). The original model explains why prices of brand drugs would increase after generic entry by arguing that brand drugs exposed to generic entry focus on a price-inelastic “loyal” segment of the market. Generic entrants instead compete for the (much larger) price-elastic segment.
Optimal pricing rule of the biologic incumbent as a function of the difference in vertical quality with the biosimilar entrant.
We solve a version of the Frank and Salkever model where the price-elastic segment is represented by a standard Hotelling model. The biosimilar entrant differs from the incumbent biologic both in terms of “travel” distance and in vertical quality. When the biosimilar is perceived as having lower quality, the incumbent has a strong competitive advantage and can capture a large portion of the price-elastic market without lowering its price too much. However, as quality differences shrink (moving from right to left on the graph), competing becomes more costly, and eventually the biologic will choose to "acquiesce" and focus on the "loyal" segment only.
Testing the implications of the model
The model predicts that “higher" quality” biosimilar entrants should capture a larger market share a trigger a weaker price response. We test this prediction by exploiting the fact that some biosimilars were approved using standard, non-abbreviated approval routes. Because these approval routes require more robust clinical evidence, biosimilars that were approved that way may be perceived as having higher quality.
We find that reference biologics that compete with these “higher-quality” biosimilars did not increase rebates in response to entry. We also find much larger drops in volume and formulary coverage for these drugs.
Key takeaways
Entry of biosimilars does appear to generate some savings. These savings cannot be detected using only invoice sales data, which may help explain why some previous studies (see, e.g., here) have argued that biosimilars are ineffective.
The way competition between biosimilars and reference biologics unfolds is a crucial determinant of the success of biosimilars (in terms of their ability to reduce prices and displace incumbents).
Recent bipartisan proposals in Congress have aimed to either reduce cost-sharing for biosimilars or provide greater incentives for physicians to adopt biosimilars. Our model suggests that these approaches could shift the equilibrium regime from a "fight" to an "acquiesce" state.
This shift could also happen more organically as more patients and physicians become comfortable with biosimilars (a 2020 poll by HarrisX found that only 35% of patients are familiar with the term "biosimilar").