Bach, Coauthors Call for Regulated Pricing for Biologics as an Alternative to Biosimilars

A noted critic of high drug prices describes biologics as natural monopolies, and says that, as such, efforts to induce lower prices through competition via biosimilars will fail. Instead, the prices for biologics should be regulated by the government, allowing for economic marginal costs, once patent exclusivity for the originator biologic ends.

The 2-part proposal from Peter B. Bach, MD, and 3 coauthors published Monday on the Health Affairs blog argues that biosimilar competition is an economically inefficient way to achieve the goal of lower prices, and that while the biosimilar—biologic relationship is often compared to the one that exists in the generic marketplace for small-molecule drugs, there are fundamental differences.

US pharmaceutical pricing rewards work well for small-molecule drugs, they say, but it is not replicable for biologics. Patents and regulatory exclusivities encourage innovation, and then after that period, other firms can produce the same product, ideally leading to price reductions. A small-molecule drug is relatively simple to produce and does not carry the same development costs as the branded drug.

Because biosimilars are more costly to produce, take more time, and, given their biologic and chemical complexity, are more uncertain, biosimilars do not fulfill one of the basic tenants of successful market-based price competition, the authors said: product substitutability.

They note that no biosimilar has yet met the FDA requirement for interchangeability, meaning that the drug can be substituted at the pharmacy level. The industry is still waiting for the FDA to release its final guidance on the matter, which could come any day.

In addition, there are too many clinical unknowns that act as a barrier to entry, the post says. Biosimilar development can cost more than $100 million and take 8 to 10 years, while a small-molecule generic might take 1 to 3 years, or between $1 million and $5 million.

“For natural monopolies, tweaking regulations, raising market awareness, targeting anti-competitive practices, or simply waiting for competitors to enter will ultimately be ineffective in rapidly lowering net prices to a level approximating the marginal cost of production for the original product,” wrote Bach, Preston Atteberry, Jennifer A. Ohn, and Mark Trusheim.

“Put another way, the hindrances to competitive entry are a structural feature of biologics themselves.”

Policy makers “should instead consider requiring innovator biologic manufacturers to lower their prices after their period of market exclusivity.”

There could be tremendous savings using this approach, the authors say. According to their estimates of market size, exclusivity end dates, and a range of production costs, they estimate that a policy starting in 2018 would have yielded $250 billion to $300 billion of US net savings by 2022, including more than $87 billion for Medicare and Medicaid. The estimate is based on the current 12-year exclusivity period and an assumption that discounts approach the traditional generic discounts of 70% to 90%.

In addition, they propose to compensate firms that have already sunk costs into biosimilar development who would be affected by any transition to a new system; they estimate those costs to be $10 billion to $20 billion.

On Twitter, former FDA Commissioner Scott Gottlieb, MD, who made fostering the development of biosimilars a priority, said he’s “not ready to throw in the towel.”

It’s far too early to throw in the towel on biosimilars. Impediments to uptake remain commercial barriers that will erode. One way to accelerate that erosion is to put Part B drugs into a comparatively bid scheme to take advantage of the fact that most are multi source medicines https://t.co/VyuwqOVD89

— Scott Gottlieb, MD (@ScottGottliebMD) April 15, 2019

There is an existing basis for their proposal, the authors say, noting that while the United States does not regulate drugs, it does regulate Medicare healthcare services through cost-plus reimbursement. Other ways to achieve a more economically efficient way of lowering costs would be by using specified margins, or return-on-investment rates.

To skeptics who say biologics are not natural monopolies because there are cases where biosimilars have succeeded in bringing costs down, both in the United States and Europe, the authors say their proposal would be quicker and “eliminate the underlying uncertainty and resulting costs of the biologically based natural monopoly. The policy goal is indisputably to lower prices to economic marginal costs, not just to lower some product prices, somewhat.”