Biologics are not natural monopolies – AEI – American Enterprise Institute: Freedom, Opportunity, Enterprise3rd July 2019
Recently, several physicians and health policy analysts took to the Health Affairs blog to propose what was, to anyone who has been following biosimilars for the last decade or more, a surprising and concerning idea: that biosimilars should be abandoned.
Biosimilars are copies of complex, expensive pharmaceuticals known as biologics. Biosimilars, which have been available in Europe for 13 years, aren’t copies in the sense we’re used to seeing with generics of traditional small-molecule drugs. Biologics are made from living cells. The FDA, in approving biosimilars, determines they have “no clinically meaningful differences” from their reference biologic. The pathway for regulatory approval of biosimilars didn’t exist in the U.S. until 2010, and it took the FDA a number of years to provide biosimilar manufacturers with key guidance on submitting applications. The first U.S. biosimilar launched in 2015 and, to date, there are 20 biosimilar approvals and 7 biosimilars on the U.S. market.
While the evolution of the U.S. biosimilars market has been slower than many would have liked, it is finally taking off. Yet, Atteberry et al. (2019) call for the abandonment of biosimilars because, they argue, biologics represent a natural monopoly. To support their conclusions, they offer evidence that net prices for reference biologics have not declined in the face of biosimilar competition.
We, however, argue that the economic and clinical realities of biologics do not make them natural monopolies even if the market for biosimilars does not look exactly the same as the market for small molecule generics. In support of this, we show that the Atteberry et al. (2019) analysis of net prices for reference biologics is incorrect—net prices for reference biologics have declined substantially following biosimilar entry.
What Are Natural Monopolies?
Natural monopolies typically are defined as cases where, due to intrinsic market features, only one firm exists in an equilibrium. Atteberry et al. (2019) appear to rely on a more expansive definition of natural monopoly: a market where features limit the extent of competition relative to a market with perfect competition. They point to two characteristics of biosimilars that, they argue, prevent meaningful competition: 1) lack of product substitutability, and 2) high costs to market entry.
Why Biologics Are Not Natural Monopolies
First, when discussing substitutability, the authors seem to emphasize the automatic substitution we are accustomed to seeing with small-molecule drugs—that is, if a doctor prescribes a small-molecule brand drug, a pharmacist generally has permission to dispense a generic version if one exists. A biosimilar could be substituted for its reference product automatically if it had an “interchangeable” designation from the FDA. However, the agency only issued final guidance on this designation in May and no drug has yet to reach this standard. Future interchangeable biosimilars will surely increase competition, but that does not mean markets are bereft of it now.
Because non-interchangeable biosimilars have been deemed by the FDA to have no meaningful clinical differences compared to their brand counterparts, it is perfectly appropriate for physicians to prescribe biosimilars for their patients. The fact that biosimilars are substitutable in this broader sense is also evidenced by the wealth of global data demonstrating that the use of biosimilars across Europe and elsewhere does not affect safety or efficacy. In other words, meaningful substitution does exist. While reference biologics may not face perfect competition immediately, biosimilars nonetheless represent important competition.
On the second argument, natural monopolies exist when fixed costs are high relative to potential returns—not just if development costs are high. While biosimilars are costlier and riskier to develop than small-molecule generics, the potential rewards for biosimilar development are substantial. Biologics currently account for 36 percent of total U.S. prescription drug spending despite comprising less than 2 percent of total prescriptions. Biosimilar manufacturers have responded as one would expect. In January 2013, the number of biosimilars in the FDA’s Biosimilar Product Development Program was 19; by April 2018, there were 63 biosimilar development programs. This threefold increase is evidence of a burgeoning biosimilars market, not one that should be abandoned.
Revisiting The Effect Of Biosimilars On Reference Biologic Prices
These issues need not be litigated in theory. Atteberry et al.’s (2019) core empirical argument largely relies on the premise that biosimilars do not, and cannot, impose meaningful price competition on reference biologics. They present data on one brand reference biologic, Neupogen, and argue that “the entry of two competing filgrastims . . . merely flattened Neupogen’s price trajectory.” In other words, they claim Neupogen’s price has not fallen in the face of biosimilar competition.
However, this analysis is inaccurate. While Atteberry et al. (2019) appropriately focus their discussion on the net price of Neupogen—the price that reflects all discounts and rebates—the data they present is clearly the wholesale acquisition cost (WAC), which is akin to the full list price of the drug. This mislabeling of their exhibit leads to erroneous conclusions about the true effect of biosimilar entry on the net price of Neupogen.
To illustrate this point, we present both the WAC and net price for Neupogen in Exhibit 1. These data are calculated by SSR Health, the same data source used by Atteberry et al. (2019). We include data from the first quarter of 2007 through the first quarter of 2019, four quarters beyond the period reported by Atteberry et al. (2019).
The WAC price of Neupogen, the blue line, increased steadily through 2014, increased more slowly in 2015 and stabilized in early 2016. The four-quarter moving average of the actual net price paid to the manufacturer is shown in black. The net price for Neupogen has fallen roughly 30 percent since entry of the first FDA approved biosimilar to Neupogen, Zarxio. The current net price is 42 percent below the WAC price for Neupogen. Adjusting for inflation, the net price for Neupogen is 8 percent lower than its net price in 2007 (inflation-adjusted figure not shown). Clearly, the entry of biosimilars coincides with a significant decline in the net price for the brand reference product. Moreover, the recent entry of Pfizer’s Nivestim is likely to add additional downward pressure on prices. Simply put, policy conclusions based on the evolution of Neupogen’s WAC price—a price that is nearly twice as high as the true net price—must be revisited.
Exhibit 1: Evolution Of WAC And Net Price Of Neupogen, 2007–2019 (300 MCG/ML)
Note: This figure shows the time series for the Wholesale Acquisition Cost (WAC) and estimated net price of Neupogen from the first quarter of 2007 through the first quarter of 2019.
Source: SSR Health US Brand Net Price Tool. As with Figure 3 from Attebury et al. (2019), we use data on the 300 MCG/ML dose size. Note that Granix was approved as a biologic not a biosimilar because the FDA biosimilar pathway did not exist at the time.
We extend this analysis to another biologic, Remicade, which now has multiple biosimilar competitors (see Exhibit 2). Remicade has faced competition for less time than Neupogen but has seen similar trends: the WAC has plateaued, while the net price has fallen nearly 30 percent in the roughly two years since the entry of biosimilar competition. Adjusting for inflation, Remicade’s net price in the first quarter of 2019 is substantially below its price in the first quarter of 2007 (inflation-adjusted results not shown).
Exhibit 2: Evolution Of WAC And Net Price Of Remicade, 2007–2019 (100 MG)
Note: This figure shows the time series for the Wholesale Acquisition Cost (WAC) and estimated net price of Remicade (100 MG) from the first quarter of 2007 through the first quarter of 2019.
Source: SSR Health U.S. Brand Net Price Tool.
Importantly, both Neupogen and Remicade have faced competition for relatively short amounts of time. Yet, the data clearly show that biosimilar entry affects prices for these reference biologic drugs. It is unclear how much further net prices will fall, as neither Neupogen nor Remicade appear to have reached a post-exclusivity equilibrium.
While it is too early to make final conclusions, biosimilars appear to generate the kind of competitive forces that most experts had predicted. Although prices likely will not reach close to marginal costs (as expected in perfectly competitive markets with low entry costs), this does not imply that biologics, writ large, are natural monopolies in any traditional sense of the concept. As such, the policy prescriptions for true natural monopolies are not appropriate in this setting.
Policy Challenges Facing Biosimilar Competition
Atteberry et al. (2019) do raise legitimate concerns about the robustness of the biosimilars market. In fact, Atteberry et al. reference work by one of us (Brill 2017) that finds that small-market biologics—those with low average annual sales— are generally unlikely to face near-term biosimilar competition. But the solution is not to abandon competition across the entire biologic market. Rather, policies and strategies that promote competition are needed.
A good place to start is with the FDA’s 2018 Biosimilar Action Plan, which outlines an important set of policy steps to consider. Marketplace developments–steps by physicians, payers, and manufacturers to hasten adoption of available biosimilars–are also critical for competition to flourish. In some cases, surmountable policy barriers or market tactics are limiting biosimilar entry. For example, many have questioned whether “exclusionary contracting” by a reference product manufacturer to prevent customers from also utilizing a competing biosimilar may rise to the level of anticompetitive behavior. And finally, further technological advancements may one day reduce the cost of biosimilar development.
While biosimilars in the United States are still relatively new, there is neither sound theory nor reliable evidence to support the view that this market will not work in the United States. To the contrary, our analysis indicates that when faced with biosimilar competition, net prices for reference biologics do fall. With time and effort, physicians, patients, and payers will gain more trust in biosimilars and pursue additional strategies to harness the cost savings they offer. Biosimilar utilization rates will rise further and, with that, the willingness of manufacturers to undertake the investment to bring these products to market. Potentially, prices will decline further. We’re on the cusp of meaningful competition in this important space. Let’s not throw in the towel now.
 There is at least one commonly used alternative definition within the economics literature that is technology-based: Natural monopolies exist when one firm can always produce a product at a lower cost than multiple firms. We assume that this is not the definition Atteberry et al. (2019) have in mind. For a detailed discussion see Joskow, Paul L. “Regulation of natural monopoly.” Handbook of law and economics 2 (2007): 1227-1348.