Biosimilars: Theory, Empirics, and Policy Implications

Monday, June 13, 2016: 3:20 PM
G17 (Claudia Cohen Hall)

Author(s): Ariel Dora Stern; Ariel Dora Stern

Discussant: Andrew Mulcahy

Biologics, also called “biopharmaceuticals” or “biologic drugs” are a broad class of products including, but not limited to, vaccines, somatic cells, gene therapies, and recombinant therapeutic proteins. Biologics are widely used to treat serious and life-threatening diseases such as cancer, diabetes and rheumatoid arthritis.

A biosimilar pharmaceutical is a close, but not identical, copy of an approved biologic branded product. It is known as a biosimilar, rather than a biogeneric, because current technology does not allow for making an exact copy of a large molecule drug. Exact molecular copies can be made in the case of small molecule drugs; these are known as generics and have enjoyed a simple pathway to regulatory approval in the United States for 30 years. The first biosimilar was approved in the United States in 2015, however they have been approved and sold in Europe since 2006.

Worldwide, sales of biologics drugs quadrupled from US$46 billion in 2002 to US$169 billion in 2012. What is particularly noteworthy about biologics is their typically high unit price, small market size, and high rate of growth. Many diseases treated by biologics are rare, and consequently market sizes are quite small. The prices of these drugs are typically high partially because the cost of manufacture is high, partially because the disease being alleviated is often very serious, and partially because R&D costs cannot be recouped on a small number of patients unless prices are high. The growth rate of expenditure on biologics is roughly 12% per year – much higher than the rest of pharmaceutical spending.

This paper outlines the theoretical and regulatory issues surrounding biosimilars. It goes on to document the experience in Europe of biosimilar approval and entry over the years 2007-2014. The European Medicines Agency (EMA) provides a single scientific and regulatory body that must approve all biologic products sold in the European Union. However, even though testing and approval is centralized, each country has its own reimbursement policies. Parties that wish to market and sell their drugs in rope must first negotiate a price with the health authority in each nation. Thus there is heterogeneity across countries in terms of initial biologic price and usage, as well as biosimilar prices and penetration.

We document detailed patterns of market entry for the first twelve biosimilars introduced to Europe in three different drug categories, using data on pharmaceutical sales from 23 European countries. The price and share outcomes for biosimilars across European countries are dramatically different. The second part of the paper explores the reasons behind these differences. Policies on procurement and pricing of biosimilars vary greatly across countries. We show that the existence and identity of the residual claimant in the procurement process – namely the party who saves money when the biosimilar is dispensed – is critical to understanding the penetration of biosimilars and cost savings from their use.