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04/28/2016

The Reference Product Strikes Back

A lot of consideration has gone into biosimilars and what they mean for the biologics drug market. The idea behind biosimilars is that they will reduce costs by providing cheaper alternatives to existing biologic drugs. As mentioned in previous blogs however, biosimilars are by no means a cheap and simple cure to high drug costs. There are several road blocks like high production costs and long periods of development biosimilars must face on the way to the market place. These road blocks cut into the discounts biosimilars could offer. This leaves a unique opening for reference products. Reference products could lower their prices slightly and make the discounts offered by biosimilars not worth the risks of adoption.

Imagine a biologic called Reference Product 1 which costs patients and insurers $10,000 a year. Now imagine a biosimilar called Biosimilar 1 comes along and costs patients only $8,500 a year. This is a 15% reduction in cost which is a fair estimate of the discount offered by biosimilars. Depending on the patient or insurer, this reduction in cost may be enough for Biosimilar 1 to be preferred over Reference Product 1. Now imagine that in response to Biosimilar 1, the manufacturer of Reference Product 1 lowers the price by $1000, resulting in a sales price of $9,000This means that patients and insurers are only saving slightly about 5% over what they would spend with the Reference Product 1 if they use Biosimilar 1. In this situation, a comparison must be made between saving 5% or sticking with an original product that has been both studied and used more. Sure some patients will elect to use the cheapest possible alternative but others will pay the higher price for the tried and true product. This could create a situation where the manufacturers of the biosimilar is forced to raise prices or take their product off the market.

Manufacturers of biosimilars must rely on an economic principle known as Economies of Scale in order to compete with the manufacturers of the reference product. The idea of Economies of Scale is that increasing the quantity of the product will decrease the per unit cost of making it. Biosimilar 1 has fixed costs for producing it like the costs of factory and equipment. These fixed costs are spread out more by producing a larger quantity of Biosimilar 1. Once enough patients use Biosimilar 1, the costs of production lowers enough to make the biosimilar profitable for the manufacturer. If the manufacturer of the reference product lowers the price and keeps patients from using the Biosimilar 1, then the sale of the Biosimilar 1 will not be profitable. This is particularly true for biosimilars targeted at small patient populations. In this environment, a smaller number of patients would make up a larger percentage of the   population. Therefore, the manufacturers of the reference product would not need to keep as many patients in order to hurt the profitability of the biosimilar.

This does not mean that there is no room for biosimilars in the biologics market however. Some biosimilars will be priced at a greater discount than the 15% mentioned earlier. These biosimilars may bring prices down low enough that reference products could not compete. Also, biosimilars do not have to be made by competing manufacturers. It may be that manufacturers of reference products will also make biosimilars to their own reference product. These manufacturers already have the equipment and expertise necessary which means production costs would not be as great. In this scenario the biosimilar would not have to deal with competition from a reference product since it is being made from the same manufacturer. In conclusion, biosimilars are not necessarily going to wipe out reference products once they hit the market. In some instances, the reference product may still have a competitive advantage over the biosimilar despite higher costs. Biosimilars will almost guarantee that prices for reference products will come down if only just a little.

 

Robert Bond, PharmD '18

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