Biosimilar Entry and the Pricing of Biologic Drugs

Model of Incumbent Pricing Strategy

To provide a structure for thinking about potential differences in incumbent response to generics and biosimilars, we build on the canonical model of generic entry by Frank and Salkever (1992). The key component in their model is the presence of consumers who are loyal to the incumbent.

We solve a more specific version of their model to derive closed-form results. In our model, one incumbent and one entrant compete on price. We incorporate differentiation between the two competitors using a standard Hotelling model. 

The graph to the right shows the best response function of the biologic as a function of the perceived differences between biologic and biosimilar. Differences in perceived vertical quality or low substitutability levels can lead biologics to price lower in order to "fight" biosimilar entry. 

However, as these perceived differences shrink (moving from right to left on the graph), the biologic will choose to "acquiesce" and will instead keep prices high and only garner sales from "loyal" customers (inertia, price-insensitive customers, etc.).

Empirical Evidence: Extra Discounts 

To assess how biologics respond to biosimilar entry, we bring together data on list prices, net prices, and volumes of biologic drugs. We look for the response of these quantities to biosimilar entry, controlling for overall trends in all biologic drugs. 

We find the following:

1. Biologic drugs do not reduce their list price (consistent with the policy discussions) but do offer greater rebates after biosimilars enter. The top figure reflects the list price response and the bottom figure the net-of-rebate price response.

2. By offering greater rebates, biologics avoid a large decrease in formulary coverage and overall volume.

The difference in price and volume response generated by generics and biosimilars is consistent with the idea that there is a greater perceived difference between incumbents and copycat entrants in the large molecule setting. Various surveys of doctors who administer biologic drugs suggest that they view biosimilars as being inferior to their reference biologics.

Additional suggestive evidence that perceived quality matters

We then provide further suggestive evidence of the perceived differences channel by exploiting the features of the BPCIA. 

Some biosimilars were approved just before the BPCIA or were ineligible for the abbreviated approval mechanism until 2020 (primarily insulins). These "biosimilars" needed to go through additional clinical trials to prove safety and efficacy (vs. an "equivalence" trial for abbreviated approvals), so they potentially have more clinical evidence supporting their safety and efficacy.

We find that the non-abbreviated biosimilars elicit smaller average net price responses by incumbents and incumbents experienced a larger decrease in formulary coverage.

We note that the evidence is quite suggestive, because we only have 4 biosimilars in our data that go through a non-abbreviated approval process. In addition, some of these biosimilars entered much earlier in the lifecycle of the incumbent biologic, creating slightly different pre-trends.

Implications for Policy and Future Trends

Main takeaways from our research:

• Use of net prices helps us uncover and understand the response of original biologic drugs. Entry of biosimilars does appear to generate some savings.

• Recent bipartisan proposals in Congress have aimed at either reducing cost sharing for biosimilars or providing greater incentives for physicians to adopt biosimilars (these appear to have public support, based on a HarrisX survey). In addition, Congress recently passed the "Advancing Education on Biosimilars Act," which funds the dissemination of information about biosimilars. Our model suggests that this could potentially 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 (HarrisX found that only 35% of patients were familiar with the term "biosimilar"). 

• A regime shift could also potentially encourage the entry of more biosimilar drugs in each market, further reducing costs.

• Other proposals have looked to make biologic patents more transparent, aiming to reduce the lag between approval and launch. We find (in additional results) that biologics reduce prices when biosimilars launch rather than when they gain approval, so any policies that can reduce the lag may generate additional savings.