Biologics Are Not a Natural Monopoly

December 02, 2019
Erwin A. Blackstone, PhD, professor of economics, Temple University
Joseph P. Fuhr, Jr, PhD, professor emeritus, Widener University

Some have recently suggested that the biologics market is a natural monopoly and thus biosimilar competition is unworkable.1 They point to the slow penetration of biosimilars in the US market as evidence of a natural monopoly. Historically, economic theory states that a natural monopoly is the result of economies of scale where it is only efficient to have 1 firm in the industry.2 There is no suggestion of such economies of scale in biologics. 

New markets often take time to develop. People have to become aware of and trust the product. This is especially true when the product can damage a person’s health. The EU biosimilar market was slow to develop because of various barriers to entry, such as informing patients and physicians of the existence and quality of biosimilars, the high research and development cost of biosimilars, as well as the learning curve in developing biosimilars and dealing with regulatory authorities. Also, physicians were initially reluctant to switch established patients to biosimilars, and only newly diagnosed and willing patients were given biosimilars. Thus, very little of the market was open to biosimilars. This has since changed, with established patients receiving biosimilars, and market shares in many EU countries have greatly increased.3 

Europe received its first biosimilar in 2006, and substantial competition presently exists in many EU markets, often yielding substantial market shares and reduced prices. Payers in the United Kingdom, Germany, and Italy, in particular, have promoted switching and other policies to encourage the use of biosimilars.4 

European experience with biosimilars is inconsistent with the existence of a natural monopoly where 1 firm could produce at substantially lower costs than its competitors. In Portugal, the 2016 price for epoetin alfa was as much as 66% below the price before biosimilar entry. Finland’s 2016 price for human growth hormones was 51% percent less, and Romania had 62% lower prices in 2016 than before biosimilar entry.5   

We have also seen biosimilar competition in other countries; for example, brand-name rituximab (Rituxan) sales have declined 46% in Japan. Illustrations of the possible benefits of biosimilar competition is the situation in the Nordic region, where in a winner-take-all tender, 4 biosimilars competed in 2018 and discounts reached as high as 80% for the brand-name adalimumab, Humira. The experience of the European market clearly indicates that biosimilar competition is possible and beneficial.  

Until the Biologics Price Competition and Innovation Act was passed in 2010 as part of the Affordable Care Act, there was no abbreviated pathway for biosimilars in the United States. Instead of being a natural monopoly, one explanation for why the US market has been slow to develop is that it is still in its infancy. Also, other barriers to entry exists: The costs and time to enter, patent issues, and originator responses (including, on occasion, claims of anticompetitive behavior) have contributed to the slow uptake. However, if a natural monopoly truly existed, there would be little reason to try to keep out entrants, since the high cost itself would do so. Further, the fact that 83 biosimilars are currently in development for 38 different biologics belies the existence of a natural monopoly. 

Especially noteworthy is the US example of Kaiser Permanente Northwest, where in 2019, 97% of its infliximab infusions were performed with Pfizer’s biosimilar, Inflectra, achieving savings of 33%. Nationally, Inflectra has only a 2.4% market share. Since Kaiser is an integrated delivery network, the conversion to a biosimilar was easier, since it is not dealing with multiple middlemen. 

Patent issues have been especially difficult to overcome. Intellectual property rights are intended to encourage innovation. However, the complexity of biologics has led to numerous patents being secured. For example, AbbVie’s Humira has been protected by more than 60 patents.3 The United States is more permissive than the EU in terms of allowing secondary patents, and further, it is often unclear when patents are valid, infringed, or no longer in effect. The patent situation creates uncertainty and risk for biosimilars and contributes to difficult entry. For example, Humira has biosimilar competition in the European Union, but not until 2023 will biosimilars be able to enter in the United States, and this fact was only after 8 biosimilar firms each had out-of-court settlements concerning patent rights. Patents are important and necessary for biologic innovation, but their impact impeding biosimilars needs adjustment.

The government should ensure that practices that unfairly inhibit biosimilars competition do not occur. We do not want to discourage normal competition. Biologics are not a natural monopoly, and competition is feasible, as demonstrated around the world. Biologics have provided great benefits; nevertheless, some policies can be adopted to maintain incentives for innovation but still allow increased competition from biosimilars.

1. Atteberry P, Bach PB, Ohn JA, Trusheim M. Biologics are natural monopolies (part 1): why biosimilars do not create effective competition [published online April 15, 2019]. Health Aff (Millwood). doi: 10.1377/hblog20190405.396631.

2. Waldman DE, Jensen EJ. Industrial organization: theory and practice. 4th ed. Routledge; 2012. doi: 10.4324/9781315510538.

3. Blackstone EA, Fuhr JP. Innovation, patents and biologics: the road to biosimilar competition. In: Gutka HJ, Yang H, Kakar S. Biosimilars: regulatory, clinical and biopharmaceutical development. Springer; 2019: 23-48. doi: 10.1007/978-3-319-99680-6.

4. Rademacher K, Edgar T. The influence of Europe on the pricing, uptake and overall impact of biosimilars. J Clin Pathw. 2017;3(10):47-50.

5. Data from Quintiles IMS, May 2017.


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