Ivo Abraham, PhD, chief scientist of Matrix45 and a professor at the University of Arizona, explores whether biosimilars should be considered a commodity and if the commodification of medications is sustainable as the market continues to expand.
Few manufacturers like to have their product referred to as a commodity. It sounds cheap, dime-a-dozen, boring. It is “unsexy”. It conjures images of grain, coal, iron, and pork bellies. More positively, it may also be “something of use, advantage, or value”.
What’s in a Name?
Let’s look at some economic definitions—with some levity but serious nonetheless. Citing several sources, Wikipedia defines a commodity as “an economic good…that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.” It is associated with “smaller profit margins”. The “importance of factors (such as brand name)” is diminished—except for price.
Referring to wheat, Karl Marx has been quoted that from its taste “it is not possible to tell who produced it, a Russian serf, a French peasant, or an English capitalist”. No doubt, there was some truth about that in the mid 19th century and may be applicable, in concept, to today. However, it has long been known that Marx was quite off with his ideas. In fact, apparently he also wrote that a commodity “appears at first sight an extremely obvious, trivial thing”; which is indeed correct, only that he qualified this by stating that a commodity is a “very strange thing, abounding in metaphysical subtleties and theological niceties”.
What are the key elements of a commodity? Full or substantial fungibility—the economic term for interchangeability. Its instances are equivalent (or nearly so). Who produced the commodity is of no regard and, in time, neither is brand name. Price is the major driver, and profit margins are smaller. Implied in all this is the importance of volume and the intensity of competition.
Are Biosimilars Commodities?
Manufacturers of biosimilar and originator products may disagree. But can we ignore the fact that pegfilgrastim is a commodity, and so is trastuzumab? We can go down the entire list of biosimilars and come to the same conclusion.
More generally, going down the list, we’ll realize that there is little if any innovation in biosimilars (not that we expected innovation). All products are equivalent (or nearly so) to the reference product. With some latitude in reasoning, all biosimilars can be presumed to be equivalent to all other biosimilars referencing the same product. The set of a reference product and all its “similar biosimilars” make up the commodity class (yes, the reference product is now a commodity as well).
Not convinced? Ten adalimumab biosimilars have been approved in Europe and it’s possible that the same number may come onto the US market next year—all from different manufacturers; all judged to be equivalent to reference; all interchangeable, in principle. In the United States, all with the same non-proprietary name and a 4-letter suffix. All with brand names to remember, but more likely to be forgotten. All aiming for sufficient market share and volume to recoup investments and provide shareholder value. And a couple years from now, all with similar (eroding) prices.
However, as commodities, biosimilars come with factors that make them a unique class of “high-tech” commodities.
First, a biosimilar is a treatment, not just a technical product. Its market is not a mass market, but a (highly) specialized niche that is constrained in size by epidemiology. It requires a highly educated “user” to make the purchase decision (physician-prescriber) and, in a shared decision-making, an informed willing “user” to consent to its use (patient).
Another unique factor: how it is paid for. A biosimilar is a high-priced and relatively low-volume commodity that few users pay for directly—certainly not the prescribing physician, nor the clinician administering it, and, except for co-pays and deductibles, the patient receiving it. It is not a regular purchase where product and money are moved across the counter. It is a transaction where the typical prescriber does not know the exact (negotiated) price; where the mere cost would run shivers down the patient’s spine; and even the actual financial burdens may be beyond a patient’s means.
This brings us to the last unique factor: constrained access. Using a biosimilar is a purchase where a third party decides access to the commodity (albeit under a pseudo contract with provider and patient). This third party— the payer—holds the ultimate decision by “authorizing” or “denying” the purchase.
The strange thing is that this third party gets most of its revenue from the people it is intended to serve. One way or another, patients pay into the payer system through taxes, fees, employee contributions, and, yes, employer contributions. In a way, the latter are employee contributions in disguise as the employees “produce” what their employer sells and therefore can make the employer contributions.
Unique and unusual commodity market
Is This Biosimilar Commodity Market Sustainable?
A quick back-of-the envelope calculation using data from the National Cancer Institute and the CDC shows that of the 1,806,590 estimated cases of cancer in 2020 in the United States, about 650,000 may have been treated with chemotherapy, of which an estimated 23.6% may have required (febrile) neutropenia prophylaxis. Of these 153,516 patients an estimated 80% will have been prophylacted with pegfilgrastim for at least 1 cycle, but probably several more.
For the sake of discussion, let’s assume generously an average of 2 cycles, or (rounded) 307,000 administrations. With 4 pegfilgrastim biosimilars on the market (another 2 have been approved) in addition to the reference, and (rather unrealistically) assuming equal market share, we are talking on average about 61,000 administrations per product per year (going down to an average 44,000 administrations after the 2 approved biosimilars enter the market). The product with the lowest CMS reimbursement limit is the reference product Neulasta (6 mg) at $1477, with all but 1 biosimilar hovering right above this level. Do the math!
And if you’re still not convinced that each biosimilars-plus-reference set is a commodity market (several products, market share competition, downward pricing pressure, smaller margins, fading brand name recognition, etc) note that just four years ago, before any biosimilar pegfilgrastim had entered the market, the CMS reimbursement limit for Neulasta (reference pegfilgrastim) was about $4,500.
Does it Pay to Be a Biologics Commodity Player?
Probably, but manufacturers may need to play it differently.
Before elaborating my answer, let me start with an observation. For those of you who follow the consumer, generics, and biosimilars markets, you may have noticed the recent trend to spin-off consumer products, generics, and/or biosimilars. To just mention a few, GSK spun off its consumer goods, including its acquisitions from Pfizer and Novartis, into a newly-listed company; and Johnson & Johnson is in the process of doing something similar.
Novartis intends to divest itself from Sandoz, its generics and biosimilars division. Pfizer merged its generics but not its biosimilars business with Mylan to form Viatris, which in turn entered into an agreement with Biocon (an Indian company) to acquire Viatris’ biosimilar assets. My speculation is that Big Pharma may be doing this to focus on the high-value and high-margin business of developing and marketing new drugs. The benefit to shareholders should be evident: profit margins are less likely to be diluted by lower-margin, cheaper products.
There may have been the (in hindsight, unrealistic) expectation that biosimilars would be a lucrative business with solid margins—better than generics but not as good as branded drugs. That may prove not to be the case for some biosimilars in the United States, as I argued in last month’s column.
Let me leave you with some food for thought for next month’s column. What are the current major markets for biosimilars? What is their size? What are the population dynamics, from growth to demographics to epidemiology? What access to care do patients have, what are the barriers, and where are the pivot points? Realistically, how many product sets of biosimilars-plus-reference can be accommodated? Does the biosimilar industry need to think about alternate models of production, distribution, pricing, etc? Where are the unmet medical needs? How can these be met in a way that is fair and equitable to patients, payers, and manufacturers.
I am a strong proponent of biosimilars. That does not mean I am against innovation—on the contrary. There would be no biosimilars without the innovators. I have worked on several of these innovators. I am working now on innovators that someday may have biosimilar analogs. I am of the generation that has had the joy of seeing treatments emerge (and some fail) for diseases that over 40 years ago had the poorest of poor prognoses—but are now treatable.
Innovation in therapeutics (that is, the originator products) is about moving the boundaries of hope. Biosimilars are a channel for spreading more hope to more patients.
Ivo Abraham is Chief Scientist of Matrix45 and Professor of Pharmacy, Medicine, and Clinical Translational Sciences at the R. Ken Coit College of Pharmacy at the University of Arizona, where he is associated with the Center for Health Outcomes and PharmacoEconomic Research. He has worked in biologicals since the late 1990s and in biosimilars since their introduction in the European marketplace—collaborating closely with Karen MacDonald (also his wife) on large international and national observational studies. On both the private and academic sides, their group published the first economic evaluations of biosimilars, a line of studies that continues to date and have been instrumental in the breakthrough and market adoption of biosimilars in Europe and the United States. More recently, Matrix45 has ventured into biosimilars in emerging markets, including low- and middle-income countries. Ivo Abraham may be reached at firstname.lastname@example.org.
Statement of Disclosures of Relevance to this Monthly Column
Matrix45, LLC and predecessor companies in which Ivo Abraham and Karen MacDonald hold or have held equity, have been contracted for research, analytics, dissemination, and consulting services by Janssen/Johnson & Johnson, Amgen, Novartis, and Roche on the originator side and by Sandoz/Novartis, Coherus Biosciences, Mylan/Viatris/Biocon, Hospira/Pfizer, and Teva on the biosimilars side; with past and current conversations with Merck KGaA, Therapeutic Proteins International, Celltrion, Apobiologix, Apogenix, Fresenius Kabi, and Spectrum. By company policy, associates of Matrix45 cannot hold equity in sponsor organizations, nor provide services or receive compensation independently from sponsor organizations. Matrix45 provides its services on a non-exclusivity basis.
All contributions to this column are prepared independently and without funding from sponsors.
Links to Prior Columns
When more may yield less: price erosion of biosimilars following US market entry. (September 2022).https://www.centerforbiosimilars.com/view/dr-ivo-abraham-column-when-more-may-yield-less-price-erosion-of-biosimilars-following-us-market-entry
It’s what we do with the savings: economics and equity. (August 2022) https://www.centerforbiosimilars.com/view/dr-ivo-abraham-column-it-s-what-we-do-with-the-savings-economics-and-equity
Good bait and fair switch: biosimilar interchangeability, substitution, and choice. (July 2022) https://www.centerforbiosimilars.com/view/contributor-good-bait-and-fair-switch-biosimilar-interchangeability-substitution-and-choice
To try or not to try, that’s not the question: phase 3 trials of biosimilars and beyond. (June 2022) https://www.centerforbiosimilars.com/view/contributor-to-try-or-not-to-try-that-s-not-the-question-phase-3-trials-of-biosimilars-and-beyond
The enemy of your enemy should be your friend: why biosimilar companies should collaborate. (May 2022) https://www.centerforbiosimilars.com/view/contributor-the-enemy-of-your-enemy-should-be-your-friend-why-biosimilars-companies-should-collaborate