Expect Shakeout Amid Biosimilar Market Growth

June 6, 2020
Joseph P. Fuhr, PhD

Erwin A. Blackstone, PhD

Erwin A. Blackstone, PhD, is a professor of economics at Temple University in Philadelphia, Pennsylvania. He has taught economics for over 40 years. Prior to coming to Temple in 1976, Blackstone taught at Dartmouth College and Cornell University. His research areas and publications include the economics of industrial organization, health economics, and antitrust topics.

The biosimilar market is headed for a fork in the road, and the road taken will lead to savings and access or less competition and stiffer regulation.

The biosimilar market, especially in the United States, is in its infancy, with the first biosimilar approval in 2015. There are considerable differences and some similarities between the generic and biosimilar markets. Many barriers make biosimilar entry more difficult than was the case for generics. Some are the high cost of research and development (R&D); FDA approval, including manufacturing site acceptability; originator response; litigation, especially involving patents; stakeholder education; required postmarketing vigilance (phase 4); the lack of automatic substitution at the pharmacy, and biobetter development.

Biosimilars cost more to develop and this process takes much longer than for generics. Biosimilar development costs between $100 million and $200 million and takes from 8 to 10 years. The long time for development means that returns have to be substantial to cover the interest cost. For example, Celltrion has invested $112 million in the development of the infliximab biosimilar Remsima, which references Remicade. Amgen spends around $200 million on average on R&D for each biosimilar. Their complexity makes expertise in manufacturing important. Companies experienced in biologic manufacturing will have a learning curve advantage that translates into a cost advantage and makes entry risky for new or startup firms. Although some successful entrants into biosimilars may be small or startup firms, most are likely to be large biopharmaceutical companies that have successfully launched reference products. For example, Pfizer and Amgen are biosimilar entrants.

Biosimilars and Discounts

Initially, the first biosimilar for each reference product has entered at around a 15% discount from the list price. Samsung launched the second infliximab biosimilar at a 35% discount and Pfizer, the first to market with an infliximab biosimilar, lowered its price to match. Although generic drug launches tend not to force price decreases from originators, the opposite is the case with biologics. Generally, the reference product has already achieved a return on its investment during the time of intellectual property protection. It is still making a profit at the lower price, because it needs only cover its marginal costs.

Biosimilar firms will enter only if they believe they can get a return on investment. Too high initial discounts could discourage future entry into the biosimilar market. For example, in Norway there have been discounts of around 70%. One could see short-run benefits of lower prices, but fewer entrants and thus higher prices in the long run.

Given the market opportunity, there is expected to be an influx of biosimilars. For example, Coherent Market Insights predicts that the global biologic market will exceed $456.8 billion by 2027, up from $255.2 billion in 2019. US biologic sales in 2018 were $125.5 billion, up 9.5% from 2017, according to an IQVIA report. In 2018, biosimilars had captured about 12% of the total spending on biologics, according to the same report. Some biologics have sales of over a billion dollars with some over $10 billion. Indeed, the world’s largest revenue-producing drug is the biologic Humira with sales of almost $19 billion in 2019.

Many firms are making huge investments in biosimilars. It is estimated that over 500 biosimilars are in development with over 200 being publicly announced. Not surprisingly given sales of Humira, 8 adalimumab biosimilars have had patent settlements but none will enter US market until 2023, and many more are in development. At least 8 different biologics have a minimum of 20 biosimilars in development.

If, for example, 19 biosimilar producers entered for a specific reference product and each company shared the market equally along with the originator, each company would get 5% of the market. Based on a $1 billion market prior to entry and an estimated 40% price discount, the annual revenue would be $31.6 million for each biosimilar company. Such a small annual revenue would make recoupment of investment difficult. Further, in most cases the biosimilars capture only a small part of the market. Also, originators are developing second-generation biologics that could make biosimilars obsolete for first-generation biologics.

Upheavals Mark Early Growth Phase

The difficulty and risk of entry into the biosimilar trade is indicated by some notable exits. Merck KGaA (separate from Merck & Co) sold its biosimilar unit and departed the biosimilars business in 2017. Allergan has decided to leave the biosimilar market after it finishes the 4 cancer biosimilars that it is developing with its partner Amgen. Momenta has announced that it is dropping all of its biosimilars except for an aflibercept candidate (M710, Eylea). Pfizer will not develop 5 of its preclinical biosimilars.

In 2016, Epirus, a biosimilar upstart, filed for Chapter 7 bankruptcy. In 2018, Merck paid $155 million plus interest to get out of its joint venture with Samsung Bioepis to develop an insulin glargine biosimilar to reference Lantus. Baxalta discontinued its development of biosimilars when it was purchased by Shire in 2016. Oncobiologics restructured and renamed itself Outlook Therapeutics and now has just a bevacizumab formulation under development, although it intends to seek FDA approval for that as a novel product.

Each company must determine what its biosimilar portfolio should be or whether it should even enter the market. Businesses that choose to enter should probably enter with more than 1 biosimilar. The more biosimilars in a portfolio, the greater is the investment needed, but the risk is lower. The greater the revenue of a reference biologic, the greater the probability of more competition. The more companies that enter, the greater will be the price discounts. Some may want to enter smaller revenue markets, which could potentially be more profitable because of less competition. A combination of entering small, medium, and large biologic revenue markets may be the best strategy.

If the grand biosimilar experiment succeeds, competition will lead to lower prices and increase access. If biosimilar competition does not work, the result may be price controls. This could decrease the incentive to innovate and lead to fewer new drugs being developed.

In the United States, many stakeholders are serious about controlling health care costs. Payers are promising tough negotiations for expensive drugs. Also, as physicians and patients become more familiar and comfortable with biosimilars, these should do better. All the factors point to a highly competitive market, but it will take some time to develop. Historically, the EU generic market was not as strong as the comparable US market, so we might expect greater biosimilar uptake eventually in the United States.

Biosimilars and biologics are highly similar so there is not much difference, if any, in therapeutic effect. Mature markets will have 5 to 6 biosimilar competitors, with most being well-established, branded companies. Many biosimilars will not succeed. In the next 5 years there should be significant growth in the biosimilar market, considerable price discounts, and increased access. There may even be more new biologics as originators lose revenues and must innovate.