Complex, powerful drugs called biological products, or biologics, now account for about two-fifths of all pharmaceutical spending and 93% of spending growth since 2014. The rise of biologics, which are harvested from biology rather than being synthesized chemically, has been a boon to patients suffering from cancer and other diseases, but the costs of these medicines are an increasing concern to policy makers. Biosimilars, which have no meaningful clinical differences from biologics, are supposed to tame biologic prices when patents expire, but so far they have had minimal effect, saving a mere $240 million a year, according to a new study by the Pacific Research Institute.
The situation is so frustrating that a group of researchers published a two-part article this spring in Health Affairs that argued for abandoning the biosimilars regime altogether, declaring biologics a “natural monopoly,” and having the government set prices according to a formula. (More details on that proposal – and the response – below.) Another article, by an intellectual-property scholar, termed biosimilars “a distraction.” Perhaps we’re asking biosimilars to do too much, too soon. On the other hand, biosimilars are already having a significant impact in Europe. Why haven’t they lived up to their promise here?
Can the Virtuous Cycle Apply to Biologics?
In recent years, the average price of a prescription in the U.S. has leveled off and even fallen. September was the fourth month in a row that the Bureau of Labor Statistics reported a decline in its pharmaceutical price index. A major reason is that regulatory changes have made it easier to bring generic drugs to market to compete with branded drugs whose patents have expired. Generics now account for 90% of all prescriptions, up from 75% in 2009, according to a May study by IQVIA. From 2014 to the end of 2017, generic drug prices fell by one-third. And when additional generics hit the market, the prices of their branded competitors fall as well.
This virtuous cycle, however, does not apply to the vast majority of biologics, which are becoming more and more important, especially in treating cancers and autoimmune diseases such as rheumatoid arthritis and ulcerative colitis. Because biologics are made from living organisms, they are large and complex molecules. For example, a Congressional Research Service (CRS) report in June pointed out that aspirin “contains nine carbon atoms, eight hydrogen atoms, and four oxygen atoms while the large biologic drug Remicade contains over 6,000 carbon atoms, almost 10,000 hydrogen atoms, and about 2,000 oxygen atoms.”
Biologics are expensive to develop, and, frequently administered in doctors’ offices and hospitals, they are also priced higher than other drugs. Last year, 11 of the 15 top-selling drugs in the U.S. were biologics, with total sales of about $85 billion.
An analogue – but not a precise one – to the relationship between a brand-name chemical drug and a generic is the relationship between a biologic and a biosimilar. While generics are exact copies of branded chemical drugs, biosimilars are almost. CRS provides this definition:
A biological product may be demonstrated to be “biosimilar” to the reference product if data show that the product is “highly similar” to the reference product, notwithstanding minor differences in clinically inactive components, and there are no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency.
Even developing a product that is “highly similar” to a biologic is daunting. “The investment needed to develop and market a biosimilar is considerably higher than the $1 million to $4 million that is required in the generic market,” wrote Erwin Blackstone and P. Fuhr Joseph Jr. in 2013 in a paper for the journal American Heath & Drug Benefits. “It takes 7 to 8 years to develop a biosimilar, at a cost of between $100 million and $250 million.”
Until recently, biosimilars faced daunting regulatory hurdles as well. Then, in 2010, Congress passed the Biologics Price Competition and Innovation Act (BPCIA) as part of the Affordable Care Act. The BPCIA created an abbreviated pathway for biosimilar approval by the Food & Drug Administration. Still, the number of biologics actually approved has been meager and the number actually reaching the market is minuscule.
Savings of $50 Billion to $250 Billion Over 10 Years
The potential for savings, however, is immense. In an earlier study, CBO estimated that biosimilars would reduce prices by 40%. Research published in July by the Pacific Research Institute found that if currently approved biosimilars became reasonably competitive -- gaining a 50% market share against branded biologics – savings would increase to $4.8 billion a year (or about 20 times current levels). With more approvals in more therapeutic classes, biosimilar savings could become much greater. A separate study by the Rand Corporation two years ago estimated total savings of $54 billion from 2017 to 2026, and a study by the pharmacy benefit manager (PBM) Express Scripts in 2013 forecast savings of $250 billion over the next 10 years.
So far, however, the FDA has approved 23 biosimilars, with only nine of those currently being marketed in the United States. Approvals are accelerating, with six in 2018 and seven so far in 2019, including two anti-cancer drugs. By contrast, Europe developed a regulatory framework five years earlier than the United States and has approved about two and a half times as many biosimilars, including 16 in 2018 alone.
Unlike in the U.S., in Europe, approved biosimilars are reaching patients and saving money. For example, the CRS study points out that the three FDA-approved biosimilar competitors to the top-selling drug in the U.S., Humira, will not reach the market until 2023. In Europe, however, four Humira biosimilars were launched at the start of 2019 with two more to come. Sanford C. Bernstein & Co. analyst Ronny Gal predicts that, by year-end, biosimilars will account for half the market in countries where they are being sold.
“The Impact of Biosimilar Competition in Europe,” an IQVIA study last year, looked in depth at the effect on prices and concluded:
The seven established therapy areas with biosimilar competition show a consistent picture of reduced average list prices in European countries. The increased competition resulting from biosimilars entering the market affects not just the price of the respective biosimilars referenced product, but also the price of the whole product class. It can have almost as large an impact on the total market price as it has on the biosimilar/referenced product price. In the case of EPO’s in Portugal, the price decease of the total market was -66%.
EPO stands for Epoetin, a drug that stimulates the production of red blood cells and fights anemia. Overall in Europe, biosimilars to Epoetin have driven prices down 27%, according to IQVIA. A separate FDA study found that the entry of a single biosimilar in a non-U.S. OECD market lowered prices by 30% compared with the previous price of the biologic. With three or four biosimilars in a therapeutic class, prices dropped 35% to 43%.
The IQVIA study also found that lower prices led to more demand and, thus, improved patient access. In other words, for the United States, more competitive biosimilars mean, not just lower spending, but a healthier nation.
Obstacles Biosimilars Face
The United States is usually in the vanguard of both medical innovation and the policy that encourages it. Why does Europe seem to be so far ahead? Besides development costs, biosimilars face a host of obstacles to getting to market here. One problem that seems fairly simple to address is lack of good information. Among the remedies discussed in the Biosimilars Action Plan, released by he FDA in July 2018, is better communication. Many pharmacists and physicians – not to mention members of the general public -- are still unclear on what biosimilars are and how they perform. There are worries that they are unworthy substitutes for branded biologics.
The FDA has initiated an outreach and education campaign, but, as a June article in STAT claimed, “misinformation about these products” is abundant. Wrote Hillel Cohen and Dorothy McCabe, two pharmaceutical executives who are members of the Biosimilars Forum Education Committee:
Some biologics manufacturers and groups have issued misleading, incomplete, and inaccurate information about the safety and effectiveness of biosimilars in an attempt to slow acceptance of and access to biosimilars. This mischaracterization is pervasive and threatens to stall system-wide health care cost savings and the advancement of biosimilars in the U.S. with untoward fear mongering.
In speech at Brookings last year, Scott Gottlieb, then the FDA Commissioner, pinpointed another obstacle. He called competition in the biologics space “anemic because consolidation across the supply chain has made it more attractive for manufacturers, Pharmacy Benefit Managers [PBMs], Group Purchasing Organizations and distributors to split monopoly profits through lucrative volume-based rebates on reference biologics—or on bundles of biologics and other products—rather than embrace biosimilar competition and lower prices.”
Is Competition Being Thwarted by PBMs and Biologics Makers?
In other words, the high rebates paid to PBMs and others by makers of biologic products – companies that make other popular medicines as well -- are a disincentive for plans to offer biosimilars to members. “The branded drug makers,” said Gottlieb, “thwart competition by dangling big rebates to lock up payors in multi-year contracts right on the eve of biosimilar entry.”
He added that the FDA was “concerned that volume-based rebates may encourage dysfunctional clinical treatment pathways. We’ve heard from multiple sources that some payors are requiring step-therapy or prior authorization on the reference biologic before patients can access a biosimilar. We see no clinical rationale for these practices.”
Joshua Cohen, a pharmaceutical analyst, elaborated on this theme in an article in Forbes:
In some ways, the U.S. biosimilars market behaves more like a branded than a generics market, where, in each therapeutic class consisting of originator biologics, biobetters (follow-on originator biologics), and biosimilars, different brands compete on price or rebates.
Originator biologics manufacturers increase rebates to retain market share, and in some cases negotiate formulary exclusivity with payers to preempt biosimilar competition. If available to them, they also introduce biobetters to the market, which compete on the grounds of improved quality, dosing, or convenience. In turn, biosimilar makers must offer payers substantial rebates to gain market share through favored formulary tier placement. Additionally, it’s vital that they invest heavily in marketing their product to obtain buy-in from payers, physicians, and patients.
The courts may step in to address this problem, or Congress and the Administration might follow through on earlier plans to rein in PBMs, whose opaque rebates enjoy an exemption from anti-kickback laws. But, clearly, a bottleneck exists in the United States but not in Europe.
Another obstacle is patent litigation. Stealing intellectual property is wrong, and patents spur innovation. But critics say that patient access is suffering when biologics makers, especially, game the system. The CRS study stated, “The launch of several biosimilar products has been delayed due to ongoing patent litigation and settlements between brand biologic and biosimilar companies.
For example, AbbVie has been the subject of Congressional inquiry for its use of a so-called ‘patent thicket’ to protect” its biologic Humira. The FDA approved three biosimilars to Humira in 2016, 2017, and 2018, but, under settlements between the manufacturer and AbbVie, none will be launched before Jan. 31, 2023. No doubt, a major reason that European biosimilars reach market more quickly is a difference in patent regimes.
Other obstacles include a confusing system for naming biosimilars that adds four random letters as the suffix to the non-proprietary name, the difficulty that companies developing biosimilars have in obtaining samples from branded biologics makers, and the thorny issue of interchangeability.
While pharmacists can substitute a generic for a branded drug on their own, they cannot substitute a biosimilar for a biologic unless the biosimilar is deemed “interchangeable” – a designation that, so far, no biosimilar has achieved. Speaking at a conference earlier this year, Gal argued that the FDA should “collapse the requirements” for interchangeable and biosimilar products into a single designation. Achieving approval as a biosimilar is already a high bar.
Are Biologics a ‘Natural Monopoly’?
Some analysts are maintaining that policy and educational obstacles are not at the root of the problem. In an article in Health Affairs in April, Preston Atteberry, Peter Bach, and Jennifer Ohn of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center, and Mark Trusheim of MIT argued that biologics, unlike small-molecule chemical drugs, should be seen as “natural monopolies.” They write, “The biologic and chemical differences between small-molecule and biologic drugs, not policy decisions” explain why generics have increased competition but biosimilars have not.
Biosimilars, they write, are too expensive and time-consuming to produce, and because they are not exact copies, they will always elicit questions about clinical adoption. “Addressing these challenges consumes development time and money, increases the risk of regulatory failure, increases sales and marketing costs, and raises the expected profit threshold a prospective biosimilar manufacturer requires before considering entering the market,” they add. “Analysts have concluded that biosimilars are unviable for any reference product with annual revenues less than $897 million—a threshold that many biologics fail to meet.”
In a second article, the authors revealed their solution, which, they say, could generate $250 billion to $300 billion in savings over five years. A biologic could retain their exclusivity as intellectual property, as currently, but when that period expires, the government would order the price drastically cut, along the lines of reductions that ensue when generics enter the market of a chemical compound. “The lowered price,” write the authors, “should equal the costs of production (including facility repair and replacement) and market distribution, plus an appropriate profit.”
The article has brought strong responses. Alex Brill and Dominic Ippolito of the American Enterprise Institute, also writing in Health Affairs, argue that biologics are not “natural monopolies” – like, for example, an electric power company – and that the limited evidence shows that biosimilars do, in fact, “appear to generate the kind of competitive forces that most experts had predicted.”
An anonymous response to the first of the Atteberry pieces, points out that the National Health Service in the U.K. “recently secured biosimilar adalimumab at >80% discount, saving >£300 Million GBP/$400 Million in one tender. [Here is a link to an article on the subject.] This was the single most expensive specialty drug on our hospitals’ formularies. The 2018/19 financial year looks to deliver half a billion pounds of savings to reinvest back into healthcare.”
Proposed Policy Changes to Ease the Biosimilar Pathway
While consumers have an incentive to choose a generic that, under a pharmaceutical insurance plan, might cost $10 out-of-pocket over a branded drug that costs $200, no similar consumer incentive exists for a biosimilar over a biologic. That must change.
Prescribers, as well, lack strong incentives. Currently, their reimbursement under Medicare is the same, no matter whether they choose a biologic or a biosimilar. But the bill approved in July by the Senate Finance Committee proposes increasing the add-on payment percentage of the biosimilar from 6% of the manufacturer’s average sales price to 8%. creating greater incentive for physicians to choose the biosimilar product.
There are other potential legislative correctives to encourage biosimilar uptake as well. For example, Medicare plans currently receive stars for achieving certain quality and performance targets. The stars make the plans more enticing to consumers. On Oct. 6, Reps. Paul D. Tonko (D-NY) and Bob Gibbs (R-Ohio) introduced the Star Rating for Biosimilars Act (H.R. 4629), directing HHS to add availability of cost-saving biosimilars as a new condition for achieving stars. That’s an added incentive for plans to encourage biosimilar use.
Employers, however, need to become more active in pushing insurers and PBMs to clarify why biosimilars are not more available to plan members. If a branded biologic has a biosimilar competitor, why isn’t the plan promoting the use of the less expensive biosimilar? The answer may lie in the rebates that the biologic manufacturer is paying to the PBM.
The truth is that the virtuous cycle exists. It took decades for public policy to change so that generics would become more available and competitive. Let’s hope that the process for biosimilars moves faster. Clearly, however, this is not the time to give up on the promise of biosimilars to constrain drug prices.
Frequent comparisons are made between health care costs in the United States and in other wealthy countries. The focus of these comparisons is nearly always pharmaceutical prices. The latest example is a report, issued by the House Ways and Means Committee staff, titled, “A Painful Pill to Swallow.” The report compared drug prices in the United States with those in Canada, Australia, Japan, and a group of Europeans countries. It concluded, “The analysis presented in this report clearly illustrates that, across the board, the U.S. spends more on drugs than other comparable developed countries.”
That’s hardly a surprise. The U.S. health care system is utterly different from that of other countries, where the government is in charge and, as a monopsony buyer, can demand the prices it wants from drug manufacturers. These nationalized health systems may have the benefit of lower prices, but they create significant drawbacks.
What About Innovation?
The Ways and Means report sheds little new light – while casting considerable shade – on a complex subject. The researchers, for example, give short shrift to what is probably the most important issue that faces serious policy makers tackling drug-cost question: the impact of prices on innovation. The U.S. set a new record last year for drug approvals, and the number of new sophisticated biological products jumped from 10 in 2014 to 24 in 2018. Many of these approved medicines target the worst diseases, especially cancer.
The Ways and Means report is clearly meant to provide ammunition for those in Congress (and even in the Administration) who want to force foreign price controls onto the U.S. system. But if that happens, how will innovation be funded? Who will provide the capital to develop the pill that cures Alzheimer’s or AIDS or that extends the life of cancer patients?
As we pointed out in Newsletter No. 52, after examining health spending in the U.S. and other rich countries last year, three Harvard researchers, including Ashish Jha, the dean for Global Strategy at the Harvard T.H. Chan School of Public Health, concluded: “Although the United States’ high prices of pharmaceuticals are controversial, these prices have been viewed as critical to innovation, including U.S. production of chemical entities.”
The effect of price controls is predictable. They will deprive drug manufacturers of the revenues needed to fund research and development and harm the U.S. pharmaceutical industry in the same way they have depleted its European counterpart. As recently as 1990, Europe was spending more than the U.S. on R&D. Today, it’s no contest. Henry Grabowski and Y. Richard Yang wrote in Health Affairs that “U.S. firms overtook their European counterparts in innovative performance or the introduction of first-in-class, biotech, and orphan products. The United States also became the leading market for first launch.”
In a report titled, “The Opportunity Costs of Socialism,” the U.S. President’s Council of Economic Advisers looked at the effects of adopting European-style price controls:
Take the case of pharmaceutical innovation to improve patient health. Empirical research in this industry and others has shown that R&D investments are positively related to market size. For the case of medical innovation, evidence suggests that a 1 percent reduction in market size reduces innovation—defined as the number of new drugs launched—by as much as 4 percent (Acemoglu and Linn 2004).
Given that future profitability drives investment in this way, Lakdawalla and others (2009) examined the impact on medical innovation of the U.S. adopting European-style price controls. The study examined patients over the age of 55 and considered the reduction in R&D and new drugs approved that these price controls would cause. The paper examined increases in mortality for the heart disease, hypertension, diabetes, cancer, lung disease, stroke, and mental illness.
The study’s major finding is summarized in a chart on page 48 of the CEA report. Life expectancy for Americans aged 50-55 would quickly fall by a half-year in the U.S. and keep falling to seven-tenths of a year by 2060. And, because the U.S. develops so many new drugs, life expectancy would drop in Europe as well, by four-tenths of a year by 2040 and seven-tenths by 2060. The conclusion: “Given that innovations are financed by world returns mostly earned in the U.S., the mortality effects on health were substantial both in the U.S. and in Europe.”
R&D Projects Estimated to Fall 30% to 60%
Many U.S. companies now plough one-fifth of their revenues or more into R&D; indeed, R&D spending often exceeds net earnings. A study by Thomas Abbott and John Vernon, published as a working paper by the prestigious National Bureau of Economic Research, found that “cutting prices by 40 to 50 percent in the United States will lead to between 30 and 60 percent fewer R and D projects being undertaken in the early stage of developing a new drug.” David R. Francis revisited the Abbott-Vernon paper on Oct. in the NBER Digest and wrote:
Numerous economic studies indicate that price controls, by cutting the return that pharmaceutical companies receive on the sale of their drugs, also would reduce the number of new drugs being brought to the market. So, a short-run benefit for consumers could lead to a long-run negative impact on social welfare. And, this damage wouldn't be fully felt for several decades because it takes so long to develop new drugs.
Against considerable research, the Ways and Means paper quotes the February congressional testimony of Rachel Sachs, an associate law professor at Washington University of St. Louis, who claims that pharmaceutical companies have “other opportunities to obtain savings” within their current business models. In other words, revenues may fall, but the drug companies can cut expenses to make up for the losses and still maintain R&D levels. Any economist would find this an odd claim. If businesses can save money and thus boost earnings, they would already be doing it. They have a huge incentive: their stock prices.
The Matter of Rebates
Rebates are a way of life in complicated pricing schemes for pharmaceuticals. As HHS explains in a Fact Sheet:
Drug companies pay rebates and other payments to PBMs [pharmacy benefit managers, who work for insurance plans], but these payments are not reflected in patient out-of-pocket drug costs. The average difference between the list price of a drug and the net price after a rebate is 26 to 30 percent. These rebates, negotiated in Medicare Part D and private plans, are typically not used to reduce patients’ cost sharing for a particular drug.
Unfortunately, it is difficult to calculate rebates. According to a study by the research firm Milliman:
Rebate contract terms are trade secrets and vary widely among brands, pharmaceutical manufacturers, and health insurers, but tend to be highest for brands in therapeutic classes with competing products. This secrecy makes cost comparisons of competing brands on the basis of price alone very difficult (if not impossible) to estimate.
What we do know is that rebates are huge, and rising. The IQVIA Institute for Human Data Science found that the difference between invoice spending (that is, the amount paid by drug distributors, or roughly the list price) and net spending (accounting for all price concessions) increased from $74 billion in 2013 to $130 billion in 2017 for retail drugs. HHS found a similar trend of growing differences between list and net prices. Manufacturer rebates were only 10% of gross prescription drug costs in 2008. Today, according to HHS, they represent between 26% and 30% of list prices and in many cases far more.
The Ways and Means study uses 22% -- a figure for the year 2015, as reported this year by the Congressional Budget Office. Why such an old number when the Centers for Medicare and Medicaid Services has more up-to-date figures?
In a table, the Ways and Means report lists average drug prices for different countries and then states what the U.S. rebate would have to be in order to match it. On average, 61 drugs were examined per country -- with a range from 37 drugs from Portugal to 78 for the U.K., so, obviously we are not talking about direct comparisons here. Again, on average, the U.S. rebate to match foreign prices would have to be 73% -- with a range from 61% for Denmark to 82% for Japan.
The actual average rebate, as we noted, is probably around 28% -- but we can’t tell what the figure would be for the 37-78 drugs examined in the Ways and Means report. That report, to the committee staff’s credit, also looked at GDP per capita in the comparison countries. Clearly, richer countries, with more demand for medicines, should naturally have higher prices. Much of the price disparity can be explained by adjusting for GDP per-capita differences and subtracting rebates. For example, Canada’s GDP per capita is 27% lower than that of the U.S., and we can assume a 28% percent rebate.
Putting Drug Prices in Perspective
While prescription drug prices seem to be the obsession of the day, they represent only 10% of total health care costs, according to official National Health Expenditures data. An additional 4% of health care costs are attributed to drugs that are administered in hospitals and doctors’ offices. By contrast, hospitals account for 33% of U.S health costs, and physician and clinical services for 20%.
The truth is that the prices of nearly all health care services are higher in the United States. According to the Peterson-Kaiser Health System Tracker, an overnight hospital stay in the U.S. costs $5,220 versus $765 in Australia. The average price of an angioplasty in a U.S. hospital is $31,620, compared with $7,264 in the U.K., and a Caesarean delivery is $16,106 in the U.S. versus $9,965 in Switzerland. An MRI in the U.S. costs an average of $1,119; in Australia, $215. And an appendectomy costs twice as much in the U.S. as in the U.K.
Physician compensation in the United States is higher as well: an average $313,000 a year, according to an international compensation survey published this year in Medscape. That compares with $163,000 in Germany; $138,000 in the U.K., and $108,000 in France. Part of that difference is owed, as mentioned above, to disparity in GDP per capita, which is roughly 50% higher in the U.S. than, for instance, in France.
In addition, U.S. doctors have a heavier burden of medical malpractice insurance in a litigious society plus higher administrative costs that they must absorb themselves. A 2014 study published in BMC Health Services Research by Aliya Jiwani and colleagues found that billing and insurance-related activities added an additional $70 billion to physician-practice expenses, or about $80,000 per doctor in 2012, which would be about $100,000 today.
Remember, as well, that Americans have won or shared the Nobel Prize in Physiology or Medicine in 29 of the past 40 years. Not only our pharmaceuticals but our physicians are the best in the world.
Lack of Access in Other Countries
But health care is useless without access. The CEA report provides a comparison that shows, for different nations, the proportion of seniors who waited “at least four weeks to see a specialist in the past two years.” Of the 12 countries studied, the U.S. did best, with only 21% of seniors waiting that long. A sampling of the others: France, 42%; U.K., 51%; Canada (worst of the 12), at 59%.
Lung cancer is the number-one killer of cancers world-wide. While treatment for non-small-cell lung cancer (NSCLC) has improved considerably because of new drugs, in many rich countries access is limited. A study by HIS Markit for PhRMA found that, for five countries studied (Canada, South Korea, France, the U.K., and Australia), the average delay between regulatory approval of a drug to treat the disease and the first actual reimbursement of a patient was 589 days, or more than a year and a half. In the U.S., the delay is just 30 days.
The long delays in the other countries mean that many patients don’t survive to benefit from the effects of the drugs. By contrast, says the study, “American patients who were diagnosed with locally advanced and metastatic NSCLC between 2006-2017 are estimated to have gained 201,700 life years in total due to innovative medicines.”
An analysis by the U.S. Department of Health and Human Services found that only 11 of the 27 advanced medicines available under Medicare Part B in the United States were available in all 16 of the rich countries examined by HHS.
Rather than the U.S. importing European-style price controls, other wealthy countries should relax the tight grip of government, pay market prices, and give their citizens access to the best medicines. A study published last year by Dana Goldman and Darius Lakdawalla of the USC Schaeffer Center study notes:
We estimate that if European prices were 20 percent higher, the resulting increased innovation would generate $10 trillion in welfare gains for Americans, and $7.5 trillion for Europeans over the next 50 years. Encouraging other wealthy countries to shoulder more of the burden of drug discovery — including higher prices for innovative treatments — would ultimately benefit patients in the United States and the rest of the world.
We have entered a Golden Age for new medicines. Shouldn’t it benefit us all?
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