Generic drugs are the biggest success story in healthcare cost containment. This great success has fooled policymakers, journalists, health plans and others into thinking that the same model will tame spending on biologic drugs the same way it has for traditional, chemical based products.
The latest example can be found in the Wall Street Journal (Knockoffs of Biotech Drugs Bring Paltry Savings). The article blames the lack of savings on price increases by makers of the original products in the run-up to the introduction of competing products. That is happening, but it doesn’t get to the root cause of the situation.
The traditional generic market is about as close as the healthcare industry gets to economists’ fantasy world of perfect competition where there is no differentiation among products, there are a large number of producers, and buyers understand that the products are all the same. As a result, prices trend toward marginal cost and it is not uncommon to see price reductions of 90 percent or more. Sometimes it’s 99 percent.
Biotech is very different. The “generic” products are not generic at all, rather they are close but not exact copies that cannot be freely substituted for one another. The number of producers will be small because they must go through the expense of clinical trials. And if the companies are smart (they are) they will do their best to make sure buyers realize there are differences among the products. One clue is that the products are referred to as biosimilars not biogenerics.
As I’ve been writing for ten years, this doesn’t sound like the market for generic drugs. Rather it’s much more like the “me-too” phenomenon we saw in the 90s with blockbuster categories such as statins. When Lipitor came in as the fifth statin on the market it didn’t advertise itself as cheaper and undifferentiated. Rather it used clever trial design and sales and marketing tactics to climb to the top of the pile.
Why wouldn’t a biosimilar try the same approach if possible? So far new entrants are pricing themselves a bit lower than the original product but if they can come up with better data from a trial why not make the price higher instead?
If we take off our generics blinders we can come up with ways to control costs while encouraging innovation. Since 2006 (A better idea than biogenerics) I’ve suggested regulating the price of biotech drugs once their patents expire. I still think it’s a good idea.
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