Don’t hinder biosimilar development

In its most recent legislative session, the Florida legislature considered precluding pharmacy benefit managers (PBMs) from holding an investment interest in biosimilar manufacturing. That restriction was rightfully removed before final passage. For several reasons, neither Florida nor other states should consider such a prohibition in the future.

What are biosimilars?

In policy discussions, pharmaceutical drugs are typically divided into two categories: small molecule drugs (medicines often taken orally via pills) and biologics (complex medicines often injected or administered via infusion). Small molecule drugs are what most people are familiar with and are the focus of most of drug policy. When people discuss generics, they are referring to small molecule drugs manufactured by companies other than the original brand manufacturer. For biologics, there’s a similar, though not identical concept known as biosimilars.

In recent years, PBMs have begun to become involved in the production of biosimilars, which has competitors and policymakers worried. Florida proposed one of the most comprehensive prohibitions, though it eventually abandoned the policy. Because states may consider such a policy, it’s worth clarifying why a prohibition of this nature would be harmful to patients and taxpayers.

Higher costs of biosimilars

The generic drug market is a compelling example of markets working. In the United States, generic drug prices are actually lower than in countries that control their prices, bringing life-saving and life-improving treatments to patients affordably.

Theoretically, biosimilars should also generate increased levels of competition and savings as generics do. Unfortunately, biosimilars face a more challenging process.

For example, the cost of developing a biosimilar is much higher than the cost of developing a small molecule generic. Regulations on biosimilars are more onerous, and the production process is more complex. Consequently, the market for biosimilar production faces more significant challenges than the market for generic production.

This may help explain why PBMs are entering this market. PBMs have often used formularies and benefit design to encourage lower-cost generic options. However, if the barriers to entry for biosimilar production are too high, PBMs may find it in their interest to enter the market themselves. This is what seems to be happening. CVS Health, through subsidiaries, is helping to market and distribute several biosimilars, even for other PBMs. All three of Express Scripts, Optum Rx, and CVS Caremark now promote biosimilars for Humira, and each has moved toward PBM-affiliated or private-label arrangements. These private label biosimilars are analogous to Walgreens or Walmart selling their own branded generic versions of common drugs.

Another obstacle to increased adoption is reluctance from physicians and patients to switch to biosimilars. Physicians and patients have been slow to adopt biosimilars, though for different reasons.

For patients, some believe potential recipients experience a “Nocebo” effect wherein they have expectations that the biosimilars are ineffective or less safe, and then when they start taking them, their prior belief becomes self-fulfilling.

Physicians might be hesitant for similar reasons. Biosimilars are fairly new, and physicians may start off somewhat skeptical. They may be unwilling to take risks either with patients who have been treated successfully with the original product for a long time or even on new patients if their experience with the new version is minimal. Still others may not know which biosimilars the FDA has granted “interchangeability” status.

Taken together, there are already many barriers to the production and adoption of biosimilars and more should not be erected. Doing so will run the risk of promoting the incumbent manufacturer of the brand biologic which wants to keep prices high. Policymakers should endeavor to instead promote the producers of the biosimilars to compete with the incumbents and bring prices down.

Vertical integration

Policymakers and special interests frequently observe a non-ideal outcome, such as higher than desired prices, identify undesirable outcomes, attribute them to incorrect causes, and propose broad interventions that fail to address the underlying problem. Prohibiting PBMs from investing in manufacturing is one such example.

While the potential downsides of vertical integration shouldn’t be forgotten, one must also consider the substantial upsides. Vertical integration can benefit consumers by reducing costs through the elimination of double marginalization, streamlining administrative processes, and cutting duplicative costs. In the PBM space, this may manifest as faster formulary decisions, more streamlined contracting, and more coherent logistics in delivery. In fact, research generally shows that the benefits of vertical integration outweigh the costs.

PBM ownership of manufacturing processes offers many of these same benefits, especially in an area where independent production has been lacking. A senior market access solutions analyst argues “Adding a manufacturing arm brings undeniable advantages for PBMs, from better cost control to smoother supply chain dynamics.”

Notably, while PBMs are pushing into the biosimilar market, they have shown less interest in the generic market. One reason for that difference may be the different levels of profitability in these two areas. However, it would be a mistake to think that the difference in profitability was not itself reflective of lower competition and entry.

The biosimilar pipeline is already underdeveloped. Many biologics that will lose exclusivity in coming years still do not have biosimilars in development, which means future competition may be thin. In a market characterized by high development costs, patent thickets, reimbursement complexity, and physician and patient hesitancy, lawmakers should be careful about adding one more reason for potential competitors to stay on the sidelines.