1. Structural Change in Pharmaceuticals: The Growth of Biologics and Emergence of Biosimilars Henry Grabowski Duke University Conference on Structural Change, Dynamics and Economic Growth Livorno, Italy September 12-14, 2013

2. Biologics Trends and Policy Issues Biological therapies have been targeted to life threatening and disabling diseases including various cancers, multiple sclerosis, neutropenia, and rheumatoid arthritis Substantial improvements in survival, morbidity and quality of life have been documented At the same time biologics often cost tens of thousands of dollar per course of treatment Biologics account for a growing share of overall drug expenditures with increasing concerns for policymakers

3. Pharmaceuticals vs. Biologics PharmaceuticalsBiologics Size (MW)Small (<1000)Large (>10,000) SourceChemical synthesisCultures of living cells FormGenerally oral solidsOften injected or infused Dispensed byUsually retail pharmaciesOften by doctors or hospitals Example Lipitor (anti-cholesterol)Herceptin (breast cancer) HERCEPTIN MW = 185,000 LIPITOR MW = 558.64

4. Characteristics of Biological Innovation Biologics account for a large share of novel and first in class therapies over the past two decades 1 There are more than 600 biologics in clinical testing – more than 250 for oncology uses alone Many biologics have multiple indications across diverse therapeutic areas 1 Source: H. Grabowski and R. Wang. “The Quantity and Quality of Worldwide New Drug Introductions 1982-2003,” Health Affairs, March/April 2006, 25(2):452- 460

5. Biologic Drugs Make Up a Large Percentage of the Drug Pipeline 5

7. New Regulatory Pathways for Biosimilars Biosimilars must be highly similar to their reference product in terms of potency, purity, and safety Establishing that a biosimilar has comparable therapeutic effects is a challenging task for regulators and companies EU has had a regulatory framework in place since 2005, and has approved biosimilars in three product classes – human growth hormones, epoetins, and filigrastims US biosimilar legislation was passed in 2010 and there are several biosimilar products in the pipeline

8. Key Factors Determining How Biosimilar Competition Evolves Market size and Commercial Opportunity Patent and Exclusivity Provisions Regulatory Standards for Biosimilarity Actions of Insurers, Physicians, and Patients Introduction of Next-Generation Products

9. Development Costs for Biosimilars Biologics are complex molecules derived from cell cultures where source materials and manufacturing can be critical to therapeutic outcomes Biosimilar manufacturers have undertaken clinical trials to demonstrate comparable safety and efficacy to their reference biologics European regulators require this on a case by case basis in the guidelines published to date

10. Cost of Developing A Biosimilar Product Development costs will vary across product classes Even less complex biologics (epoetins, filigrastims) are likely to cost tens of millions of dollars More complex biologics (MABs, interferons) have estimated costs of development ranging from $75 to $150 million By contrast, cost of completing bioequivalence studies for generic drugs is estimated to be $1 - $5 million

11. Manufacturing and Marketing Costs Manufacturing costs will be significantly greater for biosimilars than for generics Marketing costs may be necessary if biosimilars compete as therapeutic alternatives rather than equivalent products Post-approval pharmacovigilance studies will be a likely additional expense for biosimilars

12. “Entry and Competition in Biosimilars” * First paper is to analyze the sensitivity of entry and prices to higher fixed costs for biosimilars We combined a theoretical model with empirical findings on generic pharmaceuticals A key finding is that higher fixed costs result in fewer entrants and smaller discounts compared to generic drugs * Grabowski H, Ridley D, and Schulman K. Managerial and Decision Economics, 2007

13. 13 Biosimilars: ↑ fixed costs → ↓sellers & ↑prices Source: Grabowski, Ridley, & Schulman, 2007

14. Average Generic Share of Molecule By Complex Drug Characteristic Duke University/Analysis Group September 2007 Working Paper http:/www.econ.duke.edu/Papers/PDF/The Effect on Federal Spending of Legislation Creating a Regulatory Framework for Follow-on Biologics: Key Issues and Assumptions.pdf 14

15. 15 Average Generic Price Discount from Brand for the Molecule by Complex Drug Characteristic Duke University/Analysis Group September 2007 Working Paper http:/www.econ.duke.edu/Papers/PDF/The Effect on Federal Spending of Legislation Creating a Regulatory Framework for Follow-on Biologics: Key Issues and Assumptions.pdf

16. Generic Competition vs Biosimilar Competition Generic competition for small molecule drugs has been characterized by low cost entry and interchangeability (based on same chemical structure and bioequivalence) By contrast, biosimilar products face higher costs of entry and competition as therapeutic alternatives Biosimilar competition more likely to resemble “brand to brand” competition rather than “brand to generic” competition for the foreseeable future.

17. Decisions of Physicians, Patients, and Insurers Factors Influencing Biosimilar Use Nature of disease New vs continuing patients Short term vs maintenance therapy Insurers incentives – quotas, co-pays, reference pricing, etc.

18. What Type of Firms are Potential Entrants Large established generic firms like Teva and Sandoz Global research-intensive biopharmaceutical firms including Merck and Pfizer as well as Amgen and Biogen Many partnerships have been formed with specialty expertise at different stages of development, manufacturing, and marketing

19. European Biosimilar Sample Two major biologic products with biosimilars ―Eprex–Epotein alpha ―Neupogen–Filigrastim Five European countries in our sample ―Germany, France, UK, Italy, and Sweden IMS quarterly data over 2009–2011 period on sales and standard units

20. Incentives Relevant to Biosimilars Utilization GermanyFranceItalyUKSweden High Generic Usage Quotas Reference Price System for Biosimilars Price Relative to Reference Brand VariableFixed Variable Patient Co-Pays CappedMixed NoCapped

21. European Experience With Biosimilars For epoetins and filigrastims, approved biosimilars reference first generation products (Eprex and Neupogen) Number of biosimilar entrants and prices generally consistent with economic models and simulations Biosimilar market shares of first generation products vary across countries and reflect economic as well as medical factors

25. Biosimilar shares of therapeutic category defined to include next generation products are relatively small Patient utilization has shifted in most countries to longer lasting, next generation products (Aranesp and Neulasta) Potential cost savings from biosimilars may be reduced as a result of next generation products with quality advantages and/or savings to other medical costs European Experience With Biosimilars

28. Development of Next-Generation Products Competition in biopharmaceuticals is dynamic and many biologicals have next generation products in development Roche is developing subcutaneous injection presentations for its Rituxan and Herceptin products Biogen is developing a PEGylated version of its interferon beta 1-a product for multiple sclerosis Next generation products may be in the planning stages for Avastin and Remicade

29. Summary and Conclusions Biologics represent a major structural change in terms of innovation, new indications, costs, and competition Biosimilars have large potential commercial opportunities but they also face high regulatory and other hurdles compared to generic drugs for chemically derived drugs Biosimilar cost savings are expected to be modest, but scientific advances eventually could lead to easier entry and more robust price competition