The Biosimilar Onslaught
Pharmaceutical companies face huge revenue uncertainties after the loss of patent exclusivity; but not all is lost.
Pharmaceutical companies which produce major protein- based biological drugs are under fire. By the year 2020, expiry of major biologic patents will expose up to $100B in revenues to attacks from companies which produce mimics of the original drug.
Pharmaceutical drugs can be segmented into traditional small-molecule drugs and protein-based biological drugs (biologics). Biologics are complex protein, sugar, or nucleic acid compounds produced from genetically engineered living cells, often isolated from natural sources. Biologics provide a wide range of treatments from anti-inflammatory indications for arthritis to vaccinations against multitudes of viruses and tumor-fighting indications for cancers.
Innovative pharmaceutical companies are rewarded for developing a biologic drug with 12 years of market exclusivity – a government-mandated supply monopoly. As the monopoly nears its end, generic competitors prepare for market entry. These competitors adopt a strategy of mimicry and price competition; they develop a “biosimilar”, a mimic of the original biologic which is functionally analogous but not entirely identical due to the complexity of the biologic manufacturing process.
The manufacturing process for biologics produces complex compounds in a dynamic cell environment. The nature of this process demands stringent environmental control and technical aptitude such that biosimilar competitors cannot match this level of consistency without extensive R&D. This inherent complexity drives mimicry costs: developing a biosimilar requires a $100M to 250M R&D investment whereas small-molecule generics cost only $1M to 4M. Despite this heightened investment, biosimilars inevitably maintain a degree of separation from the original biologic, which detracts from their perceived quality and efficacy.
Nevertheless, upon market entry, biosimilars erode biologic revenues by competing at a significant price discount to compensate for any perceived product variation. The generic market entry effect is a primary driver of post-exclusivity revenue decay for innovative pharmaceuticals. With the loss of patent protection by 2020 and billions of dollars on the line, biosimilars represent a significant business risk for many innovative pharmaceuticals.
Biogen Battles Biosimilars
Biogen, a leading pharmaceutical company, must deal with risk exposure related to its biologic drug portfolio and development pipeline. The company prides itself in innovation – its line of biologics fuelled the company’s 40% revenue growth between 2013 and 2014, reaching an all- time high of $9.7B. Despite the revenue growth, Biogen’s stock price has been on the decline in part due to biologic revenue uncertainty.
The Food and Drug Administration (FDA) recently implemented an accelerated Biologics License Application (BLA), providing a well-defined pathway for biosimilar competitors to enter biologic markets and thus further contributing to Biogen’s revenue uncertainty.
To combat this uncertainty, Biogen should use a biosimilar licensing agreement to boost its post-exclusivity revenues. While the positive effect of this licensing agreement is outlined using Biogen’s Eloctate drug, this strategy is applicable to all of Biogen’s biologic portfolio.
Eloctate is a recombinant anti-hemophilic factor used to treat hemophilia Type A and was granted FDA market exclusivity from 2014 to 2026. The projected market share represents approximately 25% of the total hemophilia Type A market. Despite modestQ4 2014 revenues of $37M, equity research consensus projects 2026 drug revenues of up to $1.2B.
The proposed licensing system is for Biogen to license an identical generic version of Eloctate to Amgen – the world’s second largest biologic pharmaceutical by revenue. Amgen is an ideal licensee because its biologic portfolio does not include hemophiliac products, thus providing them an opportunity to expand their portfolio. Theoretically, this licensing program can be applied to Biogen’s other competitors as well.
Biogen’s national licensing agreement with Amgen would be publicly signed within two years, taking effect upon expiry of Eloctate’s market exclusivity in 2026. The terms of the licensing agreement can be seen below.
Interchangeability: Ammunition for Amgen
Under the FDA mandate, the first biosimilar to gain interchangeability for a specific biologic is awarded with one year of exclusive interchangeability during which no other biosimilar is permitted interchangeability status. During this year, the interchangeable biosimilar would have an effective monopoly as it is able to outcompete other biosimilars on status at a similar price point. This monopolized market share would decay after the exclusivity expires, at which point it can be conservatively assumed that all competitors would reach a competitive equilibrium wherein each player has an equal market share. With a decay over one year, we project the present value of receiving this exclusivity at $34M. While Amgen may receive the exclusivity without the licensing agreement, but it has a guaranteed exclusivity if it signs the agreement with Biogen. The most probable benefit from the licensing is a present value increase of $22M. For this calculation, it is assumed that only biosimilars with interchangeability will enter the marketplace since any biosimilar without the designation do not stand a chance against those which do.
Following similar assumptions indicated by the Congressional Budget Office and Avalere Health, the biosimilar market for Eloctate is expected to have three competitors. Given that Amgen would be granted an interchangeable biosimilar for Eloctate, competitors could effectively be discouraged to compete with Amgen. With the licensing system, non- licensees have more to lose given the lack of interchangeability exclusivity. This loss is projected to be $16M as compared to the $6M they would have lost without the licensing system. The significantly higher loss should discourage at least one non-licensee competitor from entering the market. For every single non-licensee competitor which enters the market, Amgen would see an incremental benefit of $245M.
R&D and Manufacturing Savings
Pharmaceuticals require specialized manufacturing capabilities in order to maintain the stringent conditions required for biologic drug production. Biogen can help Amgen with R&D savings, which typically run from $100M to $250M over 7 to 8 years for biosimilars with a simulated average of $125M. Eloctate can also offer its existing manufacturing facilities to Amgen, especially since capacity will be freed up with a declining demand for Eloctate upon patient expiration. Based on industry average of manufacturing investment costs of $200 to 400M spread over 4 to 7 years, Biogen could also help Amgen save a present value of $230M in manufacturing costs. The combined average savings of $355M, on top of the $22M exclusivity benefit, are the basis of the licensing system.
A Non-Zero-Sum Game
Overall, savings in R&D and manufacturing, as well as the guaranteed one-year interchangeable exclusivity provides the licensee with a substantial value of $375 to 380M. This value would be further supplemented by the possibility of discouraging one or more biosimilar competitors from entering the market. Discouragement of one competitor would benefit the licensee an additional $245M. Amgen can save the years they would have otherwise spent on R&D of this biosimilar on another project which can impart additional benefit. For the licensee, the benefit of the licensing system can reach upwards of $625M. Biogen can enter fair negotiations with Amgen using this as the foundation of price negotiation with any resulting price as Biogen’s profit.
In this licensing system, Biogen may bear additional legal and operational risks while manufacturing the competing biosimilar product. Some of these may be offset by the upfront fee of $500M it receives from Amgen. Biogen may run the risk of decreasing its brand drug market share as a result of the licensing system, however this is unlikely to be an issue in an interchangeable system where pharmacists make purchasing decisions based on price rather than brand motivations. Pharmacists, who are constrained by end consumer demand for both brand and generic Eloctate, would not change their purchasing patterns and continue to purchase the original brand. Therefore, there is a negligible effect on Biogen’s Eloctate revenues, while the upside is significant.
In the worst case scenario, Biogen’s brand market share can dramatically drop to 0% as a result of licensing. Biogen would then receive Amgen’s disproportionate profit (+5%) from price discounted sales, resulting in a projected loss of up to $361M. This scenario is particularly unlikely because Amgen would be incentivized against pursuing disproportionate market share by the 5% loss realized on each disproportionate sale. This maximum downside, however unlikely, still pales against Biogen’s upside.
Protected by Policy
Although the FDA has only established the accelerated BLA pathway in 2012, large biosimilar manufacturers such as Sandoz’s Zarxio are paving the road to interchangeability. Amgen’s biosimilar of AbbVie’s, which has recently shown clinical equivalence to Humira in a pivotal phase III study also shows high potential of approval. As pharmaceuticals further refine the biosimilar development process in the future, interchangeability is likely to be commonplace. The success rate of approvals from the FDA can look to the more developed European biosimilar market as a precedent to testing its validity. One example is Teva’s Granix, which was approved as a biosimilar in Europe and as a proprietary drug in the US.
Surviving the Onslaught
Biogen is threatened by the onslaught of biosimilars. As a biologics manufacturer, Biogen should proactively act against biosimilars through a national licensing agreement with a biosimilar competitor to protect post patent expiry revenues. This system would substantially supplement Biogen’s future revenues in a replicable and scalable manner, with implications extending beyond just Eloctate to Biogen’s entire biologics portfolio. The adoption of such a model by other biologic companies would ensure that pharmaceutical market conditions continue to incentivize and propel innovation in product development.