Drug Competition Means Big Savings

Drug Competition Means Big Savings

Competition for some of the priciest drugs may soon be coming to a pharmacy near you. The new development has to do with "biologics," which are drugs produced in living systems such as plant and animal cells or microorganisms.

Biologics treat some of the most serious diseases, and they are typically very expensive. But because of the way they are made, competing drug manufacturers can't precisely replicate them — there's no such thing as a "generic" version of a biologic. There are, however, highly similar substitutes known as "biosimilars." The Biologics Price Competition and Innovation Act, passed in 2010, created a process through which the Food and Drug Administration can approve these drugs.

For the first time, the FDA has done just that, approving Sandoz's Zarzio, which will compete with Amgen's Neupogen, a drug that treats a side effect of chemotherapy. What benefits can consumers expect from this competition? There are lessons in the Hatch-Waxman Act, a 1984 law that essentially did for generics what the new law does for biosimilars.

By 2013, generics accounted for around 86 percent of dispensed retail prescriptions, and it has been estimated that consumers saved over one trillion dollars in the period from 2002 to 2011. In many cases, generic price competition decreased prices by 80 to 90 percent. The law also lowered overall medical costs, since drugs decrease the need for medical services such as emergency-room visits, hospitalization, and operations. Also, when people stay healthier, they miss work less and are more productive on the job.

All this has occurred without innovation suffering. We have seen many new drugs in the last three decades.

To be sure, the market for biosimilars is different in some ways. Since development and manufacturing costs are higher for biosimilars than for generics, biosimilar competition will probably bring smaller price cuts, at least in percentage terms. Based on the European market's early experience — biosimilars have been competing there since 2006 — the savings from competition has been estimated to be 15 to 20 percent.

However, a year's supply of a biologic can cost $100,000, so a 15 to 20 percent price reduction is substantial. A RAND study estimated that savings from biologics over the next decade will be over $44 billion.

With the FDA's first biosimilar approval, the future for bringing lower-cost drugs to patients is very bright. Consumers will see tremendous benefits from biosimilar competition.

Joseph Fuhr is an economics professor at Widener University and senior fellow at the American Consumer Institute.

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