Drug prices: the lucrative world of not-so-cheap imitations

Copycats play a crucial role in the pharmaceutical industry. Patents reward innovators, but eventually imitators drive prices down. The model is being thrown into question by the high prices of some copycat drugs.

A growing share of the drugs bill — nearly a third in the US — now goes on a class of drugs called “biologics”. These large molecules, manufactured using living cells, are often used to treat cancer and immune diseases. Their complexity makes them hard to mimic. That, together with the need for extensive testing, means that near-copies — called biosimilars — usually sell for just 10-35 per cent less than the original. By contrast, generic versions of mainstream medicines, made from small molecules, typically cost 85 per cent less, according to US regulators. 

This is a lucrative market that has drawn in established drugs giants. Pfizer made biosimilar sales of $1.5bn last year; Amgen $1.7bn. South Korea’s Celltrion earned an incremental operating margin of 59 per cent after its recent launch of two biosimilars in the US, according to non-profit research group Drug Pricing Lab. By comparison, median operating margins for branded biopharma companies are 32 per cent.

Profits from biosimilars are less in price-sensitive Europe. In time, the US should benefit from greater cost savings, say Bernstein analysts. Even last year, biosimilars made sales of $4bn, but created $7.4bn of cost savings as they forced original manufacturers to lower prices. Swiss drugs company Roche faces particularly tough competition for three of its ageing blockbuster cancer drugs. Biosimilars knocked $6bn off its international revenues last year. 

But there are limits to the inroads that biosimilars can make. Copycats have focused their efforts on the biggest earners. The average peak sales of the drugs copied over the past five years was more than $5bn. None had peak sales below $1.3bn. Manufacturing and regulatory complexities could mean the monopoly pricing of many biologic drugs go unchallenged. That would add weight to demands by US campaigners for their prices to be regulated, rather than left to market forces.

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