Biosimilars are not Generics: How Entry of ‘Highly Similar’ Competitors Affects Price

open_access
Open Access
Author:
Stein, Aiden
Area of Honors:
Economics
Degree:
Bachelor of Arts
Document Type:
Thesis
Thesis Supervisors:
Robert Clifford Marshall, Thesis Supervisor
Karl Schurter, Thesis Supervisor
Sung Jae Jun, Thesis Honors Advisor
Keywords:
Biologics
Biosimilars
Entry
Prices
Competition
Pharmaceuticals
Autocorrelation
Panel Data
Driscoll-Kraay Standard Errors
Abstract:
Biologic drugs are increasingly important revenue drivers in the pharmaceutical industry and in the past decade many of these product markets are being entered by generic equivalents dubbed biosimilars. Because of their nascency, the market impacts of biosimilars are understudied. I use Medicare Part B pricing data and insights from the FDA Purple Book to develop a consistent estimator of the marginal effect of the lagged first biosimilars price and the number of biosimilar entrants into the market by a fixed effects model. I find the data is consistent with an AR(1) autoregressive model of errors. I address this using a Driscoll-Kraay robust standard error approach which is robust to autocorrelation. I find the causal effect of biosimilar entry is best attributed to biosimilar competing down the incumbent’s price. In the preferred panel which drops three anomalous drug markets, the basic specification shows a decrease of the lagged first biosimilars price by 1% causes a 0.43% reduction in incumbent price. When an interaction term is included between the lagged first biosimilar price and the number of entrants, the impact of first biosimilar price now causes for every 1% drop a 0.812% decrease in incumbent price. In this specification, the interaction term captures a unique effect whereby subsequent entrants diminish the impact of lagged first biosimilar price. In other words, my results show rapidly diminishing marginal returns to new entrants. Finally, I discuss the relevance of these results to policy makers.