From The Editor | February 21, 2019

Biosimilar Success: It's Not As Risky To Attain As We Think

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By Anna Rose Welch, Chief Editor, Biosimilar Development

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At the 2019 CBI Biosimilars Summit, discussion of the risks in the biosimilar world abounded. But one of the brightest spots of the conference was the presentation by Edric Engert, managing director of Abraxeolus Consulting, as well as Biosimilar Development’s editorial board member extraordinaire. As he argued throughout his presentation, biosimilar uptake may not be where we’d like it to be in the U.S. today, but even so, biosimilars still have a high probability of success from the start of development to market launch. In fact, Engert argued biosimilars have a “considerably higher” probability of success of launching on the market, compared to a novel biologic — approximately 50 percent vs. 18 percent, respectively. Hence, from a risk vs. returns perspective, Engert argued biosimilars continue to be quite attractive — you just have to be good at managing risk.

However, as the CBI biosimilar conference demonstrated, probability of success aside, the biosimilar market is not for the faint of heart. Prior to entering this space, companies need to honestly evaluate their own capabilities and infrastructure for clinical development and manufacturing, as well as marketing to get biosimilars to stick. As Engert acknowledged, several corporate decisions made in the past year or so demonstrate just how difficult a market this is to enter. Not only did Pfizer cut several of its preclinical biosimilar programs, but Momenta backed out of its biosimilar partnership with Mylan and Sandoz ended development of its rituximab biosimilar in the U.S.

Despite the fact the industry is increasingly frustrated with the large, systemic challenges in the U.S. — whether it be misaligned reimbursement incentives, policy loopholes, rebate walls, etc. — I appreciated his optimistic and level-headed discussion on the future of this market. As Engert put it best, “We can call some of the recent strategic corporate changes in the space an inflection point, but in which direction is this inflection point actually going to go? Is someone leaving the space a negative portent of things to come, or an opportunity for those remaining to get more of the pie?”

Throughout his presentation, Engert discussed the value returns possible for biosimilars, as well as what companies can do internally to manage the risks that may arise. In the first of what will be two articles, I’ll walk you through a high-level model forecast Engert — a self-proclaimed number’s geek — shared to demonstrate that the value-capture possible after developing a biosimilar is much higher than what we may assume just listening to the industry news today. In order to receive these rewards, however, there are five steps Engert outlines that a company must take to properly manage the risks that arise.

Theoretical Model On Biosimilar Value-Capture A Cause For Hope

As a dedicated word-nerd and the proud owner of a 480 out of 800 math score on the SATs (yikes…), I clearly shy away from anything too numbers-oriented. But when Engert started laying out a scenario and timeline for the development of an unnamed biosimilar in order to demonstrate the future value it could bring to the company, I, admittedly, found it too interesting to not revisit and share in an article (despite the amount of numbers included in the discussion).

Consider the following scenario:

Say a company is capable of developing a biosimilar over the course of seven years, and it will take 10 years to launch. The biosimilar is targeting a reference product which garners $4 billion in sales in the U.S., and there will be four biosimilar competitors approved and on the market concurrently. Assume the company has a 92 percent gross margin (a.k.a. total revenue minus cost of goods, divided by total sales revenue) and an example weighted average cost of capital (WACC) of 9 percent. (For those of you who, like me, are not financial gurus, companies use the WACC as the rate-of-return management and investors see as the minimum to support the decision to invest.)

In order to appease payers, the company may choose to offer a 35 percent discount right out of the gate. Engert also specified there could be a price erosion of 8 percent year-over-year. Though to some of you price erosion may have a bone-chilling effect, Engert emphasized this is not as worthy of panic as it may seem. “If you look at the price hikes many originator companies have enacted over the years, having to drop your biosimilar price to 50 percent oftentimes can bring you to the innovator price that was in place six years ago,” Engert explained. And, to put it frankly, “The originators were doing just fine financially with those prices six years ago.”

Of course, we also have to anticipate a relatively significant amount of money will be spent on marketing the biosimilar — especially for the first several years. Engert estimated roughly $3 million would have to be spent on early marketing, which increases to $10 million in the year prior to launch. It’s important to note that, in the early stages of establishing this market and educating stakeholders, we can assume more will be spent on the marketing side of things. However, overtime, Engert expects investments in marketing overall will decrease by as much as 50 percent per year.

After putting all of these numbers and considerations into a magical equation, Engert arrived at the conclusion that the net present value (NPV) for this biosimilar would be $480 million. For those unfamiliar with the NPV and why it is important, the NPV converts all the money you’re spending in the present and future, as well as the money you will get back in the future, into the total value of the money today, considering all these cash inflows and outflows over time.  

“Keep in mind, whenever you calculate a positive NPV, it means you are earning a 9 percent rate of return on everything that you’ve done, and, in addition to that 9 percent rate of return, you just created $480 million of additional value,” he explained. Now, the company doesn’t pocket that additional $480 million; rather, it is adding to the company’s net worth. But, as Engert clarified, creating any additional value — anything above zero — is beyond that 9 percent minimum return and, hence, is truly value-creating.

In fact, even when Engert made the equation more complicated (and realistic) by adding in a potential patent settlement and launch delay of four more years into the equation, “You still get your 9 percent rate of return, and, in addition to that, another $265 million of equity building for your firm.”

Five Steps To Managing Risk: Don’t Put All Your Eggs In One Basket

Whether you’re a number’s guru or not, Engert’s example puts a positive spin on what has seemed a particularly tricky market to manage thus far. But in order to arrive at this potentially rosy future of equity building, companies need to properly identify and manage the risks that can impact their products on the market.

Engert outlined five basic steps to guide a company through the identification and management of risks that arise in development and through commercialization. These five, in order, are: 1.) Prioritizing the issues that are the biggest barriers to achieving your company’s goals; 2.) Determining the downstream implications for how those issues may impact the business and industry in the long-run; 3.) Defining operation (or functional) specificity, in which you identify which parts of the business (e.g., commercial, legal, government affairs) will be involved and how they can impact such things as forecasting, portfolio selection, and management; 4.) Establishing detailed plans in which you lay out multiple strategies to address several different outcomes so you’re not pigeon-holing yourself into one strict plan; and, finally, 5.) Refining those plans by honestly assessing internal challenges and risks, for example, examining misalignment among departments or confronting infrastructure or capacity needs.   

Of these, Engert argued the most difficult for companies to address is step four — establishing detailed plans. It sounds easy enough, but in many situations companies get stuck by creating only one strategy to address a specific issue, oftentimes without sufficient implementation planning and reality checks. Should that issue evolve in an unexpected way, that strategy no longer remains adequate and more time is lost revisiting and revamping their approach.

“The worst thing we can do is create strategies or tactical plans and just assume they’re right,” he said. “No, it’s going to be wrong, and that’s OK. In addition to juggling multiple scenarios and plans, you have to be connected to the reality of the actual outcomes that emerge and constantly test and refine the approach and the messaging going forward.”

Misinformation was one of the biggest issues attendees at the CBI conference said are impacting firms today. As such, Engert used this as an example to highlight what kind of questions companies need to ask themselves to come up with detailed plans to help them succeed with their education strategies.

For example, he suggested companies consider first how to measure the success of an education strategy (i.e., what is the desired long-term end-state) and which external challenges might get in the way of that success, especially given the large web of stakeholders on the market. This will involve considering progress in what he termed “horizons,” for instance, determining what success might look like six months in for an education strategy, and how that success could evolve, change, or even be challenged over longer periods of time. It’s only by addressing these preliminary questions and coming up with varying scenarios that you will be able to establish a truly detailed course of action.

Internal Collaboration Also Critical In Managing Risks

Obviously, there are any number of challenges (besides misinformation) your organization may identify as barriers to the success of its individual biosimilar products. But it’s also important to approach each issue, whether it be misinformation, IP litigation, or commercialization tactics, in as integrated an approach as possible. After all, many of these challenges will have implications for a wide array of teams and specializations within a pharma company. They’ll likely impact how someone in policy or government affairs will approach their projects, as well as how the overall company will carry out market intel, forecasting, and pipeline selection and management. As Engert explained, “It’s necessary we build detailed action plans. It’s in this step I think one also needs to be incredibly mindful of how we can be proactive and operate in as integrated a fashion as possible.”

As an industry, we’ve seen many development and commercialization partnerships between companies. We have two different biosimilar trade groups — The Biosimilars Council and The Biosimilars Forum — which have engaged corporate members and embarked on educational and stakeholder collaborative journeys. And, we even are seeing more of a joint effort via the Biologics and Biosimilars Collective Intelligence Consortium to leverage the scores of data in the healthcare system to track the long-term use patterns and safety and efficacy of biosimilars on the market.

However, in addition to these incredibly important collaborations, Engert pointed out there is still a great need for more integration within the walls of an individual company. As a former pharma executive himself, Engert admitted this was a particularly big challenge. On a daily basis, there are any number of tasks or projects within each individual department that can demand undivided attention.

“I was so busy building the strategy and pipeline, selecting new products, pursuing business development deals, and supporting the manufacturing footprint that I was completely overlooking government affairs and policy — which was a huge mistake,” he shared. “Everybody was doing all their work on their own little islands, and how much was their work being substantiated and enabled by more of the business and commercialization perspectives? Not enough.”

At the end of the day, collaboration is one of many critical pieces of the puzzle when establishing risk-management strategies. Though Engert emphasized the importance of being focused and rigorous when long-term planning, he cautioned that a company not get so stuck on one single strategy that it’s thrown off-kilter the second something unanticipated happens in the market. By pursuing the five steps he outlined, encouraging internal collaboration among departments, and determining your company’s response to multiple scenarios in advance, Engert firmly believes biosimilar firms will be richly rewarded.

In an upcoming article, I’ll continue to unpack the information Engert presented at the CBI conference — homing in, in particular, on the important role the therapeutic area can play in determining just how biosimilars can save money. Stay tuned!