US biogenerics policy makes me sad

I can only shake my head on days like today when I read about the state of biogenerics policy in the United States. The Wall Street Journal reports (Firms Push for Biotech Generics) that biotech companies are lined up against health plans and PBMs over the interpretation of the waiting period for biogenerics embedded in the Patient Protection and Affordable Care Act (PPACA). The dispute is over the meaning of the 12 year “exclusivity” period specified in the Act. Biotech companies want generic companies to wait 12 years before starting development (that’s “data exclusivity”), while PBMs that distribute drugs and health plans that reimburse for them want companies to wait 12 years before the drugs are sold (“market exclusivity”). The PBM/health plan position is somewhat better for consumers, because it would get the drugs on the market a year or more earlier, but this really shouldn’t be the debate we’re having.

First, some background. Generic versions of traditional, small molecule pharmaceuticals (like statins) have been a great success story over the past couple decades, since passage of the Hatch-Waxman Act. After the patent term expires on a branded drug, a highly competitive market for generic products typically emerges. Prices often fall by 80 percent or more. Thanks to Wal-Mart, many of these products are available for $4 or so a month compared with hundreds of dollars or more during the patent period. These small molecule products are typically relatively easy to make. Generics are exact copies that don’t require much clinical testing. Pharmacists can –and generally must– substitute a generic product unless the doctor or patient specifically requests the branded version. Incentives for innovation are preserved because drug companies have ample time to make back their R&D investment during the five or 10 years the patented product is on the market without generic competitors.

Biotech drugs are different. These large molecule products are difficult to produce, and it’s almost impossible for another company to make an exact “generic” copy like with small molecules. (This is even true for the original maker of the product, who may have product variation from one manufacturing facility to another or even batch to batch. But I digress.) Until PPACA there really wasn’t a regulatory path to introducing generic versions of biotech drugs. Now legislators seem to expect that the biotech market will follow the path trailblazed by the small molecule products.

Those expectations, however, are badly misplaced. Here’s why:

  • The cost of development and manufacturing scale-up for the generic company will be much higher for these products than for small molecules. That means fewer competitors, less competition, and relatively high prices
  • Biotech manufacturing is notoriously difficult. Companies like Genzyme can’t seem to keep their factories from being contaminated. FDA has its hands full as it is and is really not in a position to inspect and oversee a bunch more facilities. That will slow approvals and/or allow dangerous products on the market
  • Even with all this effort and expense, the products are not likely to be directly substitutable by pharmacists the way small molecule generics are. That is a further reason prices won’t drop much. In fact, the market is likely to resemble the 1990s small molecule market with lots of “me-too” products in a given class. Take statins for example. Lipitor wasn’t the first statin but it used subtle differences to gain share and in some cases charge a premium price. You can bet companies will try something similar with generic biologics, aka “biosimilars.” I think it’s possible that prices could even rise as generic companies deploy salesforces and look to exploit clinical findings. PBMs don’t really mind, because they can make a lot of money by shifting market share among high priced, similar products, just like they did with the me-too small molecule market.

All of this matters a lot. Why? Because in the future biologic drugs will comprise a larger and larger share of overall drug spending. Small molecule companies don’t seem to be bringing new drugs to market, so that segment of the industry will continue shifting to generics. Meanwhile, more and more companies are trying to launch biotech drugs, which are much more expensive (often tens of thousands of dollars per patient per year or more).

I have no doubt that eventually Congress and the President will figure this out. But it will probably take 10 years or so. Here’s my suggestion (which I’ve been making for some time):

  • Allow biotech drugs to be approved and marketed as they are now, without price regulation
  • After patent expiration or after a certain number of years on the market, regulate price. The price could be based on cost of goods, a percent of the previous selling price, or some other mechanism

This would avoid the costs and risks of biogeneric development and regulatory approval while delivering the benefits of lower costs to payers. The original maker of the product should be happy too. Although their price will be lower than it is today, they won’t have to share the market with generic players or spend money blocking the entry of new players. They will still enjoy a substantial period of high margin sales as they do today. It just won’t go on forever.

When, at some point in the future, science improves to the point where truly identical biogenerics can be developed, these rules could be revisited.

January 26, 2011

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