A somewhat more compelling take on biogenerics from Express Scripts

On Tuesday I shared my disdain for Duke University research on biogenerics (Nice work if you can get it). The authors failed to even pose the real question they should have addressed: how to bring down spending on biotech drugs. This oversight may have had something to do with their funding source: Genentech. I'm still waiting for a response to the email inquiry I sent to the lead author asking why he didn't even mention price regulation as a way to bring down prices.Today I happened on a press release from Pharmaceutical Benefits Manager (PBM) Express Scripts, Inc. (ESI), in which its Chief Medical Officer cites a projected savings of $70 billion over 10 years from the introduction of biogenerics. I had a look at the source, Potential Savings of Biogenerics In the United States, which ESI issued in February. I found it to be more honest and compelling than the Duke paper, although it still represents the bias of its sponsor.The Duke paper focused on the likely paucity of biogeneric entrants, using economic theory to estimate the number of entrants based on the fixed costs of entry and potential market size. The professors look at the market as a kind of black box mechanism where a set of inputs produce certain outputs. ESI, on the other hand, sees itself as an active player in the market, driving results. That perspective is represented in its simpler, business-oriented assumptions:

• ESI assumes 83.4% of patients would switch to a biogeneric. This number, which is much higher than the Duke assumption, is based on ESI's success in moving patients from branded Narrow Therapeutic Index (NTI) drugs to generics. The main example (thought not stated here) is Coumadin (warfarin), which was off-patent for many years before a generic player was able to convince the FDA and the medical establishment that its drug was identical. ESI is probably over-reaching with this assumption because any biogeneric is likely to be less similar to the original drug than the NTI generics are to the originals
• The next assumption is one I hadn't thought of before, but which makes perfect sense coming from a PBM and is probably one of the reasons the biotech companies are so concerned about biogenerics. ESI assumes that there will be a 49% shift away from biotech drugs that are still on patent once a generic equivalent is available for a similar drug in the class. PBMs call this practice therapeutic substitution, and it explains why Lipitor sales are down even though it's not off patent yet. A similar drug, Zocor, is off patent, and PBMs have been trying to shift patients from Lipitor to generic Zocor. I think ESI is over-estimating this shift but I do believe some shift will occur. The threat of such a shift may also knock down the pricing of patent-protected drugs striving to maintain preferred positioning on the formulary. (Perhaps the 49% number should be used in place of the 83.4% figure above, as biogenerics are more likely to end up as "bio-similars")
• The other key assumption is the level of discounting from the branded price. ESI estimates this at 25% based on the single example of generic omnitrope in Germany. That's a much less sophisticated way to look at it than the Duke researchers used, but in this case I think we can count on ESI to be the expert in price negotiations based on its real-world expereince. And here I think ESI may have intentionally underestimated the potential impact. Twenty-five percent may be what ESI passes on to its customers, but my guess is ESI will try to get higher margins for itself out of generic biotech drugs, following the model that has worked so well for them on the traditional small molecule business. And this explains why they issued the paper

If biogenerics do come to market I'm confident the PBMs will find a way to extract savings for their customers and extract juicy margins for themselves in the process. I don't expect PBMs to mention price regulation as a policy idea, since that would kill their business. But I still think that if we want to keep a lid on biotech drug spending, post-patent price regulation is worth considering.