Hutchins Center Working Paper #30
`ENABLING COMPETITION
`IN PHARMACEUTICAL MARKETS
`
`Fiona Scott Morton and Lysle T. Boller
`Yale School of Management
`
`May 2017
`
`I. INTRODUCTION
`
`The United States, unlike many other industrialized nations, does not regulate the price of pharmaceutical
`products directly. There are advantages to this approach. The U.S. generic market is one of the most
`dynamic and cost-effective in the world due to competition between manufacturers. The inventor of
`a socially valuable patented drug may charge high prices in the U.S. market, and the ensuing profit
`incentivizes innovation that benefits consumers. Subsequent competition between substitute therapies,
`even those on patent, can push down these prices over time. Generic entry after patent expiration pushes
`down prices even further. This form of price discipline, generated by market forces, rewards the attributes
`and efficacies that consumers want. For example, if a particular drug is differentiated from its competitors
`in a useful way, it will be able to command a higher price.
`
`Prices that reflect value create exactly the incentives society desires for innovation. If the forces of
`competition are always strong, then the way for a pharmaceutical company to earn high profits is to invent
`a valuable treatment. If competitive forces weaken, then high prices for drugs may not reflect value but
`instead a lack of market discipline, sometimes exacerbated by regulations that enable or maintain high
`prices. When manufacturers can earn high profits by lobbying for regulations that weaken competition,
`or by developing mechanisms to sidestep competition, the system no longer incentivizes the invention
`of valuable drugs. Rather, it incentivizes firms to locate regulatory niches where they are safe from
`competition on the merits with rivals. The U.S. system performs well when competitive forces are strong,
`as this yields low prices for consumers as well as innovation that they value.
`
`Weak competitive forces are more damaging to consumers in the pharmaceutical sector than some
`others. Patients in the U.S. are typically both insured and uninformed about therapeutic substitutes for
`the medications they take; thus, without effective rules and frameworks provided by the government, they
`face difficulty in creating market forces on their own. Without market pressures, drug makers may sell at
`arbitrarily high prices to insured consumers. Therefore, the policy environment in which those consumers
`shop is critical to maintaining effective price competition.
`
`The authors are grateful to Richard Frank, Craig Garthwaite, and Elizabeth Jex for helpful comments, as well as
`to participants and organizers at Brookings. Thanks are also due to the Hutchins Center on Fiscal and Monetary
`Policy and Center for Health Policy at Brookings for research funding and for providing a forum to develop the ideas
`outlined in this paper. Prepared for the Center for Health Policy and the Hutchins Center on Fiscal and Monetary
`Policy at Brookings’s conference “Reining in prescription drug prices” on May 2, 2017.
`
`at BROOKINGS
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`Without a return to competitive conditions in this sector, expenditure will continue to grow. We are already
`hearing calls for regulation of pharmaceutical prices and seeing legislation that proposes price regulation.1
`It is very difficult to devise regulation that encourages innovation in a fast-changing industry. Regulators
`may be uninformed about valuable research, be captured by the industry, or lack the resources to keep up
`with changes in science or the cost of production.2 Because innovation is hugely valuable to consumers,
`we are hesitant to recommend government regulation of pharmaceutical prices as a solution to the current
`problem of high and growing pharmaceutical expenditures.
`
`The regulatory system in the U.S. is designed, in principle, to enable vigorous and effective competition
`that will bring down drug prices, particularly of any drug that faces a competitor or substitute. Over the
`last 10-15 years, however, industry participants have managed to disable many of these competitive
`mechanisms and create niches in which drugs can be sold with little to no competition. We argue in this
`paper that the first step toward bringing down pharmaceutical prices would simply be to fully apply the
`existing rules we already have. For example, speedy and effective entry of generic products, and financial
`incentives for consumers to choose treatments that have offered significant discounts are both part of
`the existing regulatory framework and result in lower prices. Both forces, however, have been greatly
`attenuated or stymied by the actions of pharmaceutical manufacturers. Enforcement of existing regulations
`that make markets more competitive will reduce pharmaceutical expenditures. The one type of market
`we will not address in this paper is the case of the patented, valuable medication that has no therapeutic
`substitutes because it represents a breakthrough in treatment. We refer the reader to the companion piece
`by Frank and Zeckhauser for a discussion of pricing when a drug faces no competition.3 We note that
`industry participants who benefit from the status quo may work against a return to competitive markets. If
`pharmaceutical firms and other market participants block policies that restore competition, then calls for
`more stringent regulation will re-appear and may well be successful.
`
`In this paper, we outline three major barriers to effective competition in U.S. pharmaceutical markets. The
`first focus of the paper is on biologics, the fastest growing segment of drug spending. This category has
`seen price increases in double digits for a decade and now (along with specialty drugs) represents more
`than one third of total spending with only increases in sight. Moreover, because the science behind biologic
`treatments is newer, regulations that would enhance competition in the sector are less well developed. In
`particular, regulatory delays have left the United States without competitive biosimilars – biologic entrants
`analogous to generics – that create price competition. There are only two biosimilars on the market in
`the U.S. while there are more than twenty on the market in the EU. This delay in biosimilar entrance in
`the U.S. carries a hefty price tag. We also outline regulatory barriers that are likely to inhibit biosimilar
`competition even after FDA approval. These barriers have also been used by brands to prevent entrance of
`traditional generics, and include pay for delay schemes, abuse of orphan drug classifications, and REMS
`requirements meant to increase drug safety. These barriers have also slowed the market response to price
`hikes in small generic markets. In conjunction with the FDA’s slow progress on biosimilar approval, these
`tactics have led to a decline in the fraction of pharmaceutical expenditure exposed to significant price
`competition.
`
`1 On March 29, 2017, the Improving Access to Prescription Drugs Act was introduced in the Senate and the House, which, among other policy
`proposals, calls for Medicare to negotiate “fair prices” for prescription drugs, requires monitoring of price gouging by manufacturers, rebates
`from manufacturers to consumers, and shorter periods of marketing and data exclusivity for brand-name drugs. This legislation represents just
`the latest call for greater price regulation of drugs.
`2 Jean-Jacques Laffont and Jean Tirole, A Theory of Incentives in Procurement and Regulation (Cambridge, Mass: MIT Press, 1993).
`3 Richard Frank and Richard Zeckhauser, “Framework for Negotiation in Part D of Medicare,” Hutchins Center Working Paper #28,
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`The second focus of the paper relates to the demand side imperfections of market participants. Pharmacy
`Benefit Managers (PBM), which are increasingly consolidated, may face agency problems that undermine
`their stated goal of bargaining for lower drug prices. PBMs may use rebates as a tool to increase profits by
`keeping a share of the high prices paid by patients who consume costly medication. Additionally, product
`hopping schemes instituted by brands and suboptimal Medicare reimbursement policies undermine patient
`incentives to substitute toward cheaper drugs. These problems are exacerbated by the ability of brands to
`provide kickbacks in the form of coupons, financial assistance, free meals, patient care, and other benefits
`designed to undo the financial incentives that exist in the marketplace and would otherwise steer demand
`to lower-priced alternatives. Insurers that negotiate low prices for a brand also give patients a low copay to
`steer them toward more cost-effective products, giving them higher market shares, but higher copays can
`be eliminated by competitors that provide financial assistance (e.g. coupons) to patients. These payments
`counteract the insurer’s pricing incentives and lead the patient to consume the more expensive drug. In
`equilibrium, this results in higher prices on all drugs that consumers ultimately pay.
`
`The third focus of this paper relates to older drug markets, where firms with small portfolios have recently
`instituted drastic price increases for essential drugs. This market also faces the potential for shortages and
`exit of competitors over time. After discussing these problems in some detail, we propose specific policies
`that would remedy or remove these barriers to competition, thereby lowering prices while incentivizing
`targeted innovation to the most valuable unmet medical needs.
`
`II. MARKET TRENDS IN BIOLOGIC AND SPECIALTY DRUGS
`
`Over the past two decades, pharmaceutical innovation has shifted from chemically-synthesized small
`molecule drugs toward more complex, bioengineered treatments grown from living tissue that are known
`as biologics. Biologics are often used to treat severe diseases that do not have effective small molecule
`treatments. The development of biologic medicines has represented a boon to many patients suffering
`from cancer, hepatitis, hemophilia, multiple sclerosis, autoimmune disorders such as rheumatoid arthritis,
`or inflammatory diseases such as Crohn’s and ulcerative colitis. Many of these drugs impart high value
`to patients. Being able to sell at a high price while being protected from competition by a valid patent
`incentivizes manufacturers to innovate and produce high-value products. Recent hepatitis drugs, for
`example, have received negative press for the high prices that they carry, but they also represent some
`of the most innovative medical treatments in recent years, curing a disease that previously required a
`liver transplant. On other other hand, many drugs have high prices not justified by their value. This paper
`focuses on the incentives that enable the persistence of high prices when competing alternatives should
`drive down those prices.
`
`The top thirty best-selling biologics, with licensure date, manufacturer, and corresponding indications,
`are listed in Table 1. Annual per-patient expenditure as measured by wholesale acquisition cost (WAC)
`demonstrates that biologics typically carry a high annual per-patient expenditure in the tens of thousands
`of dollars. Cheaper biologics, by this measure, tend to be insulins. Insulins are so widely used, however,
`that in aggregate, they are large contributors to pharmaceutical spending. Strikingly, although the biologics
`listed below carry a high price tag, many were licensed in the 1990s or early 2000s, suggesting that prices
`are high despite relevant patents having expired.
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`BROOKINGS
`available.
`and “Data Sample Shows January Brand Price Increases of ~6.2%, down ~180bps y/Y” (Leerink Partner LLC Equity Research, January 17, 2017). WAC data for Aranesp and Neupogen not
`Drugs: Estimates of Annual Per-Patient Expenditures for 150 Specialty Medications,” Report (AHIP, April 2016), https://www.ahip.org/wp-content/uploads/2016/04/HighPriceDrugsReport.pdf.,
`Source: All data except for prices sourced from “2016-2020 Roadmap: $20 Bln Trophy with Pricing Challenge” (Morgan Stanley, November 14, 2016). Pricing data sourced from “High-Priced
`
`
`
`
`
`4
`
`Plaque Psoriasis, Psoriatic Arthritis
`Respiratory Syncytial Virus
`Cancer
`Cancer
`Cancer, HIV/AIDS
`Rheumatoid Arthritis, Crohn's disease
`Rheumatoid Arthritis, Ulcerative Colitis
`Osteoporosis, Bone Cancer
`Diabetes
`Multiple Sclerosis
`Osteoporosis, Bone Cancer
`Anemia, Renal Failure, Cancer
`Renal Failure
`Rheumatoid Arthritis, Asthma
`Rheumatoid Arthritis
`Macular Degeneration
`Anemia, Renal Failure, Cancer
`Crohn's Disease, Multiple Sclerosis
`Diabetes
`Psoriasis
`Diabetes
`Breast Cancer
`Cancer
`Cancer, Macular Degeneration
`Diabetes
`Cancer, Rheumatoid Arthritis
`Cancer
`Rheumatoid Arthritis, Crohn's disease, Ulcerative colitis
`Rheumatoid Arthritis
`Rheumatoid Arthritis, Crohn's disease, Ulcerative colitis
`
`$54,840
`$35,571
`$138,861
`
`$71,184 - $80,508
`
`-
`
`$39,563
`
`$41,997 - $56,345
`
`$12,326
`
`$3,228 - $4,842
`
`$64,032
`$22,620
`$55,046
`
`-
`
`$10,488-$62,930
`$33,054 - $38,436
`$14,000 - $23,400
`$13,128 - $17,505
`
`$63,096
`$3,065
`
`$25,655 - $81,900
`
`$5,904
`$50,201
`$30,090
`
`$91,572 - $124,908
`
`$2,982 - $4,473
`$29,916 - $38,142
`
`$19,659
`$32,686
`
`$41,468 - $51,835
`$41,460 - $48,372
`
`0.4
`0.5
`0.6
`0.7
`0.7
`0.8
`0.9
`0.9
`1.0
`1.0
`1.0
`1.0
`1.1
`1.4
`1.5
`1.5
`1.7
`1.9
`2.1
`2.2
`2.2
`2.6
`2.7
`3.1
`3.6
`3.7
`4.2
`5.2
`7.1
`11.7
`
`Common indications
`
`patient expenditure)
`WAC (Annual per
`
`(US $billion)
`2016 sales
`
`Novartis
`Astrazeneca Corp
`Lilly
`Hoffmann-la Roche
`Amgen Corporation
`UCB
`Johnson & Johnson
`Amgen Corporation
`Novo Nordisk
`Biogen Idec Corp
`Amgen Corporation
`Hoffmann-la Roche
`Amgen Corporation
`Hoffmann-la Roche
`Bristol meyer squibb
`Hoffmann-la Roche
`Amgen Corporation
`Biogen Idec Corp
`Novo Nordisk
`Johnson & Johnson
`Lilly
`Hoffmann-la Roche
`Bristol meyer squibb
`Hoffmann-la Roche
`Sanofi Aventis
`Hoffmann-la Roche
`Amgen Corporation
`Johnson & Johnson
`Amgen Corporation
`Abbvie Inc
`
`Innovator
`
`Jan-15
`Jun-98
`Feb-04
`Nov-04
`Feb-91
`Apr-08
`Apr-09
`Jun-10
`Jun-05
`May-96
`Jun-10
`Jun-12
`Sep-01
`Jun-03
`Dec-05
`Jun-06
`Jun-89
`Nov-04
`Jun-00
`Sep-09
`Jun-96
`Sep-98
`Dec-14
`Feb-04
`Apr-00
`Nov-97
`Jan-02
`Aug-98
`Nov-98
`Dec-02
`
`licensure
`Date of
`
`Cosentyx
`Synagis
`Erbitux
`Tarceva
`Neupogen
`
`Cimzia
`Simponi
`Prolia
`Levemir
`Avonex
`Xgeva
`Perjeta
`Aranesp
`Xolair
`Orencia
`Lucentis
`
`Epogen/Procrit
`
`Tysabri
`Novolog
`Stelara
`Humalog
`Herceptin
`Opdivo
`Avastin
`Lantus
`Rituxan
`Neulasta
`Remicade
`
`Proprietary
`
`Enbrel
`Humira
`name
`
`Table 1: Top 30 biologic drugs by sales
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`The shift toward biologic sales in the United States is reflected by corresponding growth in R&D spend
`in the biotech industry and biologic approvals by the FDA. Whereas traditional drugs must file for FDA
`approval via a New Drug Application (NDA), most biologic drugs undergo a separate regulatory approval
`process known as a biologic license application (BLA).4 The growth in novel biologic license issuances
`compared to new molecular entities (NMEs), shown in Figure 1, demonstrates how the industry has shifted
`toward biologics, especially in recent years.
`Figure 1: Biologic license approvals5
`
`14
`
`12
`
`0
`
`024681
`
`2016
`2015
`2014
`2013
`2012
`2011
`2010
`2009
`2008
`2007
`2006
`2005
`2004
`2003
`2002
`2001
`2000
`1999
`1998
`1997
`1996
`1995
`1994
`1993
`
`NME Approvals (left axis)
`
`Novel BLA Approvals (right axis)
`
`50
`45
`40
`35
`30
`25
`20
`15
`10
`
`05
`
`
`
`Source: John K. Jenkins, “CDER New Drug Review: 2016 Update,” Presentation, (December 14, 2016),
`https://www.fda.gov/downloads/AboutFDA/CentersOffices/OfficeofMedicalProductsandTobacco/CDER/U
`CM533192.pdf.
`
`BROOKINGS
`
`In the United States, biologics have grown from just 13% of pharmaceutical spending in 2006 to 27% in
`2016 as shown in Figure 2 below.6
`
`Although total pharmaceutical spending has been increasing rapidly, with 29% cumulative growth between
`2011 and 2015, utilization has remained roughly constant, with only a 1% increase in units sold over the
`same period.7 This indicates that increased pharmaceutical spending can be attributed to increases in the
`price of the average bundle of drugs consumed, a shift caused both by price increases and consumption of
`more expensive drugs.
`
`4 Some biologic drugs, such as insulin, continue to follow the traditional regulatory pathway.
`5 Data excludes BLA approvals that do not contain a new active ingredient.
`6 These statistics include biologic insulins as well as biologics that have been approved via a Biologic License Approval. This may somewhat
`understate true biologic spending as it does not include some vaccines and hormones that are neither insulins nor approved with a BLA.
`“Global Pharmaceuticals, US, China, Japan and Europe: The Grand Tour of Drug Pricing, Reform, and Market Growth,” Report (UBS Global
`Research, February 9, 2017). W. Price, I. I. Nicholson, and Arti K. Rai, “Manufacturing Barriers to Biologics Competition and Innovation,” Iowa L.
`Rev. 101 (2015): 1023.
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`Figure 2: Pharmaceutical sales in the United States
`
`30%
`
`25%
`
`20%
`
`15%
`
`10%
`
`5%
`
`0%
`
`2007 2008 2009 2010 2011 2012 2013 2014 2015
`
`450
`400
`350
`300
`250
`200
`150
`100
`50
`0
`
`Spending (US$ billions)
`
`Total Pharmaceutical Spending (left axis)
`Biologic Market Share (right axis)
`
`Biologic Spending (left axis)
`
`Source: IMS data.
`
`BROOKINGS
`
`Biologics are often classified as specialty drugs, a loosely defined category of high-priced medications
`
`that also includes small molecule drugs with special characteristics that increase expense.8 Specialty drug
`spending has grown at a much higher rate compared with spending on traditional drugs over the past
`10 years as shown in Figure 3.9 One of the largest PBMs, Express Scripts, notes that in 2014, specialty
`drugs represented 32% of its spending but just 1% of prescriptions issued to its patients.10 Both units and
`prices of specialty drugs have grown in recent years. This cost is driven in part by the high price of biologic
`medicines compared with their small molecule counterparts. In 2007, the CEO of Express Scripts testified
`before Congress that the average daily cost of a biologic was more than 22 times the average daily cost
`of a small molecule drug.11 That trend remains today.12 Several biologics covered by Medicare Part B cost
`more than $50,000 per beneficiary per year.13 Medicare Part D has also experienced massive spending
`increases on biologics in recent years, with spending rising from $1.9 billion to $3.5 billion between 2009
`and 2012.14
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`8
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`9
`
` Drugs requiring cold chain distribution or special monitoring by a healthcare professional (e.g., IV infusions) are also typically
`categorized as specialty drugs. Some drugs, however, are simply characterized as specialty drugs because they are expensive. One
`commonly used threshold to classify specialty drugs is if treatment exceeds ten thousand dollars in annual expenditure. “Specialty
`Drugs and Health Care Costs,” Fact Sheet (The Pew Charitable Trusts, November 2015),
`http://www.pewtrusts.org/~/media/assets/2015/11/specialty-drugs-and-health-care-costs_artfinal.pdf.
` Not all biologic drugs are specialty drugs. Insulin, for example, is a biologic drug, but was originally approved under an NDA and so is typically
`classified as a traditional drug.
`“U.S. Rx Spending Increased 13.1% in 2014.” Express Scripts. Accessed March 6, 2017. http://lab.express-scripts.com/lab/insights/industry-
`updates/us-rx-spending-increased-13-percent-in-2014.
`“Statement of Ed Weisbart, M.D., Chief Medical Officer, Express Scripts,” Hearing Before the Subcommittee on Health of the Committee on
`Energy and Commerce, (May 2, 2007), https://www.gpo.gov/fdsys/pkg/CHRG-110hhrg40500/pdf/CHRG-110hhrg40500.pdf.
`12 Erwin A. Blackstone and P. Fuhr Joseph, “The Economics of Biosimilars,” American Health & Drug Benefits 6, no. 8 (2013): 469–78.
`13
`“Medicare Part B, Expenditures for New Drugs Concentrated among a Few Drugs, and Most Were Costly for Beneficiaries,” Report to the
`Ranking Member, Committee on the Budget, House of Representatives (Government Accountability Office, October 2015), http://www.gao.
`gov/assets/680/673304.pdf. Table 4. See also Judith A. Johnson, “Biologics and Biosimilars: Background and Key Issues” (Congressional
`Research Service, September 7, 2016),
`14 Surya C. Singh and Karen M. Bagnato, “The Economic Implications of Biosimilars,” The American Journal of Managed Care 21, no. 16 Suppl
`(December 2015): 331–40.
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`10
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`11
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`Figure 3: Growth in traditional and specialty drug spending
`Specialty
`
`35%
`
`25%
`
`15%
`
`5%
`
`-5%
`
`35%
`
`25%
`
`15%
`
`5%
`
`-5%
`
`2008
`
`2009
`
`2010
`
`2011
`
`2012
`
`2013
`
`2014
`
`2015
`
`2016
`
`
`
`Traditional
`
`2008
`
`2009
`
`2010
`
`2011
`
`2012
`
`2013
`
`2014
`
`2015
`
`2016
`
`Utilization
`
`Cost per Script
`
`
`
`Source: “Express Scripts Drug Trend Reports,” (2008 - 2016).
`
`BROOKINGS
`
`
`
`
`
`
`
`
`As will be explored in the following sections, there are numerous causes for the rise in U.S. pharmaceutical
`spending, two of which apply disproportionately to biologic and specialty drugs more broadly. First,
`
`regulatory barriers to competition are higher in biologic and specialty drug markets, resulting in fewer
`competitors and allowing manufacturers in the United States to increase prices above levels observed in
`other parts of the developed world, such as the European Union. Second, externalities and information
`asymmetries prevent consumers from optimally substituting toward cheaper equivalents because they
`do not typically bear the full cost of drug expenditures, and do not have the medical expertise or reliable
`information necessary to identify therapeutic equivalents. Pharmaceutical manufacturers further inhibit
`attempts to increase consumer price sensitivity by making side payments to insured consumers to
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`encourage consumption of particular products, distorting and undermining price mechanisms set by
`insurers to control costs. Because biologics are often very expensive, these demand-side distortions
`impose huge costs on the insurer and society.
`
`III. REGULATORY BARRIERS TO COMPETITION
`
`A patent for a novel and effective drug is of course a barrier to competition in the short run. This barrier
`is created by the government in order to generate incentives for innovation. The patent guarantees the
`inventor of the drug a limited monopoly over its sale, allowing inventors to earn a profit if their inventions
`are valuable. The potential to earn profits incentivizes the creation of new treatments for unmet medical
`needs. There is debate in the economics literature regarding the length of the optimal patent and whether
`the patent system on net increases or decreases innovation. This paper will not address those debates,
`but will take the current patent regime as given. Instead, we focus on the nature of competition among
`patented products and how quickly competition is restored upon patent expiration.
`
`The Food and Drug Administration (FDA) controls entry into the market for both innovator and follow-
`on pharmaceutical treatments to ensure that they are safe and effective. Follow-on treatments typically
`enter the market after many years, well after the reference drug has demonstrated a history of safety and
`efficacy. Follow-on applicants have lower fixed costs of entry than the reference product because they
`do not have to prove the product is safe and effective, but only that their version of the product is bio-
`equivalent (or similar) and safe. Moreover, a follow-on entrant is likely to significantly intensify competition
`and erode the profits of the incumbent reference medication. Incumbents will thus have a financial incentive
`to influence regulation to make competitive entry harder, slower, or less effective. To the extent incumbents
`are effective at shifting the priorities of the FDA away from consumer welfare, regulations governing
`the entry of follow-on products form barriers to competition. In particular, the U.S. regulatory framework
`governing biologic follow-on entry has experienced numerous delays, and the guidance that has been
`issued has raised competitive concerns.
`
`Other regulations promulgated by the FDA or Congress may limit competition in ways not foreseen by the
`writers of the regulation or legislation. Examples discussed below include orphan drug provisions, patent
`settlements with Hatch-Waxman, drug safety regulations (REMS), and formulary regulations. Finally, FDA
`approval delays of follow-on products may further inhibit competition.
`
`III.1 Regulatory process for biosimilar entry
`
`The regulatory framework governing small molecule drug competition comes from the Hatch-Waxman Act,
`which was passed by Congress and signed into law in 1984. The Hatch-Waxman Act attempted to strike a
`balance between innovation and provision in the market for pharmaceutical drugs by granting a period of
`patent exclusivity to manufacturers of novel drugs while at the same time lowering the regulatory barriers to
`generic entry by offering an abbreviated new drug approval process (ANDA).
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`Biologics, on the other hand, are approved by the FDA under the Public Health Service Act (PHSA).15 In
`2010, Congress passed the Biologics Price Competition and Innovation Act (BPCIA) to encourage
`competition in biologic markets, amending the PHSA to establish an abbreviated regulatory pathway
`for FDA approval of follow-on biologics (i.e., biosimilars and interchangeable biosimilars) parallel to
`Hatch-Waxman’s ANDA pathway for small molecule generics. Provisions of the BPCIA differ in some
`significant respects from those of the Hatch-Waxman Act because the technical methods used to show
`interchangeability between generics and small molecule reference drugs are not adequate for biologics,
`and because current methods are incapable of measuring exact differences among biologics due to their
`complexity.16
`
`Under the BPCIA, a “biosimilar” product is “highly similar to the reference product notwithstanding minor
`differences in clinically inactive components,” and “there are no clinically meaningful differences between
`the biological product and the [FDA-licensed biological] reference product in terms of safety, purity, and
`potency of the product.” The BPCIA requirements for an “interchangeable” biologic product are more
`stringent. An interchangeable biologic product is expected to produce the same clinical result as the FDA-
`licensed biological reference product in any given patient even if a patient switches to the interchangeable
`drug in the middle of a treatment regimen. Parallel to regulatory construction of varying degrees of
`therapeutic equivalency for generic drugs as either A-rated (automatically substitutable by the pharmacist)
`or B-rated (requiring additional steps by the pharmacists including a new prescription), the BPCIA directed
`the FDA to establish guidelines for manufacturers to prove drugs meet the standards of biosimilarity and
`interchangeability. Interchangeable products are meant to allow for automatic substitution by pharmacists
`without the consent of a physician.17
`
`Although BPCIA was passed in 2010, final guidances for demonstrating biosimilarity were only made
`available beginning in early 2015, about the same time as the first biosimilar approval. This contrasts with
`regulations in the EU, which issued guidelines ten years prior and has experienced successful biosimilar
`entry. The first draft guidance for demonstration of interchangeability was made available only in January
`2017, more than six years after the passage of the BPCIA, and final guidance is not expected until 2019,
`nearly nine years after the enactment of the original law.18 As a result, firms that are pursuing follow-on
`biologic applications face delay and uncertainty over how their applications may be received and evaluated
`by the FDA. Due to lack of guidance from the FDA, none of the biosimilars approved thus far have obtained
`interchangeable status, which would further promote price competition among biologics by allowing for
`
`15
`
`“Biologics Price Competition and Innovation Act of 2009,” 42 U.S.C. § 262. Generally, the reference biologic is approved by the FDA with a
`full Biologics License Application pursuant to the requirements set forth under 42 U.S.C. § 262(a); whereas follow-on biologics are approved
`pursuant to the requirements set forth under 42 U.S.C. § 262(k).
`16 Under Hatch-Waxman, generic applicants must provide “information to show that the other active ingredients of the new drug are the same as
`the active ingredients of the listed drug,” that the “route of administration, the dosage form, and the strength of the new drug are the same as
`those of the listed drug,” and that the drug is “bioequivalent to the listed drug” Aaron S. Kesselheim and Jonathan J. Darrow, “Hatch-Waxman
`Turns 30: Do We Need a Re-Designed Approach for the Modern Era,” Yale J. Health Pol’y L. & Ethics 15 (2015): 293.
`Interchangeability is granted if a product is biosimilar and if it “…can be expected to produce the same clinical result as the reference product
`in any given patient…” and “the risk in terms of safety or diminished efficacy of alternating or switching between use of the biological product
`and the reference product is not greater than the risk of using the reference product without such alternation or switch.”
`“Biosimilar Biological Product Reauthorization Performance Goals and Procedures Fiscal Years 2018 through 2022” (FDA, 2016),
`https://www.fda.gov/downloads/forindustry/userfees/biosimilaruserfeeactbsufa/ucm521121.pdf.
`
`17
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`18
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`SCOTT MORTON & BOLLER
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`automatic pharmacist substitution toward cheaper biologics.19
`
`The United States, known for having some of the world’s highest drug prices, lags behind other developed
`countries in encouraging biosimilar entry. Although four biosimilars have been formally approved following
`the FDA’s final guidance for demonstration of biosimilarity, at least twenty-two biosimilars have been
`approved in the EU, where the regulatory pathway for biosimilars has existed since 2005 and entrants
`since 2007.20 The first biosimilar in the U.S., on the other hand, Novartis’ Zarxio (filgrastim-sndz), was
`approved by the FDA only in March 2015 and offered for sale in the U.S. in September 2015 due to delays
`caused by patent litigation and the BPCIA patent resolution process.21
`
`While this paper does not consider patent law, it will cover market exclusivity rights granted by regulators or
`the legislature. The BPCIA established that the FDA could not approve biosimilars that rely on the BLA of a
`reference product for at least 12 years after the approval of a reference biologic.22 This protection is
`known as “data exclusivity” and provides protection for branded products beyond that afforded by patents.
`The BPCIA also provided for a separate patent resolution mechanism. Both of these provisions were
`included over objections from the FTC, whose policy analysis concluded that no such period of additional
`data exclusivity, over and above patent exclusivity, was necessary to ensure innovation, and that the
`creation of an early patent resolution mechanism separate from the usual legal process would burden
`and delay entry of potential competitors.23 Two of the four approved biosimilars in the United States have
`not been marketed due to ongoing patent litigation, and a third has entered at risk, with the potential for a
`considerable penalty if the court rules for the reference biologic.24
`
`Due to uncertainty regarding the biosimilar entry process, lack of approvals, and, more recently, delays
`caused by patent litigation, most innovator biologic products in the United States are effectively never
`exposed to competition from another maker of the treatment even after patent expiration. Although
`biosimilar entrants for some of the best-selling biologics appear to be close to market, lack of competition
`among many biologics with expired patents will likely extend into the foreseeable future unless there is
`reform of regulatory and reimbursement policies. In the absence of reform, the evidence indicates that
`prices of branded biologics will be high and rising indefinitely. The a