VOI News

Biosimilars offer less of a savings than traditional generics (as expected)

A recent Wall Street Journal article addresses the fact that biosimilars won’t be replicating the savings generated by small molecule generics anytime soon. None of this should come as a surprise.

Manufacturing biologics is substantially more complicated and more expensive than is the case for small molecule drugs. Often, the production process has to be tailor-made for each product: what works for one won’t work for another. Adding another layer of complexity is the fact that biologic manufacturing processes are themselves protected by numerous forms of intellectual property and trade secrets. To replicate the characteristics of the final product, biosimilar manufacturers must, to a greater or lesser extent, re-create the production process using other means. So, while a biosimilar company can avoid a good portion of the R&D costs, it still has to create what amounts to proprietary manufacturing methods.

Not that biosimilar hopefuls are completely off the hook for R&D either. Bioequivalence studies don’t satisfy the FDA’s current thinking of what it takes to approve these copycat products for use, where the standard is that “there are no clinically meaningful differences between the biological product and the reference product in terms of the safety, purity, and potency of the product.” Demonstrating equivalence for biosimilars may necessitate data from new clinical studies.

All this is illustrated by a 2013 article from the National Library of Medicine and a study by the IGES Institute that estimated developing a biosimilar takes an average of seven to eight years and costs $100 million to $250 million, while bringing traditional generics to market only costs between $1 million and $4 million.

Then there is the matter of who is allowed to replace the brand product with the biosimilar. With generics, the doctor or pharmacist can make the switch and, at present, this is almost always done automatically via IT systems at the pharmacy or other dispensing location. Substation rights are another hotly contested area with biosimilars and, since this is a regulatory area that is largely governed at the state level, the result is an emerging patchwork of inconsistent rules across the country – many creating barriers to getting a biosimilar to the patient. Automatic substitution creates a guaranteed demand for generics that, for the foreseeable future at least, will not be present for biosimilars.

In this environment, modest discounts are to be expected. Classical economic theory tells us that price declines towards the marginal cost of production as more competitors enter. This is certainly the case in traditional generic drug markets where prices tend to fall from around 90% of pre-generic brand price with only one entrant to 10% or less as the molecule becomes fully commoditized. Given the need to master complicated manufacturing, to conduct some level of R&D, and to carve out a profitable market share in the absence of automatic substitution, it seems unlikely that any biologic drug will attract the number of entrants necessary to create a commodity-pricing situation. Even if this were the case, the pricing floor established by the cost of marginal production will be higher with biosimilars than with traditional generics.

The WSJ also reports that “pharmaceutical companies have been raising prices on biotech drugs about to lose patent protection to squeeze out more revenue before competition arrives…And makers of the knockoffs are setting their prices just below those marked-up ones.” A run-up in brand price at the time loss of exclusivity (LOE) is also a familiar tactic among small molecule drug makers. In fact, the phenomenon of brand drugs raising prices in the period before and after LOE is so common that economists have given it a name, the “generic paradox.” Ultimately, it is competition from other generics that will drive cost down (or lack of such competition that will keep prices high). As long as the competition is between a biosimilar and the reference drug, neither party will undermine the combined value of the market by starting a price war.

Again, none of this should come as a surprise. The relatively modest discounts associated with biosimilars as compared to their small molecule predecessors have been anticipated for some time (and demonstrated in Europe where these products have been on the market for approximately ten years). As we wrote in our 2009 report, Biosimilars: Problems, Prospects and Projections, “biogeneric producers will need to recoup R&D investments that far exceed what is required for traditional generics – and, as a result of limited competition, they are likely to have some degree of pricing power that allows them to do so…Litigation risk will also need to be considered and insured against by all parties…As a result, biosimilars are unlikely to achieve the types of societal savings provided by ANDA generics.”

GDUFA leads to major efficiency gains in the FDA’s Office of Generic Drugs

For the first time since the FDA’s Office of Generic Drugs (OGD) was authorized to address its approval backlog with industry-paid user fees, the agency has provided a top-level view of activity in the form of its first annual report. The highlight for the generic industry is the 580 approvals (along with 146 tentative) that were issued in 2015, which includes a record-setting 99 combined approvals in December alone.

The agency, which is in negotiations with Congress to reauthorize the user fee project, can also point to dramatic operational improvements. With roughly $300 million per year provided through user fees, the agency has been able to clear almost 90% of the backlog in generic applications. The backlog, which is defined as applications that were received before October 1, 2012, initially included 2,866 ANDAs and around two-thirds as many applications for substantial changes on previously approved drugs. At the end of the reporting period, 84% of the former and 88% of the latter had been resolved in one way or another.

As is frequently the case, however, it pays to read the fine print: specifically, the most common form of ANDA-resolution by a substantial margin was “Complete Response with an Inspection.” According to the agency, this constitutes “a written FDA communication to an applicant usually describing all of the deficiencies that the agency has identified in an application that must be satisfactorily addressed before it can be approved.” If a high percentage of the sponsors of these applications take steps necessary to address the deficiencies identified in their complete response letters, a lot of the “resolved” applications could wind up back in the agency’s workload. Given the speed with which the generic industry changes, it is possible that many sponsors walked away from these applications years ago but the complete response approach does not have the same level of finality as one might expect.

Less ambiguous and of perhaps greater importance for the future is the fact that the ANDA filing backlog has been eliminated for all practical purposes. Filing can be thought of as a “pre-review review.” In other words, this is the period during which the FDA performs an initial audit of a submitted application in order to determine whether it can move forward to the substantive review phase. As recently as August 2014, more than 1,100 applications were stuck in this particularly frustrating form of limbo. In a very short period of time, the OGD addressed this backlog and is now making filing decisions in an average of 40 days, with only one percent taking longer than two months.

Generic drug sales forecasting published in Journal of Generic Medicines

VOI Consulting is pleased to announce that Probability-based forecasting for U.S. generic drug sales, an original article by VOI’s President, Todd Clark, has been published in the Journal of Generic Medicines: The Business Journal for the Generic Medicines Sector. The article abstract is below:

Probability-based forecasting for U.S. generic drug sales
Todd D Clark, Value of Insight Consulting, Inc.
Journal of Generic Medicines, September 2014

Most sales forecasts, including those in the generic drug industry, are based on an implicit assumption that the market can be represented as a continuous variable, an approach that works only when activity consists of many independent, incremental customer buying decisions, each of which is too small to substantially affect total sales. These conditions are generally true in branded pharmaceutical markets but they do not reflect the reality of the US generic drug industry where decisions regarding which company’s product is dispensed at the pharmacy are primarily a function of a limited number of binary (yes/no) decisions from drug wholesaling companies, the largest of which control access to one-fourth of the market or more. Unfortunately, binary situations are difficult to model in standard spreadsheet forecasts due to the extremely high number of permutations that are possible even with a small number of variables. In this paper, we explore the binary nature of the US multi-source industry from a single, hypothetical, generic company’s perspective and discuss a probability-based sales forecasting technique that offers a more accurate approach to modeling based on the number of wholesaler contracts available and the degree of generic competition present. The forecast is derived from actual wholesaler market share data and, based on extensive industry experience, the parameters used are believed to be reasonably representative of the US generic market, meaning that the results can be scaled to determine approximate probabilities of achieving certain revenue levels in real-world situations.

The article will be published in the September 2014 print version of the Journal of Generic Medicines. It is currently available online.