Mehta Analysis: Two Pillars of Industry Success Being Shaken

Regulators and policy makers are threatening the long-standing regulatory and patent protection structures that have helped prop the industry for many years. But pharma sustainability should in any case be based on innovation, writes Viren Mehta of Mehta Partners LLC.

Regulatory barriers and patent protection are two of the three fundamental pillars on which the biopharma industry success has been built, the third one being innovation.

When the famed Framingham Study began in 1948, we could measure only a few proteins.  Today this number is 1,300 and climbing rapidly.  The innovation cycle is at an inflection point, promising to usher in a new golden era for biopharma, but the other two pillars are being shaken.

Regulatory processes are a major barrier to biopharma entry, keeping much of the competition at bay, but the FDA and other officials are increasingly and publicly promising to expedite preclinical and clinical pathways to break down this barrier. In part they want to remind biopharma managers that society will lose confidence if market forces are systematically thwarted.

In direct contrast to this drive to open up the field, and almost as if daring the policy makers, these managers are doubling down on a range of practices, from patenting to pricing to bundling to multi-year contracting, as if to create ‘natural monopolies’. One notable arena for this is the biosimilars battlefield.

Regulators Invite Competition

As a result, even the US FDA, whose mission has not included pricing and economics, is actively expanding its influence beyond the traditional remit of ensuring safety and efficacy of healthcare products and services. (Also see “From Interchangeability To Exclusivity: US FDA Looks For Ways To Make Biologics Market More Competitive” – Scrip, 7 Sep, 2018.) This became starkly evident when Richard Pazdur, oncology director at the FDA, used not one but two panel discussions at the April annual conference of the American Association for Cancer Research, a preeminent industry forum, to call the biopharma industry managers to task. 

Pazdur cited the PD-1/PD-L1 cancer therapy companies for avoiding collaboration in pre-competitive and companion diagnostics development, thereby putting patients at risk. At the next forum, he chastised six companies that already market these cancer drugs for ignoring market forces and maintaining the same price for all six agents. In fact, he explicitly invited Chinese companies developing PD-1/PD-L1 products to expedite their US studies, as the treatment effect data from the six US approved PD-1/PD-L1 products take away much of the clinical and statistical risk. Two Chinese PD-1/PD-L1 products have already been approved in China and launched at discounts of as much as 80% to the US price.

Imagine the impact of market forces on the industry that has managed to avoid them to date. Should the industry worry, or is this just one bureaucrat expressing a personal opinion? Signals from multiple fronts are converging that the holes in the dyke are weakening the dam.

Managers Double Down with Patenting, Pricing And More

Take the initiatives by the biologic innovators to foreclose biosimilar competition at any cost, market forces be damned (no pun intended). 

Johnson & Johnson’s bundled multi-year contracts with US institutions have ensured that its TNF inhibitor Remicade (infliximab) continues to dominate in the US, its largest market.  In fact, the market situation has become so intractable that Pfizer Inc. has taken legal action against J&J’s anti-competitive positioning. In Europe, AbbVie Inc. initiated a frontal assault on biosimilar competitors to Humira (adalimumab) last autumn, days after Humira’s patent expired. In the Netherlands, for example, it put adalimumab biosimilar competitors in an untenable position by offering close to a 90% discount on Humira’s brand price as long as a hospital would continue to use the Humira brand for at least 80% of their patients. Throwing this 20% crumb must be to keep the anti-competition authorities happy.

Most biosimilars in Europe to date have achieved gradual but reasonable market penetration with about half as large a discount to the originator price as that which AbbVie is preemptively offering.  In effect, AbbVie has decided to forego the hefty profits on the 2018 sales of €220m much sooner than over the several years that biosimilar competitors would need to gradually erode a majority of this revenue stream. By accepting revenues of only about €20m to keep biosimilar competitors out at any cost, AbbVie still seems happy with the financial outcome. 

Such industry actions led the Health Affairs blog of 15 April 2019 to label biologics ‘natural monopolies,’ where patent expiries are only one of the multiple barriers deterring viable competition.

The biologic originators’ patenting strategy builds a formidable barrier for biosimilar competitors, which ironically may put the very life blood of our industry in the eye of the storm.  AbbVie has nearly 250 Humira patents, half of them filed only in recent years to scare away biosimilar competitors, including the deep-pocketed groups Amgen Inc., Pfizer and Merck & Co. Inc.

What the industry critics consider as scorched earth initiatives and predatory tactics have forced at least half of Humira biosimilar competitors to quit, and others including Amgen have been left licking their wounds with a handful of Dutch hospitals opting for their products – likely at a similarly painful discount just to save face. 

True, AbbVie is simply playing the present patent protocols to maximize returns for its shareholders – all legal and well within its rights – but will these actions prove short-sighted? Politicians, payers, patients, and policy mavens all have begun to ask if the present patent protocol should survive such actions of biologic innovators. (Also see “AbbVie’s ‘Unjustified’ Humira Settlements Divide Market, Class Action Claims” – Pink Sheet, 19 Mar, 2019.)

Equally importantly, AbbVie accepting only 10% of its brand price is bound to accelerate biosimilar adoption. A range of substitution initiatives are afoot that will embolden many more biosimilar competitors, and these competitors likely would be elated even with a 10% portion of the brand revenue stream. As much as a quarter of the entire biopharma industry profits may be at risk within this decade

Luckily, as noted at the outset, the innovation cycle promises to usher in the next golden era. And with a bit more luck, these innovations will be accessible globally to every patient who may benefit, while still yielding handsome profits to the innovators during their legitimate patent life.

Viren Mehta founded and is managing member of Mehta Partners, LLC, a globally integrated boutique providing strategic insights to senior management teams in the biopharmaceutical sector for nearly 30 years.

This column originally appeared on Scrip Biopharma Intelligence, April 30th, 2019.

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