Mapping Out the Future for US Biosimilars/Follow-on Biologics… How Low Can They Go?

Why all the fuss? The market for innovative biologics exceeded $43b in 2006 and is growing at ~12% annually. With costs for treatment exceeding $50,000/yr for cancer drugs like Erbitux or Avastin, and no clear path for generic alternatives, biologics have occupied a comfortable position in an industry facing mounting generic competition. However, the tide may be turning – Europe already has a biosimilar regulatory pathway in place and the US appears poised to follow. The cost of prescription drugs is already a hot topic in the 2008 presidential election and the rhetoric is likely to intensify. Biosimilars will continue to remain on Washington’s mind as Democratic candidate Hillary Clinton was instrumental in forging bi-partisan agreement on legislation in the Senate this past June. Assuming biosimilars are able to enter the US market during the next presidential administration, how big is the threat to the branded biologics? Or conversely, how big is this opportunity for generics players?

Coming US presidential election won’t settle the regulatory debate: All three candidates have extolled the need to encourage drug cost control measures, and spoken in favor of articulating clear regulatory pathways for generic biologics. While no candidate can be considered a friend of BioPharma, which one poses the most credible threat?

Little congressional evidence can be found to support Obama and McCain’s stance on follow-on biologics. Given Obama’s short tenure in Washington this is not unexpected; meanwhile in the generic pharmaceutical arena, McCain has proven himself a capable advocate of past legislation, sponsoring through passage 2002’s Greater Access to Affordable Pharmaceuticals Act (S.812). The enacted bill, some allege “watered down” in its final form, marked a notable improvement upon existing Hatch Waxman legislation, but left considerable loopholes that form the basis of the three presidential candidates’ popular “improve generic access” mantra during this primary season. Senator McCain co-authored S.812 with Senator Charles Schumer (D-NY), one of the key supporters of current biosimilar legislation, along with Republican proponents Orrin Hatch (R-UT) and Michael Enzi (R-WY).

Where the rubber hits the pavement, it is Senator Clinton who has been behind the wheel of biosimilars legislation. Clinton, along with Senator Edward Kennedy (D-MA), co-authored the watershed Biologics Price Competition and Innovation Act of 2007 (S. 1695), legislation that maps a regulatory and approval pathway for biologic therapies. Details of the plan illustrate the conciliatory nature of the bill: if enacted, it will grant 12 year exclusive marketing rights to branded products, versus the 14 – 20 years demanded by biotech companies and seven years by generic manufacturers, reimbursers and consumer lobbies. Strong bipartisan support and the bill’s collaborative nature suggest that whatever happens this November will not swing the vote nor incur a veto.

From now through November, it is safe to say any bill that promises drug cost reduction in the healthcare arena will be embraced by all three presidential candidates. With what potency and efficiency said legislation makes it to approval is now the critical question.

The industry view – no impact (no surprise): A recent white paper from Grabowski and colleagues at Duke University estimates that the effect of biosimilars will be minimal. Grabowski estimates that biosimilars will offer a relatively modest 10-30% discount to the branded price due to the high fixed cost of manufacturing biologics and the potential need to market biosimilars (as is the case with Sandoz’s Omnitrope in the US). At this price, physicians may be hesitant to stray from tried-and-true branded products and anticipate prescribing biosimilars in just 10-40% of patients. Not surprisingly, the Biotechnology Industry Organization (BIO) has enthusiastically endorsed this view and posted Dr. Grabowski’s publication on its website.

A more realistic perspective from physicians: The scenario painted by Dr. Grabowski is primarily based upon the US experience with complex small molecule generics and may not fully factor in the high degree of physician frustration with current biologic prices nor the impact of the global economy. Leading oncologists including Michael Friedman of the City of Hope and Leonard Saltz from Memorial Sloan-Kettering have spoken publicly against the high price of biologics. Saltz, who helped develop Erbitux, said that Imclone “made a real mistake in their pricing.” His view appears to be widely shared – in a survey at the 2007 ASCO meeting, 60% of oncologists were “extremely willing” to prescribe biogenerics of leading cancer medicines within six months of release. Thus, the 40% peak share estimated by Grabowski appears low.

The price advantage: The high prices of branded biologics have allowed Mature Biotech companies to command gross margins of ~80%. In contrast, companies in our Indian generics universe have gross margins closer to 50%. Thus, even with no change in the cost to manufacture biologics, generics companies could offer a 30% reduction in price. Companies like Reliance, Wockhardt and Dr. Reddy’s are aiming to go beyond this price discount through economies of scale. For example, Wockhardt recently invested $38m to build a biologics facility capable of manufacturing 15% of the worldwide supply of biologics. Earlier this year, Dr. Reddy’s launched a biosimilar of Roche’s Rituxan/Mabthera in the Indian market at Rs 20,000 per vial (~$500), a 50% discount to the original price. If Dr. Reddy’s is the first to market and offers their biosimilar at a 50% discount, future competitors will likely drive the prices down even further. If physicians, payers and hospital administrators can get FDA-approved equivalent therapy and save themselves half the cost or more, biosimilars could follow small molecule generics to top tier placement, or even fail-first therapy. On cost alone, without marketing, biosimilars could achieve dominant market share.

Conclusions: Although the first biosimilars have launched in Europe and a regulatory path is taking form in the US, we remain several years from follow-on biologics/biosimilars emerging as a major threat to biotech companies or opportunity for generics. That said, the investments being made now to scale up manufacturing for follow-on products in conjunction with the evolving regulatory environment is poised to create a sizeable sector. Within five years, biogenerics could be available for 10 products that currently exceed $15b in WW sales in addition to human insulin and HGH. Even with a discount of 2/3 off of the price of innovator biologics, the biosimilar market is likely to quickly exceed $3-5b. Companies that are investing today in large scale, low-cost manufacturing are likely to have a sustainable advantage in this sector in the years to come.

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