What happens when a drug won’t go generic?
Peter Kolchinsky, Ph.D.
This is the second in a series of articles that aim to define the biopharmaceutical industry’s social contract with America, to examine practices that deviate from that contract, and to propose refinements to healthcare policy to ensure that our continued investment in scientific progress ultimately yields affordable, effective therapeutics for future generations.
Article 1: America’s Social Contract with the Biopharmaceutical Industry
Article 2: What happens when a drug won’t go generic?
Article 3: Protecting Off-Patent Sole-source Drugs from Price-Jacking
Article 4: Why wait for Generics? In praise of me-too drugs
Article 5: False Heroes — How PBMs Add Insult to the Injury of Insurance Cost-Sharing
Op-Ed: Let’s Throw a Patent-Burning Party
Article 6: The favors they do us: Charging less in other countries makes drugs more affordable in America
Article 7: Hard Negotiating Tactics: Compulsory Licensing and Willingness to Deny
Article 8: Unintended Consequences of “Fairness”: Critically examining the idea of the US referencing EU prices
Article 9: Direct-to-Consumer (DTC) Advertising: misnamed, misunderstood, and underappreciated
Article 10: The strange and special case of epinephrine
Please see Important Disclosures for Readers at the end.
The industry social contract is based on the premise that innovative drugs are worth the high prices biopharma companies charge while they’re on-patent because eventually they’ll be practically free for society, forever (see box 1). Yet not every drug is easily genericizable. In fact, some drugs, including remarkable life-saving ones, won’t ever go generic, at least not in the way we think about generic drugs today, and therefore will represent the industry’s failing to fulfill its end of the contract.
This creates two problems: first, prices for certain drugs may never drop. And second, companies selling such drugs would have less incentive to innovate to replenish revenues that should be lost to the normal process of their drugs going generic.
But non-genericizable drugs are not an unsolvable problem. “America’s Social Contract with the Biopharmaceutical Industry” described industry’s responsibility to grow our already valuable mountain of generic drugs by creating new drugs that will eventually, without undue delays, go generic. This is a straightforward process for the majority of medicines: traditional “small-molecule” chemical drugs. It’s becoming easier for “biologics,” those often-complex medicines made in living systems, which include enzymes and antibodies, thanks to the biosimilar pathway established as part of the Affordable Care Act. For certain drug-device combinations, the genericization process is trickier, but again, a pathway exists
But in other cases — for example new therapeutic modalities like cell and gene therapy — there is no pathway at all. Here I elaborate on some ideas for handling those exceptions, and for smoothing out the bumps in the pathway for difficult-to-genericize therapies.
Sizing up the problem
Medicare and Medicaid combined spent about $127 billion on thousands of prescription drugs in 2015, a large fraction of the $325 billion of total retail drug spend in the US that year¹. The US government breaks out in detail their spending on 121 drugs they consider notable for various reasons such as price or total cost; these account for about 68% ($87 billion) of the government’s present spending on prescription drugs. Let’s focus on this cohort of drugs and ask whether they will eventually go generic.
The majority of the spend, 55%, is on drugs that are easily genericizable and therefore can be expected to eventually drop considerably in price. Another 11% consists of spending on drugs like Advair Diskus (see box 2) that are inhaled or administered in a special way that makes it somewhat challenging to develop a generic, but these too should eventually succumb to generic competition. Another 30% of this spending is on biologic drugs that should face biosimilar competition (see box 3); many, like Remicade, Neupogen, and Humira, already have biosimilars approved, which either has led to price erosion² or eventually will.
Therefore, if we can assume that these 121 drugs are representative of the whole, then 96% of Medicare’s and Medicaid’s current drug spending will decrease substantially over time simply due to the normal process of drugs facing generic or biosimilar competition. So if Medicare and Medicaid are still spending as much in 2025 on drugs as they were in 2015, that future spending will be on newer, better drugs that today may still be just concepts locked in scientists’ minds waiting to be developed.
Indirect Paths to Genericization
Roughly 2% is spent on biologics that, while hard to biosimilarize, might actually be disrupted by other simpler branded drugs that are themselves genericizable. For example, in the treatment of hepatitis C, oral drug combination pills upgraded the standard of care for curing HCV from the old standard, which required injection of PEGylated interferons, a biologic treatment.³ Many patients experienced difficulties tolerating interferon-based treatment and it only cured 40% of patients after as much as a year of injections. The new oral drugs increased cure rates to nearly 100%, while cutting the treatment time to as little as 8 weeks, all but retiring pegylated interferon. What’s more, several companies came to market within a couple of years of one another with comparably effective oral HCV cures, triggering a price war that cut HCV drug cost per patient by over 60% from the price of the first entrant. Someday, all these drugs will likely see further competition from their own generics.
Another interesting case study features blood-derived factors called IVIg, basically antibodies collected from healthy donors to be infused into patients with a variety of immune-related problems. Companies that specialize in extracting various proteins from blood sell their own branded versions of IVIg that the FDA cannot classify as interchangeable and therefore aren’t generics but that physicians recognize as being substantially interchangeable. Therefore, when a hospital needs to purchase IVIg, it can shop around. Still, the prices for IVIg and its ilk remain relatively high because there is a relative scarcity of donated blood and therefore a limited supply of plasma proteins, sometimes leading to shortages. Several biotechnology companies are working on drugs that could possibly replace IVIg and could be manufactured like typical biologic drugs instead of purified from blood. Such an IVIg replacement would be expensive at first. But a simpler-to-manufacture IVIg replacement would attract biosimilar competitors someday, reducing the risk of shortages and lowering price.
Similarly, NovoSeven is a last-resort clotting factor used to treat patients with hemophilia and requires frequent infusions but is likely to be displaced by more convenient subcutaneously injected drugs that can be given less frequently. Therefore, even the small fraction of what Medicaid and Medicare spend on hard-to-genericize drugs will likely be lowered as these drugs are rendered obsolete by better branded drugs, which themselves may be easier to genericize (or biosimilarize), thereby ultimately fulfilling the social contract. However, it’s also possibly that hemophilia will someday soon be cured or nearly cured with one-shot gene therapies which are not genericizable. Such non-genericizable, non-disruptable therapies represent the final 2% of CMS’ spending and require a new strategy to protect the social contract.
Fixing forever-monopolies
A drug might remain a monopoly forever if it can neither go generic nor be replaced with a better technology. Approximately 2% of CMS’s drug budget is going towards drugs that may fall into this category. Such a drug would give a company the ability to charge a high price indefinitely, which violates the biotechnology social contract as we have described it.
For example, consider a gene therapy cure for a genetic condition that can be diagnosed at birth and that works best when administered in the first few months of life. Such a gene therapy might only be given once and impart a permanent benefit. Once such a drug comes to market, it is hard to imagine that any parent would be willing to take a chance on any other treatment instead, however similar it might seem based on animal tests. So when a biosimilar company tries to run a trial to demonstrate that its gene therapy works as well as the original, who would agree to take a chance on the untested version in a randomized clinical trial? After all, even slight differences could cause the biosimilar gene therapy to be worse (if there were no risk of that, then the FDA wouldn’t require running a trial). And because we might not know that the biosimilar was inferior until the treated baby got older and showed symptoms, the optimal treatment window for giving the child the original product would have passed.
In such a scenario, the first company to bring a gene therapy cure like this to market would have an undisruptable monopoly, at least until we found ways to get ahead of treatment entirely by preventing the disease in the first place. Currently, there are few such gene therapy programs in clinical development and, even at prices of a few million dollars per patient, these therapies would stay below 5% of total drug spend for decades to come. But to make sure that the generic drug mountain continues to grow under the terms of biopharma’s social contract, all drugs must go generic or somehow be replaced by drugs that will eventually go generic. Society should not grow dependent on drugs that threaten to remain monopolies forever.
Synthetic genericization
Such indefinite monopolies should therefore be regulated using a contracting mechanism that kicks in after a fair monopoly period (say, twenty years, a generous enough stretch of exclusivity that no entrepreneur or investor could claim to be un-incentivized to innovate) if society’s total spend on a drug has not sufficiently declined due to competition or disease prevention. Such an approach could borrow from what already occurs in the area of biodefense.
Today, the government contracts with certain companies to manufacture pandemic flu, smallpox, and other biodefense-related vaccines and therapies that, while unnecessary most days, might suddenly come in handy. To make sure that society always has a steady supply of these medicines, the government pre-negotiates with biodefense manufacturers that it will purchase a certain number of doses each year at a pre-determined price. If you think that this is some kind of violation of a purely capitalist free-market, consider that without such a contract, biotechnology companies could not justify spending the money to develop a drug that would likely never be used, but without which society would be unprepared were a natural pandemic or biologic weapon to strike. Even if any biotech company happened to produce exactly the right vaccine when it was needed, there would likely be a supply shortage that would allow it to charge any price — and society would have to pay. Imagine a million doses of a critical vaccine going to the highest bidders? By contracting with companies to create products that the government fears we might need (but probably won’t) at a modest price per dose, everyone wins. These biodefense companies generate reasonable, consistent revenues each year, and society is insured against worst-case scenarios.
Likewise, for non-genericizable drugs, such as curative one-time gene therapies, it would make sense to use the explicit contracting mechanism to make sure that, after a long enough monopoly, society could count on synthetically genericizing the drug by contractually reducing its profit margins to be modestly more than its cost of production.
Such a synthetic generic would come at a cost, however, because it would indefinitely lock in only a single manufacturer of the drug, which commonly make drug at a single manufacturing site. Should a catastrophe strike the manufacturing facility, society might experience shortages and patients would suffer. One of the advantages of there being multiple generic manufacturers of most drugs is that society is hedged against problems with any one of them.
Therefore, an alternative to using mandatory government contracting to control the price of an ungenericizable drug is to compel the company that makes the original drug to transfer its manufacturing know-how to a second company and even a third company to guarantee both manufacturing redundancy and price competition. This presumes that the FDA would recognize that the drugs produced at different facilities are the same. In a sense, the FDA routinely acknowledges this when it allows a company that makes a biologic to scale up its manufacturing to a large facility so that it can expand the market it serves. However, this transfer of manufacturing is not foolproof.
Surmounting manufacturing challenges
There is a famous case in which Genzyme, now a subsidiary of Sanofi, failed to convince the FDA that two versions of its drug Myozyme, for the treatment of Pompe disorder, were the same. Genzyme originally launched Myozyme for infants with Pompe and, as it tried to expand the drug’s use for the treatment of older children with Pompe, it needed to produce much more drug to address the larger number of patients and higher doses. The FDA considered that the slight differences between the original small-scale Myozyme (made in a 160 liter container) and the new larger scale (2000 liter) product were too significant to call them the same drug, forcing Genzyme to treat the batches from the new manufacturing process as a new drug, which they called Lumizyme. This meant running a new clinical trial. Even when the same company tries to replicate its own production of a complex biologic, it is not guaranteed that the FDA would consider them the same.
Therefore, if an expensive drug proved to be ungenericizable after 20 years and the government relied on compulsory transfer of manufacturing to increase the number of suppliers both for manufacturing redundancy and price competition, it is possible that the FDA would decline to consider these versions to be interchangeable. In the case of Lumizyme, that was not a problem since there wasn’t enough Myozyme to treat both infants and older children and therefore older children had no choice but to enroll in a trial of Lumizyme, helping Genzyme collect the necessary clinical data to get FDA approval for this new drug. But if the original manufacturer of a gene therapy was making enough product to supply the world, then one could imagine that patients would not want to enroll in a clinical trial of a copy drug that the FDA didn’t consider equivalent, even one produced with the assistance of the original manufacturer.
The Myozyme/Lumizyme case is a rare one, but it is more likely to occur with complex biologics like gene therapy. Therefore, we propose that synthetic genericization of an otherwise ungenericizable drug would be a more reliable way of fulfilling the social contract than compulsory licensing of manufacturing know-how to competitors. Hedging against supply shortages could also be achieved by other means, such as building up a large reserve of doses.
The challenge of cost stacking
There are thousands of rare genetic disorders, many of which could potentially be addressed with gene therapy. Most biotechnology companies hope that their innovation will lead to a so-called blockbuster drug, which corresponds to at least $1 billion in global annual revenues. In the case of rare orphan disorders, the US conventionally represents 30–40% of global sales. Therefore, to calculate a price for the drug in the US, one could divide roughly $350 million by the number of patients that would likely be treated in the US each year. So if one would expect to treat 1,000 patients each year with a drug in the US, one might set a price of $350,000/year. If there are only 500 eligible patients in the US, then one might charge $700,000/year. Some companies aim to generate a higher return and would charge more per patient. Companies rarely aim lower.
In theory, if each gene therapy company to solve one such disease were to generate $350 million/year in the US from their innovation, then treating even 10% of the 6000 genetic disorders listed in the genetics OMIM database could eventually drive societal spending to exceed $200 billion/year. That would be nearly 60% of what we spend on prescription drugs in the US each year. And if their benefits were anything like the gene therapies in development today, they would not feel at all discretionary to the patients and their families devastated by these disorders. That might not be an intolerable price to pay for a finite time if these therapies were to permanently upgrade our generic armamentarium. But if these gene therapies were ungenericizable, as they currently seem to be, then they would threaten to impose a permanent rent on society unless the biotechnology social contract were preserved, which calls for either coming up with a way of enabling true gene therapy biosimilars to come to market or achieving the same end by creating a mechanism for synthetically genericizing such monopoly drugs.
In the long run, prevention might obviate the need for expensive treatments altogether. For example, gene therapies developed for rare genetic disorders potentially might be disrupted by more widespread preconception and prenatal genetic testing that enables families to side-step these disorders.⁴ And the need for CAR-T cell therapies might be obviated if more cancer were detected earlier when it might be more easily cured with surgery, radiation, and other conventional therapies.⁵
Even after the advent of widespread screening, one would still expect that some non-genericizable gene therapies would remain necessary indefinitely since not all genetic disorders are hereditary or detectable and not all cancers will be caught early enough to cure with more conventional therapies. Though they are unlikely to grow to be a large fraction of total drug spend anytime soon, it is worth considering a mechanism such as synthetic genericization to ensure that even these therapies abide by the biotechnology social contract.
Acknowledgements: I’m grateful to Aaron Hiltner and Chris Morrison for their invaluable and substantive thought-partnership and drafting/ editing, to everyone who engaged with me in the constructive debates that led up to these articles, and to Erin Clutter and the RA Capital graphics team for creating artwork that so astutely captures the essence of each core concept.
Sources
³ https://www.fda.gov/ForConsumers/ConsumerUpdates/ucm405642.htm
⁴ https://www.wired.com/2017/06/radical-proposal-preventing-rare-genetic-diseases/
⁵ https://www.ncbi.nlm.nih.gov/pubmed/25993143
⁶ https://www.brookings.edu/wp-content/uploads/2017/05/wp30_scottmorton_competitioninpharma1.pdf
⁷ Steve Usdin, “Health & Wealth,” BioCentury, 6/26/17, 5
⁹ http://www.medicinesforeurope.com/wp-content/uploads/2017/05/IMS-Biosimilar-2017_V9.pdf
¹⁰https://www.rand.org/content/dam/rand/pubs/perspectives/PE100/PE127/RAND_PE127.pdf
¹¹ https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4899342/; http://www.raps.org/Regulatory-Focus/News/2016/06/20/25166/Biosimilars-in-the-EU-Lower-Costs-Increased-Patient-Access-IMS-Report-Finds/ ; http://www.ajmc.com/journals/issue/2016/2016-vol22-n5/greater-potential-cost-savings-with-biosimilar-use
Peter Kolchinsky, Ph.D.
Peter Kolchinsky is a founder, Portfolio Manager, and Managing Director at RA Capital Management, LLC, a multi-stage investment manager dedicated to evidence-based investing in healthcare and life sciences. Peter is active in both public and private investments in companies developing drugs, medical devices, diagnostics, and research tools, and serves as a Board Member for various public and privately held companies, including Dicerna Pharmaceuticals, Inc. and Wave Life Sciences Ltd. Peter also leads the firm’s outreach and publishing efforts, which aim to make a positive social impact and spark collaboration among healthcare stakeholders, including patients, physicians, researchers, policy makers, and industry. He authored “The Entrepreneur’s Guide to a Biotech Startup”, written on the biotech social contract, and served on the Board of Global Science and Technology for the National Academy of Sciences. Peter holds a BS from Cornell University and a Ph.D. in Virology from Harvard University.
Important Disclosures for Readers
The contents of this publication are intended for informational and educational purposes. The views and opinions expressed are those of the author and are subject to change. They do not necessarily reflect the views or opinions of RA Capital Management® or any other person the author is affiliated with.
Nothing of the content should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or product. The author and/or RA Capital Management® may hold or trade securities of the companies named in this publication or that manufacture the drugs discussed.
Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this article are trade names, service marks, trademarks or registered trademarks of their respective owners.
The author’s opinions are based upon information he considers reliable, and there is no obligation to update or correct any information provided.
© 2017 Peter Kolchinsky, Ph.D.
