Why wait for generics? In praise of me-too drugs
Peter Kolchinsky, Ph.D
This is the fourth 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 central premise of the biotech social contract, discussed in depth here, is that, as long as drugs go generic, their cost is finite and their value is infinite. By that rationale, one could argue that we only need one drug of any given class (e.g. only one good statin, only one cure for hepatitis C, only one anti-PD-1 antibody); that there’s no need to waste creativity and R&D dollars on a second or third.
In-class monopolies offer a relatively straightforward reward to those successful enough to bring a new type of drug to market. A company sets a price, it sells the only drug of its kind, and, whenever a physician comes across a patient that looks like she needs that kind of treatment, that one drug is all there is. Especially when the drug is so effective that it would be unconscionable to deny an eligible patient access, the company need not engage in any significant price negotiations. Eventually, the drug would go generic and stay inexpensive for the rest of time, continuing to offer society great value.
For decades it was fairly typical for biopharmaceutical companies to enjoy in-class monopolies. Genzyme enjoyed a monopoly on the treatment of Gaucher for 19 years before Shire brought its enzyme to market¹, and four years later Pfizer launched a third such enzyme². Roche’s and Biogen’s Rituxan was the only anti-CD20 antibody on the market for 12 years before GlaxoSmithKline launched Arzerra. Novartis’ dominated the treatment of CML with Gleevec, the first BCR-ABL kinase inhibitor on the market, for five years before BMS launched Sprycel in 2006. And even in type-2 diabetes, a very large market, Merck was the only company to sell a DPP4 inhibitor, Januvia, for three years in the US before other companies joined the fray.
So what is the point of the products that came in later, hardly representing the same level of technological breakthrough as the first drug? Such products are sometimes derided as unoriginal “me-too” drugs undeserving of a high price because companies didn’t seem to take as much risk to develop them as the first-to-market company³. If the first drug to market generates $2 billion/year in sales and the second drug $1 billion, critics appear to consider the sales of that second drug unearned and excessive, implying that, if not for the second drug, patients wouldn’t be taking the first (i.e. possibly driving it towards $3 billion/year in sales) or else wouldn’t be harmed by going untreated (e.g. if they can’t tolerate the first drug).
A public outraged by what they see as the high costs of currently branded drugs does not yet appreciate the many beneficial properties of me-too drugs, including helping to contain costs of what would otherwise be branded drug monopolies.
So it is good news that the era of lengthy, on-patent (i.e. pre-genericization), in-class monopolies may be ending, thanks to advances in research and development productivity across the biopharmaceutical industry. The first two drugs targeting PCSK9 to treat high cholesterol were approved within weeks of one another, allowing payers to play them off one another to keep their prices in check. A first-in-class migraine drug targeting CGRP is likely to have multiple competitors within its first year on the market, also likely giving payers some leverage. Similar scenarios are playing out in a diverse set of drug classes, from SGLT2 inhibitors for diabetes and GnRH antagonists for endometriosis and uterine fibroids, to CDK4/6 inhibitors, anti-PD-1 antibodies, PARP inhibitors, and CAR-T treatments for cancer.
Fast followers, the me-too drugs that follow closely on the heels of first-in-class agents, are getting faster. In the process, they’re quickly offering multiple options for patients, for whom not all drugs in a class will be comparably safe and effective. And to the extent that these drugs are interchangeable for many patients, they also offer savings, provided that payers and policymakers recognize which levers to pull. Historically, payers appear to have missed opportunities to negotiate more aggressively to contain costs within competitive drug classes such as anti-TNF alpha antibodies and beta-interferons.
But ongoing public scrutiny of drug prices suggests that payers, even if not truly incentivized to negotiate down the long-term growth of healthcare spending (since they are paid a percent of total healthcare spending and therefore can only grow if the total pie increases), will at least attempt to negotiate on behalf of their clients, which include the federal and state governments, companies, and individuals, when multiple products in a class make it easier to do so. To the extent that payers are successful in using the tools they have to negotiate down drug prices, society will get a bargain, but if payers are crude in their tactics, failing to reward the late comers with meaningful market share, patients may in the future end up deprived of the innovation and cost-saving benefits of me-too drugs.
FDA Commissioner Scott Gottlieb made the same case for biosimilars⁴, which are a specialized case of me-too drugs, that payers need to reward biosimilar manufacturers for their efforts with market-share, even if it means painfully kicking their addiction to the rebates branded manufacturers offer payers in exchange for high market-share. The alternative is that the biosimilar industry dries up, killing society’s chances of enjoying low-cost, off-patent biologics, an intrinsic piece of the biotech social contract.
The benefits of me-toos
Having multiple comparable options within any given class of drug allows payers to play each drug off one another, offering preferential formulary status and market share in exchange for price concessions. This doesn’t work well in all cases, but there is no doubt that having two sellers is better for any buyer than having one seller. Me-toos sometimes launch at a higher price than the first-in-class drug, prompting a matching price increase on the first drug in the class. But those price increases are even easier to take when there is only one branded drug in a class. Also, these list prices are reduced by the secret rebates extracted from drug manufacturers by pharmacy benefit managers (PBMs), obscuring from the public the obvious mitigating effects of competition on price (and, as I discuss here, creating an incentive for these payers to perpetuate higher list prices from which to negotiate discounts/rebates, making it seem that prices are climbing faster than they are).
Some drug classes, such as CAR-T cell therapies and gene therapies, are not genericizable by any approaches conceivable today (I propose “synthetic genericization”, discussed in more detail here). Therefore, me-toos represent the only foreseeable strategy to commoditize certain drug classes. Society (via government policies and contracts with PBMs and private insurance companies) should encourage the development of me-too products, especially for non-genericizable complex biologics classes, by rewarding some market share to each new entrant; otherwise, if companies have nothing to show for putting the third or fourth new, yet undifferentiated drug in a class on the market, they won’t bother doing so in the future.
Beyond the benefits created by on-brand competition, me-too drugs that may appear identical to a first-in-class therapy may in fact behave differently in practice. Different compounds in a particular class may be approved at different dosages or dosing schedules (i.e. how frequently they are taken). The differences between therapies in the same drug class may manifest as different side effects or efficacy profiles or interact differently with other drugs a person may be taking. Some patients have genetic differences that cause them to degrade some types of chemicals faster or slower than other chemicals. A fast degrader might quickly break down one drug, getting less benefit from it. A different drug may be less susceptible to that patient’s particular enzymes. These differences have been observed for pain medications, anti-depressants, antibiotics, and many other drug classes. With several options, a physician has a better chance of finding a version of a treatment that works for a particular patient.
A third major benefit of me-too drugs becomes evident when drugs from different classes are used in combination to create more effective therapeutic regimens. For example, HIV has long been treated with a “triple cocktail” of three kinds of drugs; hepatitis C is now easily cured with combinations of two or three types of antivirals. Think of this like a plumber putting a wrench and a pair of pliers together to solve a difficult problem that would be impossible to solve with either tool alone. So imagine if there were only one wrench and only one pair of pliers. If one company owned both, it would have a monopoly and could set a high price for its combination therapy. If different companies owned each, they might not be motivated to think about how to combine their drugs into a single pill or therapeutic regimen in the first place. Each certainly would want to charge a high price for its own drug since each could be considered necessary. Having multiple wrenches and multiple pliers, with several companies each owning a set, creates the opportunity for multiple therapeutic solutions.
When companies compete at the level of solutions by combining or sequencing multiple drugs to offer patients better outcomes, me-too drugs turn into necessary building blocks of potentially competing solution sets. Multiple DPP4 and SGLT2 inhibitors have enabled three companies to create co-formulated pills that more effectively manage diabetes. Multiple HIV polymerase inhibitors, protease inhibitors, and integrase inhibitors have allowed two primary groups of cocktails to emerge, those controlled by Gilead and those controlled by GSK’s Viiv division, with more options on the way. Drugs do not actually need to be co-formulated into a single pill to be used together; they can simply be co-administered at the same time or during the same course of treatment. If they are owned by the same company, their prices can be functionally linked via co-contracting with payers (e.g. Drug A and B each costs $10,000/month, but together the price is $15,000/month).
These pricing and convenience advantages of combinations are also why every oncology company is developing an anti-PD(L)1 antibody (FDA has approved five, and there are upwards of 20 more in development); that’s the one drug class everyone knows is going to be a part of a solution set for many cancers. And as soon as there is a hint that maybe a new type of drug could also work, there is a rush by many companies to get their own versions. Oncology companies fear that they will be stuck with nothing if their solution set ends up missing a key ingredient that synergizes with the rest of their pipeline. That logical fear drives the creation and acquisition of many drugs within a single class, but make no mistake: these companies are trying to beat one another to create the single best oncology solution.
Using society’s leverage
Given the benefits of me-too drugs, it’s understandable that regulators and payers would want to see more of these options in the pharmacopeia. At a conference in late 2015, FDA’s then-director of its Office of New Drugs John Jenkins lamented⁵ the lack of me-too drugs in the industry pipeline and among FDA’s approved drugs list that year, declaring that me-too therapies for chronic diseases were often “me-better” and can be a boon for public health. In early 2018, among the regulatory reforms suggested by the President’s Council of Economic Advisors was an expedited approval pathway for me-too drugs. Still, it’s understandable that biopharma R&D dollars are being directed to first-in-class drugs, often for rare diseases: that’s where the regulatory incentives lie and where payer hurdles are often lower. Me-too drugs don’t often garner FDA’s coveted “breakthrough designation.”
Yet, the biopharma industry’s success and increased productivity has led to the proliferation of technologies, skilled people, and companies competing to address many of the same unmet needs, shifting the balance of power to society: almost everywhere we look, we see multiple potentially-comparable products. These are all examples of drugs in the same therapeutic class (i.e. they are all either screwdrivers, hammers, or pliers) though they may differ from one another in subtle ways. In theory, if they are similar enough, they can be played off one another in a price war to extract savings for society (generics are the extreme of this since they aren’t just similar but, in fact, the same).
With increasing numbers of me-too drugs in each class, society typically no longer needs to wait for generics to be able to negotiate down prices if it knows how to take advantage of its bounty. It’s important to acknowledge that biopharmaceutical companies have several perfectly legal tactics at their disposal to compete for market share and to preserve their prices, and they should be expected to use all of them. But society also has some tactics that its agents, those who administer insurance plans, sometimes but not always employ to contain drug costs.
Failures of society’s payer agents (after all, they do work for you and me) to leverage me-toos in price negotiations are worth considering. Sometimes payers are precluded by law from doing so (e.g. CMS can’t negotiate drug prices). Occasionally it’s because they can’t be bothered (branded prescription drugs are, after all, only 12% of total health care spend, so some would say there are bigger fish to fry). Sometimes insurers are stuck between the rock of paying more for a drug and the hard place of being vilified in the media for denying access to any treatments. Most disconcertingly, society’s agents have found a way to align their own profit motive with higher drug prices. Pharmacy benefit managers (PBMs) can increase their profits by favoring high-cost drugs from which they extract money-back rebates instead of recommending lower-cost drugs, even generics, without a rebate.
Integral to the biotech social contract is that, whenever possible, payers should play similar drugs off one another to get the best deal on behalf of society while properly covering a drug, which is to say without co-pays or other forms of cost-sharing, when it is uniquely suited and medically necessary for a patient.
Encouraging price wars, when possible
But before we assume one can instigate price competition among several similar drugs, the key questions are how meaningful the differences are among all the drugs in the same therapeutic class and how willing payers are to overlook those differences to exploit the similarities. It’s possible that one drug has a higher rate of a particular side effect, such as a rash, than the others; it doesn’t seem so unconscionable to ask a patient to try that drug first if it’s cheaper, and then, only if they experience a rash, offer them one that doesn’t cause a rash. The company with the rash-causing drug will have to offer a price discount to an insurance company to require that patients try it before authorizing payment of one of the other rash-less drugs in that class.
Payers can leverage even a slightly worse second entrant against a better first-in-class drug to lower costs, as they did when they played AbbVie’s twice-daily HCV cure Viekira Pak off of Gilead’s once-daily pill Harvoni to lower HCV drug spending. While AbbVie ended up with only a modest share of the market, less than a fifth, the sheer size of the HCV market was enough to make that small piece of the pie worth billions. Later, Merck launched Zepatier. Though not quite as compelling as Harvoni for most patients, Zepatier had some advantages in a subset of patients, and it got a sliver of the market.
If second-rate players have indeed created drugs that are good enough for payers to leverage against the higher cost best-in-class products in pricing negotiations, then it’s important that payers reward these second-rate, late-comer players with meaningful share of the market (at least until the better drugs go generic and there is no need for compromise). Failure to do so, for example by treating them like stalking horses and giving the best-in-class drug the majority of the market as long as it, too, comes down on price, discourages other late-comers, robbing payers of additional leverage. For example, with Gilead hanging onto the lion’s share in HCV, Merck and JNJ each dropped further efforts to develop better HCV drugs.
It’s possible that companies selling the better drugs will offer a discount so their drugs will be used first, but what’s clear is that the companies with the worse drugs have to offer something in return, an even bigger discount, to get any market share. If all drugs cost the same, then payers, physicians, and patients will just use the better ones and the others will get no share. In other words, good-enough drugs can be leveraged against better drugs to save society money. The challenge is defining what is “good-enough” and what is “unconscionable to deny.” For example, let’s say Drug A were effective in all patients at slowing a progressive disease, such as cancer, and Drug B were effective in only half of patients, but we couldn’t tell ahead of time which half. Then it would be difficult for a physician or insurance company to require that patients try Drug B first, offering Drug A only to patients whose disease got worse, because disease progression is a permanent harm. Drug A, in this case, would be “unconscionable to deny” and Drug B would not be “good enough.” There would certainly be a good argument for trying to develop a diagnostic test to try to predict which patients would benefit from Drug B and which won’t, since that would give insurance companies leverage in their price negotiations. Absent such a test, in a just world, Drug B would get no market share and would be forgotten. (Therefore, it would be in Company B’s interest to develop such a test.)
We now operate in a world in which biopharma companies must continue to expeditiously innovate and combine products to maintain their competitive edge and pricing power. Such competition benefits both society and the small, development-stage companies that offer vital innovations to pharmaceutical leaders. In Lewis Carroll’s Through the Looking-Glass, and What Alice Found There, the Red Queen explains that, in her world, one has to run just as fast as one can just to stay in the same place, and to get ahead, one must run faster than that.⁶ Such are the rules of our industry, except the race is to acquire more and better chess pieces than others to best vanquish a disease. Along the way, this surge in productivity empowers society to get better value by leveraging the proliferation of comparable me-too drugs to both keep down branded prices for a class (to be at least lower than they otherwise would be if they were monopolies) and better treat certain subsets of patients for whom the subtle differences among similar drugs matter, an advantage that persists even after all these drugs go generic. Payers being mindful to reward less-expensive me-toos with market share will ensure that companies bother to launch good-enough drugs even when they fall short of developing the best-in-class.
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
¹ http://www.evaluategroup.com/Universal/View.aspx?type=Story&id=207449
³ http://www.nytimes.com/2012/03/07/opinion/pay-only-for-drugs-that-help-you.html ; https://www.nytimes.com/2015/01/08/upshot/the-drugs-that-companies-promote-to-doctors-are-rarely-breakthroughs.html ; https://www.nytimes.com/2015/09/29/upshot/how-patent-law-can-block-even-lifesaving-drugs.html
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.
© 2018 Peter Kolchinsky, Ph.D.
