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Generic Biologic Drugs: What Are They And Will They Save Billions Of Dollars?

Much has been made of the recent pressure on the FDA to create a pathway for follow-on biologics. On June 9, 2009, Rep. Henry Waxman, chair of the Energy and Commerce committee, sent a letter to President Obama imploring him to approve a pathway for generic biologics: “I urge the administration to consider what steps can be taken under existing authority to prepare and even begin to use a pathway for generic biologics.”

Six days later, President Obama, in his June 15, 2009 speech to the AMA, followed Waxman’s lead, asking the FDA and industry “to introduce generic biologic drugs into the marketplace.” He continued: “These are drugs used to treat illnesses like anemia. But right now, there is no pathway at the FDA for approving generic versions of these drugs. Creating such a pathway will save us billions of dollars.”

Is this true? Are follow-on biologics, biosimilars, or generic biologics (all names for the same concept) truly the path to healthcare savings? And what are they, anyway? To clear up the confusion, this post aims to explain what biologics are, what generics are, and what the challenges are in the creation of an approval pathway for generic biologics.

What are biologics? How do they differ from traditional small-molecule therapies?

When you think of a drug, you probably think of a pill like Tylenol or Lipitor. You may not be as familiar with biologics, which are attracting a great deal of attention from policymakers and media. Biologics represent a different set of drugs, distinguished by their size, their informational and manufacturing complexity, and their therapeutic advantages.

If you were to look at most drugs under a microsope, you would find that they are actually rather small relative to a typical biologic. Acetaminophen, which is the active ingredient in Tylenol, weighs 150 daltons (a dalton is a unit of atomic mass). Enbrel, on the other hand, which is a top-selling biologic indicated for several autoimmune diseases, weighs 150,000 daltons. To put that thousand-fold difference in visual terms, if Tylenol weighed as much as your mountain bike, then Enbrel would weigh as much as an unfueled 12-passenger private jet. Hence you will often hear people in the pharmaceutical industry refer to “small molecule” drugs and “large molecule” drugs — because these are two truly distinct classes.

Biologics are often designed to closely mimic the body’s own specific natural processes. Because of this higher specificity, biologics tend to bind to drug targets in the body more precisely than do traditional drugs, which may bind to other unintended targets in the body, placing the patient at greater risk of side effects.

On top of it all, there is currently no defined pathway at the FDA for companies to develop generic versions of biologics, so biologic manufacturers retain data exclusivity over their products. Not surprisingly, the therapeutic and market advantages of biologics have caused pharmaceutical companies to focus their efforts on developing or acquiring biologics over small-molecule drugs. In fact, according to a recent forecast, by 2014, seven of the top ten drugs in America will be biologics, including every single one of the top six.

Unfortunately, while biologic therapies provide a great deal of therapeutic benefits, they are also extremely challenging for biopharmaceutical companies to develop and manufacture, because they are composed of entire proteins, carefully grown through recombinant DNA methods which are newer and less practiced than traditional drug chemistry methodologies. A traditional drug is usually derived through a set of chemical reactions. It’s a lot like following a recipe. Synthesizing a biologic, however, is a bit more like cloning a cat. In order to synthesize a biologic, host mammalian cells, usually Chinese hamster ovary cells, must be implanted with a gene that codes for the desired drug. The host cells are maintained in a special bioreactor that is designed to keep the cells alive as they translate, synthesize and excrete the drug. The broth of cells must then be harvested from the cells, modified, purified, and tested. The solution is finally packaged into vials or pre-filled syringes for distribution.

This manufacturing process is unusually challenging to reproduce consistently, even within a company. For example, Johnson & Johnson manufactures epoetin alfa, an anemia therapy, under the name EPREX in Europe. In the late 1990s, J&J changed its manufacturing process for EPREX at the request of the EMEA (the European version of the FDA). The process change caused some patients to develop pure red blood cell aplasia, a serious adverse reaction. Rather than receiving the benefit of the anemia therapy, these patients actually lost their ability to make red blood cells because they produced an antibody (triggered by the faulty EPREX) that inactivated both the EPREX and the body’s natural protein that is essential for red blood cell production. J&J eventually determined the cause of the adverse reaction and corrected it, but only after a lengthy and expensive investigation.

Because of the intense development and manufacturing process, biologics are also significantly more expensive than traditional therapies. Herceptin, an effective treatment for some forms of breast cancer, can cost as much as $48,000 for one year’s worth of treatment. It’s important to keep in mind, however, that virtually every drug company provides programs to help underinsured or uninsured patients get financial assistance in the form of co-pay cards, co-pay grants, or free drug programs. Simply contact the drug manufacturer.

Why have biologics gotten so much attention from healthcare reformers such as Rep. Waxman and President Obama?

The high cost of biologic therapies has attracted attention from both private payers, such as Aetna and UnitedHealthcare, and public payers, such as Medicare, Medicaid, and state health insurance programs. While payers agree that the therapeutic benefits of these treatments are important, they are still anxious to limit their exposure to the high price tags. Most insurers require several other therapeutic steps before allowing a physician to prescribe a biologic therapy.

Wait, what exactly is a generic? And what’s all this talk of bioequivalence?

The Hatch-Waxman Act of 1984 established a pathway for generic versions of small-molecule drugs to be offered to the public. Once the patent ends on a drug, generic drug makers may manufacture and sell the same drug without repeating the research, expensive clinical trials, or marketing efforts conducted by the original patent holder. These savings allow generic manufacturers to sell their versions for a lot less.

In order to gain approval, the maker of the generic must still show bioequivalence to the original drug, called the “reference listed drug” in the generic drug maker’s application. In a bioequivalence study, the reference listed drug is administered to one group of healthy volunteers, and the generic is administered to a second group. The blood concentrations of the active ingredients are measured over time and graphed. If the generic drug’s graph lies between 80% and 125% of the graph of the reference listed drug, then the two are deemed bioequivalent, and the generic drug is approved. Once approved for the market, it may be sold and independently substituted by a pharmacist for the branded medication without telling the physician, assuming the doctor has not expressly forbidden generic substitution. This last permission is referred to as the “interchangeability” of the drug.

Why can’t Congress just duplicate the same approval process used for generic small-molecule drugs?

In theory, Congress could. In practice, however, there are several technical hurdles that remain to be cleared. As discussed above, the processes used to create biologic therapies are extremely sensitive to manufacturing changes, as in the EPREX case. If a generic biologic manufacturer develops its own process, there is a good chance that the quality of the product would differ from that of the reference listed drug. Furthermore, no one has yet confidently measured bioequivalence for a biologic.

Frank Torti, Chief Scientist of the FDA, summarized these issues very well in a September 2008 response to a Congressional inquiry about follow-on biologics:

Because of the variability and complexity of protein molecules, current limitations of analytical methods, and the difficulties in manufacturing a consistent product, it is unlikely that, for most proteins, a manufacturer of a follow-on protein product could demonstrate that its product is identical to an already approved product. Technology is not yet sufficiently advanced to allow this type of comparison for more complex protein products.

All is not lost, though. The FDA could still create a pathway for generic biologic manufacturers to develop “biosimilars,” which are products that are intended to be close to a reference listed drug but cannot be shown to be the same. Because they are not the same, biosimilar manufacturers would likely have to conduct clinical trials to show that their version is safe and effective for human use, and can be manufactured consistently.

What are the realistic cost savings?

Because of the added cost of clinical development, testing, and marketing of a biosimilar product on top of the difficult manufacturing process, and competition, generic biologic pricing is more likely to resemble brand-to-brand biologic competition than the generic-to-brand competition seen in the small-molecule drug marketplace. Therefore, it’s not yet clear how much more affordable a FOB would be for health insurers. Without being able to show that the products are truly identical and therefore interchangeable, physicians are also likely to be reluctant to try what is essentially a “new” drug that does not truly share the established track record of the original drug. Payers and patients may be excited about the lower cost but skeptical of potential safety issues. As a result of these factors, generic biologic manufacturers may ultimately fail to capture enough business to make up for the upfront expenses of clinical testing, as well as the ongoing manufacturing and marketing expenses.

The Federal Trade Commission recently published a report that studied and called out these limitations. The consequences of the market dynamics imply that only two or three companies with large biologics manufacturing capabilities will even bother to get involved in this field, because only those companies will already have the plants and people to compete effectively. Ironically, the FOB manufacturer for a given reference drug will probably be other biologics innovators who already have the manufacturing capabilities but don’t normally compete in that particular market.

What would be some of the other implementation challenges for the government?

For one, CMS would need to decide how to bill and code for the new products, a subtle referendum on how identical the biosimilars will really be. If they give the generic versions the same codes as the originals, interchangeability is easier and the cost savings are more likely to materialize. On the other hand, it’s important for both the FDA and CMS to track adverse events with these new products (an activity known as “pharmacovigilance”), which is easier to do if the codes are different.

Where does the policy debate stand? What are the Eshoo and Waxman proposals?

The current Waxman bill is remarkably similar to the Hatch-Waxman Act of 1984, which was originally designed for small-molecule drugs. It would not require any new clinical trials for generic biologics provided that the generic had a “highly similar molecular structures,” and allows a case-by-case determination on whether or not safety and efficacy data would be required before pharmacies could substitute generics for reference biologics without telling the physician, but the default would be to allow substitution on approval. The Waxman bill allows for five to nine years of data exclusivity for the original patent holder.

The current Eshoo bill would require clinical trials comparing the generic biologic to the reference biologic, unless the FDA waived them. Rather than automatically granting interchangeability upon approval, the FDA would have to publish guidance with data that describe the criteria required for interchangeability. The bill also recognizes the greater challenge in developing biologics by allowing for twelve to fourteen years of data exclusivity.

Can the healthcare system really save billions of dollars with biosimilars?

President Obama’s speech to the AMA suggested that billions of dollars would be saved by the creation of a biosimilars approval pathway. Several others to study the issue have cited fairly conservative numbers. Avalere Health put the federal savings at $3.6 billion over a ten-year period, while the Congressional Budget Office says $6.6 billion. Avalere’s model assumes moderate discounting, several entrants, slow uptake of biosimilars, and a ten-year data exclusivity period. The CBO report scores a bill that resembles the Eshoo option described above, but doesn’t account for some of the market dynamics discussed above and in the FTC report.

Finally, to keep pharmaceutical costs in perspective, policymakers should remember that prescription drugs currently make up only 10% of healthcare costs, while physician services make up 21% and hospital care makes up 31%. The CBO estimate also predicts that follow-on biologics would save $25 billion on national biologics expenditures over ten years. Even if correct, those savings still make up one-half of one percent of all national spending on prescription drugs, which is itself one-tenth of all healthcare spending in the United States.

Which option makes more sense?

Overall, the Eshoo bill appears to do the best job of reflecting the current technical challenges particular to biologic therapies. The need for clinical trials to insure the safety, efficacy and quality of FOBs ought to be non-negotiable. However, given the high cost of becoming a FOB manufacturer, and the small number of likely entrants, the optimal length of data exclusivity is a good open question. Henry Grabowski of Duke University studied the issue and concluded that an ideal breakeven point is 12.9 and 16.2 years, also suggesting that the Eshoo option is the most likely to drive economic growth. The European Union currently allows for biosimilars and permits ten to eleven years of data exclusivity. Let’s hope that policymakers work hard to thoughtfully strike the right balance that maintains both a stream of innovative therapies from scientific pioneers and a structure that wisely manages costs for payors.

Author’s bio:
Jonathan Sheffi is a summer intern in the FDA Office of Biotechnology Products. Before the FDA, Jonathan worked for Amgen, first as a marketing analyst and then as a biopharmaceutical sales rep. He will start at Harvard Business School in the fall of 2009, and is seeking an internship opportunity for the summer of 2010. Follow Jonathan’s blog at and on Twitter at @sheffi.

Thank you to Val Jones (Better Health), Niko Karvounis (The Century Foundation), and Kimberly Barr (UnitedHealthcare) for their comments and suggestions.

All included information has been derived only from publicly available sources. This blog post reflects the author’s personal opinions and do not represent the opinion of any other organization or individual.

Advice to Medical Tourists From the American College of Surgeons

Earlier this year, DrRich offered several potential strategies for doctors and patients to consider, should healthcare reformers ultimately decree it illegal for Americans to seek medical care outside the new universal system. This eventuality  (i.e., making it a crime to spend your own money on your own healthcare) may not be as far fetched as one might think at first glance, since in societies where social justice is the ultimate goal, such individual prerogatives must be criminalized.

At that time, DrRich offered several creative solutions to this problem, including offshore, state-of-the-art medical centers on old aircraft carriers, and combination Casino/Hospitals on the sovereign soil of Native American reservations. A reader subsequently offered the possibility of simply establishing institutions something like the “Cleveland Clinic Tijuana,” i.e., cutting-edge medical centers just south of the border. (This solution would have the added advantage of encouraging the government to finally close the borders once and for all, employing whatever means it might take, including military patrols, minefields, and missle-armed drone aircraft.)

As entertaining as it might be to imagine such solutions, a readily available, though much more mundane, solution exists today – medical tourism.

Medical tourism, where one travels outside one’s country in order to obtain medical care elsewhere, is a booming business.  A number of superb state-of-the-art medical centers expressly aimed at attracting medical tourists have been established in the Middle East, Singapore, India, China and elsewhere in Asia. These institutions cater to citizens of the world whose own healthcare systems cannot (or will not) provide in a timely fashion (or at all) the level of care patients may desire. They offer modern hospitals, numerous amenities, luxurious accommodations, attentive nursing care, top-notch doctors – and they do it all for a tiny fraction of what the same care might cost (if you can even find it) in the U.S. and other “first world” nations.

Obviously medical tourism is not particularly feasible for medical emergencies such as heart attack or stroke, or for chronic illnesses such as diabetes, congestive heart failure, or Parkinson’s disease, which require frequent visits and long-term management.  What is feasible is to become a medical tourist for those one-time medical services that can be scheduled and planned, for which there is a long waiting period at home, or which is simply too expensive in one’s own country.  Such medical services often include coronary artery bypass surgery, hip replacements, knee replacements, and numerous minimally-invasive and not-so-minimally-invasive surgical procedures. In other words, medical tourism to a large extent is something one does for elective (i.e., non-emergency) surgery.

It ought not be a surprise, therefore, that the first organization of American physicians to issue a formal policy statement regarding medical tourism is the American College of Surgeons.

The reaction of American surgeons to medical tourism ought to be obvious. They hate it. Elective surgical procedures – the very procedures for which Americans become tourists – are the bread and butter of most surgical specialties. And here go their prospective patients, off to Singapore for their lucrative bypass surgeries. American cardiac surgeons, for instance (already underemployed, thanks to American cardiologists throwing stents at every tiny coronary artery indentation they they can justify as a “blockage”), are nearly apoplectic at the idea.

It’s always fun to read formal policy statements which attempt to deliver an entirely self-serving message whose essence is, “We hate this and if you do it we’ll hate you,” but in which it is necessary to deliver the message in a polite, politically correct, non-judgmental, helpful and even friendly manner.

The surgeons in general have made a good effort, as you can see if you’d like to read the policy statement for yourself. It’s pretty much what you would expect – “Go ahead and have your knee replaced in Timbuktu if you want to. It’s your right, so go ahead and devil take the hindmost. Just don’t come crying to me when things go south a month later.”  Only, of course, the surgeons employ the obligatory very polite and professional tone.

DrRich is struck by two aspects of the surgeon’s policy statement on medical tourism.

First, the surgeons begin with a litany of dire warnings regarding all the medical considerations one must take into account before trusting one’s health to foreign medical hands:

“Some of the intangible risks include variability in the training of medical and allied health professionals; differences in the standards to which medical institutions are held; potential difficulties associated with treatment far from family and friends; differences in transparency surrounding patient discussions; the approach to interpretation of test results; the accuracy and completeness of medical records; the lack of support networks, should longer-term care be needed; the lack of opportunity for follow-up care by treating physicians and surgeons; and the exposure to endemic diseases prevalent in certain countries. Language and cultural barriers may impair communication with physicians and other caregivers.”

These are all very important considerations. DrRich notes, however, that these very same considerations (even the warning about endemic diseases, once one allows for the MRSA infections which are secretly “endemic” in some American hospitals) must also be taken into account before agreeing to receive care even in an American institution. It may be that these considerations are more an issue in top-notch foreign hospitals than in your average American hospital, but DrRich is not convinced this is the case, and the surgeons do not provide any evidence that it is. That is, DrRich sees this very good advice as being equally applicable whether one is considering becoming a medical tourist, or just a typical American patient.

Second, and most astoundingly, DrRich notes – not so much with interest, but more with awe – that the surgeons are beseeching their patients to consider just how difficult it might be to launch a malpractice suit against foreign doctors. (DrRich himself does not know how difficult this would be. Given that we are being so strongly urged these days to merge the American legal system with international law, it might not be much of a problem for long.) Indeed, the potential difficulty in suing foreign doctors appears to be the chief differentiator, and the primary argument in favor of good-old-American-surgery. The surgeons, in essence, are saying, “Let us do your surgery, because we’re easier to sue if we screw up.”

This, from the very body of American physicians who are most at risk for malpractice suits, and who traditionally have been most vociferous in favor of malpractice reform.

DrRich can only shake his head in wonderment. If medical tourism is viewed by surgeons as such a dire threat that they are formally embracing medical malpractice suits as their chief weapon against it, then medical tourism must have already caught on far more than most of us realize.

Which means, of course, that when healthcare reform takes place, medical tourism will likely enter a phase of truly explosive growth.

And so, Dear Reader, thanks to this critical clue provided by our friends in the American College of Surgeons, DrRich can confidently offer yet another nugget of investment advice. He formally recommends the medical tourism industry – now in its infancy – as an area ripe for growth.

*This blog post was originally published at The Covert Rationing Blog*

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