Politics, Policy & Law
When drugs can’t go generic: Honoring our end of the contract with 'synthetic genericization'
Kolchinsky: How to keep the social contract for drugs that can’t go generic
The biopharma industry’s social contract with society relies on the idea that drugs eventually go generic and thereafter remain inexpensive. When that can’t happen, the contract breaks down - but there are ways to fix it.
Most of the time, the contract works. Emerging oral gonadotropin releasing hormone 1 (GNRH; GNRH1) antagonists could reduce the need for surgery to treat endometriosis and uterine fibroids.
For the first 15 years or so after these drugs launch, they will be expensive. Their costs probably won’t be entirely offset by the reduction in costs from fewer hysterectomies and fibroid removal or embolization surgeries. But then those drugs will go generic, their costs will drop considerably, and yet surgery rates will remain reduced.
That’s how societal investment in drugs can improve our lives, reduce utilization of healthcare services, and save money in the long run. This narrative has already played out for statins, blood pressure medication, drugs for heartburn and many other therapeutics.
But consider a gene therapy, CAR T cell treatment, oncolytic virus, or some other complex biologic. The problem of genericizing these kinds of drugs needs to be solved with a regulatory fix; I’ll call it synthetic genericization.
“For complex biologics that cannot go generic, such a fix would bring a growing fraction of drugs into alignment with the commoditization society has earned.”
This would require companies to lower prices to some reasonable margin above the cost of production if, after some time - let’s say 20 years -- a drug’s price has not naturally eroded due to competition from generics or other drugs. This wouldn’t apply to drugs where generics or biosimilars are readily made. But for complex biologics that cannot go generic, such a fix would bring a growing fraction of drugs into alignment with the commoditization society has earned after an innovation has enjoyed a patent-protected monopoly.
Mortgages, not rents
That some drugs do not go generic is a problem for two reasons. First, it’s a violation of the biotech social contract, which I frame as a tacit agreement that our industry will make drugs that will go generic without undue delay and, in exchange, society will ensure that patients can affordably access therapies that their physicians prescribe (see Sidebar: “Due vs Undue Delay”).
Sidebar: DUE vs UNDUE DELAY
This requires significantly reforming, capping, and maybe even eliminating cost-sharing imposed on patients by insurance companies (see Sidebar: “The Case Against Insurance Cost-Sharing”).
Sidebar: THE CASE AGAINST INSURANCE COST-SHARING
Second, any company that can comfortably sell a drug that can’t go generic won’t be as motivated to put its resources behind the invention of new drugs. The need to solve patent cliffs has been a powerful motivator for pharmaceutical companies to continue to search for new products, often compensating for low productivity internally via M&A and partnerships with smaller biotech companies.
A drug’s genericizability justifies its high prices while it is branded. Paying those prices is an investment in the value that drug brings in the present as well as the eternity that it will offer a benefit to humanity.
Once a new drug is invented, mankind will never have a lesser standard of care; it can only get better.
Think of on-patent drug costs as finite mortgage payments, worthy investments in our generic drug armamentarium that, as it expands, will improve the lives of our children, grandchildren and all future generations in perpetuity. Therefore, the cost of drugs that cannot go generic are essentially rents that may never end.
Synthetic genericization, while necessary, isn’t our only tool for ensuring that we don’t have to pay high rents on ungenericizable drugs forever.
Sometimes newer, genericizable products obviate the need for older, non-genericizable products. For example, some small molecule complement inhibitors threaten to disrupt Alexion Pharmaceuticals Inc.’s blockbuster Soliris eculizumab franchise. While Soliris biosimilars could be made, the drug is used at such high doses that even biosimilars would be expensive.
In other cases, multiple companies may come to market with similar-enough products - such as CAR T cells - that, while not genericizable, may at least compete on price and thereby keep costs somewhat in check.
Finally, disease prevention might obviate the need for any drug treatment. For example, a combination of genetic preconception carrier testing with IVF and pre-implantation genetic testing can allow families to sidestep the kinds of inherited monogenic disorders that many gene therapies are intended to treat. And early cancer detection and curative surgery with adjuvant therapy may limit the need for treatment of metastatic disease with CAR T therapies and other complex biologics.
A fail-safe
The number of non-genericizable or otherwise disruptable drugs today is small. Their costs total a modest fraction of total drug spending, less than 2% I estimate. But their existence represents a problem that should be resolved well before a larger segment of our industry is tempted by this rent-seeking business model.
Creating a synthetic generic pathway offers a kind of fail-safe in case a branded drug isn’t otherwise disrupted, by contracting with the innovator to sell the original product at a generic-like price.
“Some might object to the idea of a contractual price reduction as some kind of price control. Sure it is.”
This pathway doesn’t currently exist, but there are approximations. Japan mandates that companies lower their prices gradually each year if, after some time, they aren’t naturally falling due to generic or other competition.
The US could mandate the same. Or we could look to how the Biomedical Advanced Research and Development Authority (BARDA) contracts for biodefense products, guaranteeing but capping a certain profit margin for companies willing to develop products that hopefully will never be used.
Some might object to the idea of a contractual price reduction as some kind of price control. Sure it is -- just as a patent is an artificial monopoly designed to allow an innovator to profit, for a time, in exchange for disclosing how to make its product, so that society can enjoy it as an inexpensive commodity for the rest of time. Patents intend for society to pay finite mortgages, not infinite rent.
Some tough-to-genericize products, like Novartis AG’s spinal muscular atrophy (SMA) gene therapy Zolgensma, arguably don’t even need a patent to have infinite market exclusivity; they are “red-tape monopolies”, protected by the necessary rigors of the drug approval process.
As long as FDA demands clinical evidence of equivalence, can you imagine asking a mother to forgo the proven one-shot therapy for her baby and risk a clinical trial of an untested product that aspires to prove it’s merely similar? If we had neither the FDA nor a conscience, then another company could just whip up a product that, by every preclinical model, appears the same as Novartis’, price it lower, and count on insurance companies and Medicaid to force parents to choose between nothing and the cheaper, clinically untested version.
Fortunately FDA enforces standards grounded in ethics and science; unfortunately, those standards make it impossible to envision a biosimilar version of Novartis’ gene therapy.
20 years are incentive enough
So just as patents and regulatory requirements are artificial constructs that enable what are intended to be temporary monopolies, let there be a mandate for synthetically genericizing products that can’t otherwise go generic.
After 20 years, if the therapy has not undergone price erosion for other reasons, the company would drop its price to some percent above the cost of production.
High prices while drugs are on-patent fund and incentivize future drug discovery and development. But investors and pharmaceutical companies realistically do not factor more than 20 years of revenues into their NPV models when deciding whether a drug candidate is worth developing.
“After 20 years, if the therapy has not undergone price erosion for other reasons, the company would drop its price to some percent above the cost of production.”
If one needs to model more than 15 years of revenues for the math to generate a high and attractive investment return, there is probably another problem with the drug candidate. Even with drugs for extremely small populations where the math breaks down, the solution tends to be modeling higher prices, not longer periods of exclusivity.
The relatively high cost of capital (8-12% discount rate) used by the private sector makes anything beyond 20 years irrelevant to present decision making.
In contrast, when we think about spending on infrastructure for the long run, society’s cost of capital is in the 2% range - which means that a dollar saved in 2068 is worth today over 20 times more to society than to any company or investor, to whom it’s worth about a penny or two. That’s why high-priced but genericizable drugs are a win-win for the private sector and society. Finite high prices early on support private NPV models, while low-cost generics for the rest of time economically justify those early payments for society.
Legislation and logistics
The logistics of implementing synthetic genericization require new legislation. Because companies sell their products to government and private payers, I propose that there be a branch of the U.S. Department of Health and Human Services (HHS) to act as a contracting agent on behalf of all U.S. payers, monitoring the cost of production of synthetically generic products and ensuring that everyone pays the same low price for a given product.
Certain countries already negotiate the price of drugs as a single payer; those that don’t might need to adopt similar strategies or piggyback off the US synthetic generic price.
A potentially significant downside of this approach is that society could face a supply shortage if a sole manufacturer were to run into production problems. To address that, synthetic genericization might entail a mandate that the innovator set up a second site, despite the complexity that can entail. The best party to work with a regulator to recognize the equivalence of a complex biologic made at a second site would be the manufacturer that sets up and runs the first site.
We already live with the risk of supply shortages during the branded period of many drugs, but innovators are highly motivated by their profits to ensure against disruption of production. Once drugs go generic through competition, we rely on redundancy of manufacturing to ensure against supply disruption.
But with synthetic genericization, we would have the problem of a single manufacturer with capped profits who might not be as attentive to the production process; therefore, the burden would be on society to require or otherwise incentivize reliable production.
“Biotech should not be rent-seeking. Let’s leave that business to the rest of healthcare.”
When regulators contemplate how low to cap profits, they should consider that margins on hard-to-produce drugs should remain high enough to ensure that the innovator remains highly motivated to keep production going smoothly.
To incentivize the innovator to make improvements to its product after launch, FDA could grant exclusivity extensions of six months or longer, just as it does to encourage companies to run pediatric studies so that we learn how to best treat children before those drugs go generic and research into their uses drops off (see Sidebar: “Due vs Undue Delay”).
Biotech should not be rent-seeking. Let’s leave that business to the rest of healthcare. For example, surgeries are and always will be expensive because they are based on labor and real estate, but drugs can displace the need for those costs.
And consider that the biotech social contract goes in two directions. In being willing to ensure that all drugs go generic without undue delay, we would improve our standing as we press for insurance reforms. More than anything, the drug industry needs to push back on the abusive cost-sharing practices of our insurance system, which are the real reason that patients struggle to afford medicines their physicians prescribe to them (see Sidebar: “The Case Against Insurance Cost-Sharing”).
Some may shudder at the idea of relying on government to regulate one more thing. But biotech is already a heavily regulated industry and it makes sense to tweak those regulations to ensure that all products align with the biotech social contract.
Regulated utility monopolies such as those responsible for our water and electrical infrastructure are notoriously slow to innovate. Because our products go generic, our industry has to run as fast as it can just to stay in one place and must run faster still to get ahead (credit to the Red Queen from Alice in Wonderland for that visual), making biotech a valuable and productive engine of healthcare progress for America and the world.
Peter Kolchinsky is co-founder and managing partner of RA Capital Management LLC.
Companies and Institutions Mentioned
AbbVie Inc. (NYSE:ABBV), North Chicago, Ill.
Alexion Pharmaceuticals Inc. (NASDAQ: ALXN), Boston, Mass.
AstraZeneca plc (LSE:AZN; NYSE:AZN), London, U.K.
Novartis AG (NYSE:NVS; SIX:NOVN), Basel, Switzerland
U.S. Biomedical Advanced Research and Development Authority (BARDA), Washington, D.C.
U.S. Department of Health and Human Services (HHS), Washington, D.C.
U.S. Food and Drug Administration (FDA), Silver Spring, Md.