With Congress and the president trying desperately to find ways to fund health-care reform, a Senate committee last week rejected an approach that would have cut costs the old-fashioned way: through private-sector competition.
Instead, in a 16-7 vote on July 13, the Health, Education, Labor, and Pensions Committee decided to grant lucrative biologic drugs 12 years of insulation against competitors. Such a lengthy period was opposed by the Obama Administration and a wide variety of organizations, ranging from generally liberal groups like the AARP, AFL-CIO, and Consumers Union, to conservative ones like the Council of Citizens Against Government Waste, the Competitive Enterprise Institute, and Dick Armey’s Freedom Works. The bill will face opposition in the House and the full Senate, but if it passes, few if any drug companies are likely to develop generics to compete with patented biotech drugs, or "biologics," as they are called.
Biologics, which are made from living tissues and microorganisms, are playing a growing role in fighting disease. In 2007, Americans spent $40 billion — or about one in every seven dollars spent on prescription drugs — on biologic medicines, including blockbusters such as Avastin for colon cancer and Lantus for diabetes. Like conventional, or "small-molecule," drugs biologics are protected by patents for 20 years after their invention. But when the patent on a biologic expires, the Food & Drug Administration provides no efficient pathway for generic-style competitors — in this case called "biogenerics."
With patents on the majority of the leading biologics set to expire by 2015, Congress wants to establish a process that can bring biosimilars to market, but many of the big pharmaceutical companies are resisting. On July 13, the Senate’s health panel supported the companies’ position, scoring, as Reuters put it, "a major victory for biotech drugmakers such as Amgen Inc. and Roche Holding AG." The vote flew in the face of a FTC report last month, which found that a "12-to-14-year regulatory exclusivity period is too long" and "unnecessary to promote innovation."
In the same Reuters article, Bill Marth, the North American CEO of Teva Pharmaceuticals, the world’s largest maker of generics, said that, under the conditions laid out by the Senate panel, his company does not see a viable biogenerics market. And if Teva, with a market capitalization of $42 billion, won’t make such drugs, Marth said, "I don’t know who will."
I am a big believer in strong intellectual-property protections to spur innovation — a basic principle of economics. It can cost more than $1 billion to bring a new drug to market, and companies that make the investment should be rewarded with a monopoly. The question, however, is how long that monopoly — with the high prices that accompany insulation from competition — should last. Biologics are magnificent inventions, but annual treatment with Herceptin, a breast-cancer drug, can cost $48,000; with Remicade, which treats rheumatoid arthritis, $20,000.
Good public policy strikes a balance by creating a reasonable patent life — in most places and for most products, between 15 and 20 years — and then encouraging competition when the patent expires. In 1984, the Hatch-Waxman Act (named for Republican Sen. Orrin Hatch and Democratic Rep. Henry Waxman) struck such a balance for small-molecule patented drugs. These drugs were endowed with an exclusivity period of five years in addition to their patents, but after that, the FDA can give relatively swift approval — without long and costly clinical testing — to generic drugs that are shown to be bioequivalent to the patented drug.
Nearly everyone agrees that such a path is needed for biogenerics as well. The analogy isn’t exact. Since biologics are chemically more complicated than small-molecule drugs, the approval process will be more costly and will, said the FTC report, "limit the number of [biogeneric] competitors" because of the "substantial costs to obtain FDA approval, plus the costs to develop manufacturing capacity." Also, because a biogeneric at first won’t be an exact replica, the FDA won’t certify that it is therapeutically equivalent to the original patented biologic, and pharmacists can’t automatically substitute it. As a result, the FTC concluded, biogenerics’ "entry, although important, will be less dramatic than [conventional] generic drug competition." The FTC estimated that biogenerics will be developed only for drug markets with at least $250 million in annual sales and that discounts would be in the 10 percent to 30 percent range.
Still, biogenerics would definitely drive down prices, with significant benefits to consumers. So why didn’t the Senate committee set an exclusivity period for biologics similar to the one for generics — the five to seven years favored by Rep. Waxman himself and the White House? Timothy Noah of Slate last week suggested that the explanation might involve a $5 million donation by Amgen to an institute named for Sen. Edward Kennedy (D-Mass), the ailing chairman of the health committee.
Let’s accept the position of Sen. Kennedy and others as sincere but misguided. Twelve years is just too long. With five years, or something close, we can achieve the substantial benefits of both innovation and competition. This may sound like an arcane Beltway battle, but its outcome will have real consequences, not only saving taxpayers billions of dollars but also establishing private-sector competition as a key principle in the unfolding debate over health-care reform.