Notes on Follow-On Biologics

Quick Analysis of Follow-On Biologics

On June 10, 2009, the U.S. Federal Trade Commission (FTC) issued a 120-page report providing a competitive analysis of allowing generic biologics, or follow-on biologics (FOB).  The full report can be found on the FTC's website here.

The Hatch-Waxman Act, which essentially created the generic pharmaceutical industry in 1984, does not apply to biologics. Hatch-Waxman paved the way for generic small molecules by allowing two pathways for approval. The first is an Abbreviated New Drug Application (ANDA), which allows for the filing for approval by a generic manufacturer using safety and efficacy data from the original developer, and the 505(b)(2) pathway, which allows for use of non-originated data to support changes in formulation of administration without having to conduct large-scale clinical programs.

There is currently no path to approval for generic or alternative biologic molecules as exists for small molecule chemical entities.

In January 2008, the Congressional Research Service (CRS) prepared a briefing document that summarizes the key issues relating to biologic molecules and how Hatch-Waxman could be applied to allow a regulatory pathway for FOB's. The report can be found here.

The FTC's report draws several conclusions relating to FOB's. The key conclusion is that competition between a biologic drug and an FOB is much more likely to resemble brand-to-brand competition than the dynamics of brand-generic competition. This is due to the fact that manufacturing biologic molecules will require substantial upfront capital costs ($100 - 200 million) and time (8 - 10 years) to produce. Thus, barriers to entry for generic providers looking to create FOB's will be significantly high enough as to limit the number of players to only a small handful.

This should keep the prices of FOB's relatively high. Our best guess it that FOB's in the U.S. will be priced roughly at only a 10% to 30% discount to the branded pioneer. This is in stark contrast to the 80% - 90% discount in generic small molecules.

Considerable manufacturing expertise will also be necessary. Given this notion, FOB's market share gains are expected to be slow at first, as payors and providers shy away from potentially risky non-bioequivalent alternatives that offer only a small pricing discount. We are already witnessing evidence of this dynamic in Europe, where bioequivalent erythropoietin (ESA) and colony stimulating factor (G-CSF) molecules are on the market and competing with the branded pioneers.

That being said, launching an FOB molecule with peak sales above $250 million will make an attractive investment for generic manufacturers. The FTC concludes that there are existing incentives that will support the FOB market, while not stiffening new biologic innovation at the same time. The FTC also concludes that the 12 - 14 year market exclusivity in which the Biotechnology Industry Organization (BIO) and the Pharmaceutical Research and Manufactures of American (PhRMA) are asking for is unnecessary because the original biologic pioneer company will probably maintain a significant portion of the products revenues even after the loss of patent or data exclusivity.

Special legislation adjustments within Hatch-Waxman are probably sufficient to create a fair and clear path to market for FOB's. Representative Henry Waxman (D-CA), Chairman of the House Energy and Commerce Committee, recently introduced a bill calling for only five years of data exclusivity. We believe that final legislation will most likely be a compromise between the five years Mr. Waxman is looking for and the 12 - 14 years for which BIO and PhRMA have been lobbying.

With respect to our coverage list, firms with potentially the biggest risk exposure to generic biologic legislation include Amgen (AMGN - Analyst Report) and Biogen Idec (BIIB - Analyst Report). However, these are also among the two largest biologic manufactures in the world, and thus two companies that would be in the best position to produce FOB's. Other firms that initially look as though they have the knowledge and capital base to be major players in the FOB market are Roche, Wyeth (WYE) and Johnson & Johnson (JNJ - Analyst Report).

It's an interesting dichotomy because the firms with the biggest biologic drugs obviously have the most risk, but they are the best positioned to product FOB's. Our advice on the best way to play the emerging FOB market would be Teva Pharmaceuticals (TEVA - Snapshot Report). The firm is well-positioned on the upside, with limited risk on the downside in its existing portfolio