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Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
Follow on Biologics Market
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Follow on Biologics Market

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  • 1. Life Sciences The follow-on biologics market: Enter at your own risk
  • 2. 18 The follow-on biologics market: Enter at your own risk Contents 1 Introduction 2 The potential regulatory pathway 4 The future market 11 Follow-on biologics company strategies 13 Closing thoughts 14 Endnotes 15 Acknowledgements
  • 3. 1The follow-on biologics market: Enter at your own risk Introduction Follow-on biologics (FOBs), also known as biosimilars, have gained tremendous attention in recent years as biologics continue to increase their market presence, focus on life-threatening diseases, and adopt high price tags. In 2010, biologics accounted for 28% of new molecular entities approved in the United States, and are expected to comprise up to 60% of the top-ten selling drugs by 2014.1 For over a decade now, Congress and the FDA have been contemplating a FOB regulatory pathway that would increase consumer access to affordable biologic therapies. With the passing of the Biologics Price Competition and Innovation Act (BPCI) as part of the 2010 Patient Protection and Affordable Care Act (PPACA), it seems that the wait is almost over. Entry into this market will be more challenging than initially expected by Congress. Follow-on biologic investors will face challenges ranging from the high costs of market entry, to potential physician reluctance of switching patients to biosimilars, to the likelihood of price competition from branded products, and finally, to unattractive patent challenge provisions. Despite these barriers, we expect to see market-demand gradually develop, given the tens of billions of dollars of revenue potential that it offers; and also expect to see leading global pharmaceutical companies with deep pockets and branded commercial resources enter the space, especially since FOBs will require extensive brand-like R&D and marketing. Declining revenues associated with the upcoming patent cliff and uncertain pipelines will make it difficult for brand manufacturers to ignore an opportunity of this scale. While the exact nature of the pathway has not been revealed, there is a growing consensus among experienced industry observers that the market will look very different than that of current small molecule generics. It is not likely that we will see the same rate of FDA-approved entrants, brand market share erosion, or generic product price reduction. Instead, the market will grow slowly as physicians gain comfort with the clinical attributes and quality of biosimilars. Despite these roadblocks, we believe the FOB market will eventually emerge and flourish and competitors that lead the space will command multi-billion dollar businesses with a sustainable revenue stream. The key to success will be getting to market first with the correct molecules, and selecting the right strategies to help in that journey.
  • 4. 2 The follow-on biologics market: Enter at your own risk The flexibility Congress provided the FDA regarding the extent of clinical trials required for FOB approval also could lead to circumstances where innovator firms could be accused of undertaking tactics to thwart or delay FOB entry. Innovator firms are likely to raise substantive safety and efficacy concerns – potentially through the FDA’s citizen petition process or through other means – regarding the robustness of the FDA approval scheme for particular FOB products or a particular FOB entrant’s ability to comply with FDA’s trial requirements. It is likely that we will see FOB entrants contend that such complaints are not legitimate but rather intended to impede FOB entry. – Seth Silber, Esq., Partner, Wilson, Sonsini, Goodrich, and Rosati (Source: Deloitte Interview, May 13, 2011) The potential regulatory pathway The Hatch-Waxman Act of 1984 first enabled the proliferation of small molecule generic drugs by creating a regulatory pathway that approved products based on bioequivalence data instead of clinical trial data. It also allowed marketed AB-rated products2 to be automatically substituted for the branded equivalent at the retail pharmacy level. This quick and inexpensive approval pathway combined with interchangeability at the pharmacy has enabled small molecule generic drugs to capture more than 78% of total prescriptions in the US in 2010 with a market value of approximately $42B – a 600% increase over the last 15 years.3 However, biologics are larger, more complex molecules than small molecule drugs. The molecular diversity of large molecules is both a source of innovation and risk as the market migrates towards follow-on biologics. While an exact, identical small molecule generic can be reliably manufactured, the manufacturing processes are more sensitive and less repeatable for biologics. Additionally, due to the complexity of development and manufacturing, biologics have higher development costs which are usually reflected in the consumer price. To increase consumer access to affordable biologics, the BPCI seeks to lower barriers to entry and encourage competition through a new abbreviated FDA approval pathway for FOBs. Accordingly, the FDA will be challenged with balancing incentives for both follow-on and innovator manufacturers and upholding patient safety, while properly regulating the use of or perceived use of legal strategies intended to impede follow-on approval.. Follow-on biologics may exhibit clinically meaningful differences from the innovative reference product. Therefore, a majority of industry analysts, including several official estimates from federal agencies, expect the FDA to require product and manufacturing quality studies, as well as large safety and efficacy trials that compare the biosimilar to the reference product in order to grant approval. This is essentially the pathway that the European Medicines Agency (EMA) put in place when it began approving biosimilars in 2006. It is less likely that the FDA will choose to enact a biosimilars pathway with less stringent requirements. The FDA has been under heightened public scrutiny over patient safety for the better part of a decade due to some high profile product withdrawals and safety concerns. As a result, we have observed pre- and post-marketing clinical trial requirements become more stringent.
  • 5. 3The follow-on biologics market: Enter at your own risk Note: N / A = comment not available Notes: R&D timeline includes Discovery through FDA approval; R&D costs include the costs of failures The underlying manufacturing complexity is at the core of the equivalence or similarity issue. FOB manufacturing usually involves cell-lines that are distinct from that of the innovator’s cell lines, which can create differences in molecular structure and bioactivity. Unfortunately, these impacts can only be measured via large clinical studies similar to current Phase III trials. The expected requirement for clinical studies would result in a clinical development pathway for follow on biologics that more closely resembles that of a branded product, as opposed to that of a small molecule generic. Figure 1. Government agency assumptions on the follow-on biologics pathway Figure 2. Estimated R&D costs and timeline for follow-on biologics Requirement for large clinical trials R&D Timeline Interchangeability R&D Costs Congressional Budget Office4 Federal Trade Commission5 White House6 New Product (NDA or BLA) Follow on Biologic (FOB) Small Molecule Generic (ANDA) Yes Yes Yes 10 – 14 yrs7 8 – 10 yrs9 3 – 5 yrs11 No No N/A $1,300M8 $100M – 200M10 $1M – $5M12 FOB manufacturers have varying views on the costs associated with product development. For example, John Lane, Vice President of Hospira, stated “I would say for the less complex proteins that we’re looking at, you could expect anywhere between, maybe, $30 and $50 million, and for the more complex proteins, it’s not inconceivable that you could approach $75 to $100 million if you have to do full development.13 In contrast, Sandoz’s head, Jeff George, is less optimistic putting the cost as high as $250 million for difficult-to-copy large-molecule drugs. In any respect, the higher costs of a FOB, as opposed to a small-molecule generic, pose a significant barrier to entry, while the expected longer development timeline increases the risk that the innovator molecule will be supplanted by a second generation technology before the upfront investment can be recouped. The cost of developing a marketed follow-on biologic is fractional when compared to the aggregate cost inclusive of R&D failures. Instead of waiting for the FOB pathway to be announced, various pharmaceutical manufacturers are proceeding with development of their follow-on products through the traditional Biologics License Applications (“BLA”) route. These manufacturers can move molecules through the BLA pathway much cheaper than an innovative product since the risk of development failure is lower. Not only is the BLA route available today, its familiarity reduces the risk of repeating studies due to design flaws. The BLA route also provides data exclusivity from competitors and incumbent biologics, which the FOB pathway does not.
  • 6. 4 The follow-on biologics market: Enter at your own risk The future market While almost all small molecule drugs with annual revenues in the hundreds of millions of dollars experience generic competition upon loss of exclusivity, we anticipate that only “blockbuster” biologics will face biosimilar competition upon exclusivity loss. We believe that several factors will ultimately deter FOB entry, including the cost of entry, physician concerns around product switching, legal barriers, marketing and support service capacity, and expected price competition from brands. High costs of entry We expect to see high financial barriers to market entry. First and foremost, we expect potential market entrants to be required to invest in large scale safety and efficacy trials, which can easily exceed $100 million in cost for a single indication. For products with a large number of indications, such as oncology therapies, the cost of FOB development could be much higher if the FDA or physicians demand trials for each indication. Secondly, biologics require a much higher investment in manufacturing capacity than small molecule generics. The manufacturing costs of small molecule generics can be very low since the active pharmaceutical ingredient (API) can typically be purchased on the open market. The only significant capacity investment is in formulation /packaging and fill/finish for solids and injectables, respectively. For generic manufacturers, these capacities “Given these high entry costs, FOB entrants are likely to be large companies with substantial resources, and it is likely that only two to three FOB entrants will seek approval to compete with a particular pioneer biologic drug.” – Emerging Health Care Issues: Follow-on Biologic Drug Competition, Federal Trade Commission Report, June 2009 are also readily transferrable from one product to another, thereby creating economic scale and cost savings that brand products cannot achieve. In contrast, biologics manufacturing capacity tends to be much more expensive and must be customized to the specific molecule. The reconfiguration of capacity from one type of cell line to another (e.g. between yeast, bacterial or mammalian cell expression) requires significant re-tooling and capability acquisition. As a result, biosimilar manufacturers will find it more difficult to create a meaningful manufacturing cost advantage over the innovator brand. Once commercialized, FOBs will also be more expensive to market, sell, and monitor than small molecule generics. Given the low expectation of interchangeability and the fact most products will be physician-administered, FOB manufacturers will need to actively promote their products, analogous to a branded biologic product, which significantly increases costs and requires commercial capabilities. Greater support services capacity and competencies, such as medical communications and call centers, will be required for FOB versus small molecule generics in order to address questions regarding dosing, administration, and side effects of complex biologics. Risk evaluation and management will also be necessary if the FDA requires a Risk Evaluation and Mitigation Strategy (REMS) program. In this regard, branded pharmaceutical companies will be at a significant advantage when bringing FOBs to market.
  • 7. 5The follow-on biologics market: Enter at your own risk Concerns over patient switching Given the low probability of interchangeability at approval, market share adoption for biosimilars will be fairly gradual, occurring over a course of several years. For small molecule generics, prescriptions are automatically substituted at the pharmacy and the generic often replaces more than 90% of the originator molecule’s volume in the first year without any physician directed promotional activity.14 The brand erosion curve will look very different for biosimilars since biosimilars will not be FDA approved to be interchangeable/substitutable with the reference product. In addition, most biosimilars will be physician-administered and be classified as Medicare Part B drugs. The fact that there are currently no financial or formulary mechanisms to encourage physician usage, FOBs will not enjoy the steep adoption curve of small molecules and must invest heavily in brand-like marketing. Market adoption of physician-administered biosimilars will require more time to gain traction due to concerns over switching patients already on the branded therapy to the biosimilar. Due to the molecular differences between the innovator and biosimilar product, there is a valid safety risk of triggering an immune response, running into tolerability issues or needing to re-titrate the patient’s dosing upon switching. Physicians may not want to subject their existing patients to these risks simply for the sake of cost reduction. This means that biosimilars, aimed at treating chronic disorders, may be constrained to competing primarily for new patient starts. Weak basis of competition From a high-level perspective, products can compete on only two dimensions: differentiation and price. Because biosimilar labeling will reflect equivalent efficacy and safety with respect to the innovator product, it will not be possible to differentiate on product efficacy and safety attributes. Therefore, the remaining strategy will be to compete on price. Small molecule brands rarely compete with generics on price today because automatic substitution at the pharmacy will occur regardless of whether there is a price- match. It has been more profitable to hold price steady or increase price for the few percent of patients who remain loyal to the brand. In the US, the average price discount for a generic, in comparison to that of the brand equivalent, is approximately 85%, although products with lower production costs can reach price-discount levels well over 95%.15 The CBO expects FOBs to discount price by 20-25% below the innovator product in the first year, building to 40% in four years. For biosimilars, we expect to see brands compete aggressively on price in order to stay on commercial formularies. The lower expected discount ranges and relatively equal cost base will make it possible for brands to maintain market share at a lower, but still profitable price. The history of biosimilars in Europe and the US has shown a willingness in most cases for the brands to drop prices to effectively close the pricing gap and maintain reimbursement. Without the ability to establish price leadership, penetration of biosimilars in these markets has been very limited. Figure 3. Basis of competition for follow-on biologics vs. generics Small molecule generics Follow-on biologics Advantage Equal Equal Equal Favorable Equal Equal Equal Disadvantage Unfavorable Price Efficacy Safety Quality Overall competitive position
  • 8. 6 The follow-on biologics market: Enter at your own risk Additionally, we expect the brand to attempt to differentiate on quality by highlighting their established track record of product safety and manufacturing consistency compared to the biosimilar which is new and unproven. Many physicians will have more trust in the branded product because it has been tested clinically and used commercially in a larger number of patients over a longer time period, versus a new and relatively untested product. Because the FDA does not guarantee biosimilars to be “identical” it is conceivable that the manufacturing process for the new product could be inconsistent or a safety signal could emerge post-launch. For small molecule generics, the AB rating from the FDA acts as an assurance of identical quality and any physician concerns when prescribing will be reversed via automatic substitution with the generic at the pharmacy. If pricing between the brand and biosimilar is close enough, then many physicians could choose to stay with the better characterized molecule. Figure 4. Efficient frontier16 of competition – biosimilars Legal barriers to entry The costs and time of litigation associated with patent challenges will also be higher for FOBs compared to small molecule generics. Under Hatch-Waxman, generic companies bear relatively low costs and risks through Paragraph IV filings and the resulting patent infringement suits. These suits typically result in settlements that enable generics to come to market without the hassle of costly litigation. This has become such an industry norm that between 2003 and 2009 there has been a 900% increase in Paragraph IV-derived patent settlements.18 In contrast, under the BPCI, the patent challenge process has been revised to include an “open exchange” of patents and information germane to the development process, a negotiation period to determine what patents will be challenged prior to FOB entry, and financial penalties to those who step outside its guidance. This was enacted to weed out the number of sham patent challenges prior to litigation such that only the substantive challenges remain. It is anticipated that FOB challengers will require numerous years of hand-holding by outside counsel to properly complete these provisions and subsequently enter into patent litigation. In regards to large molecule patent settlements, given the surmounting investments and high revenue potential of biologics and FOBs, the patent holder and challenger actually bear very similar risks. This is in far contrast to a small molecule patent challenge, where, typically, the brand holds the majority of the risk, while the small molecule does not. In many cases, a small molecule brand may choose settlement over litigation without regard to its actual patent validity and/or likelihood to prevail in a trial. However, in a large molecule context, due to the fact that risk is allocated symmetrically amongst large molecule innovators and challengers, with imposing R&D, manufacturing, and marketing costs on both sides, the innovator is now incentivized to litigate based on the validity of its actual patents and test the risk tolerance of its challengers. As a result, we may experience far less settlements and more successful litigation pursuits by innovators, thereby creating an additional barrier to FOB entry. Brand has ability to narrow the price gap Brand can differentiate on quality and reliability Low cost Biosimilar Biologic brand Biologic brand Differentiated Given the high barriers to entry, the uptake of biosimilars has been fairly slow in most markets. However, biosimilars have also met with considerable success in selected markets. When Erythropoietin biosimilars were launched in Germany in 2007, they captured nearly 60% of the market of the reference product in 2 years, before levelling off in 2009.17
  • 9. 7The follow-on biologics market: Enter at your own risk As we have mentioned above, the patent provision process of the BPCI has numerous disadvantages for a FOB investor, which can pose a potential barrier to entry in terms of expenses and potential delays of launch. While a small molecule is usually covered by an average of 8-10 patents, biologics can have as many as 50-70 — covering everything from the R&D to the manufacturing and method of use — complicating the legal strategy for generic competitors19, 20 . The BPCI contains detailed procedures for identifying the patents relevant to the FOB application, as well as measures to resolve disputes that may arise during this time. It is clear the complex nature of this process will require increased time to navigate and sizable expenses for internal and external counsel. In addition, even prior to litigation, the process is extremely intrusive in that the innovator must receive a fully-disclosed copy of the application within 20 days of the FDA’s decision to review. Under the Hatch-Waxman Act, a Paragraph IV certification can be filed if the generic challenger believes the brand’s patents, as listed in the Orange Book, are invalid or its own patents do not infringe upon valid brand patents. It must only substantiate this claim with a “detailed statement of factual and legal basis for this opinion” to the innovator.21 In contrast, due to the fact there is no Orange Book in the biologics universe, the Act provides for an exchange of information designed to determine which patents may be applicable for patent infringement. The scope of the patents to be identified is extremely broad, as the applicant must provide the innovator with the patents that claim the biologic product and the methods of using it and “such other information that describes the process or processes used to manufacture.”22 Providing the innovator with all claim, method, and process patents will expose the FOB investor’s unique patents and trade secrets, which in the case of FOBs may be of considerable value. After the brand receives all of this information, both parties begin a negotiation process regarding which patents the parties will actually litigate over. Nevertheless, the fact that the FOB investor receives no data exclusivity and must reveal all trade secrets and patent information related to its FOB, regardless of actual infringement, will create elevated risk for potential entrants and create incentive to enter the market using a BLA. What if no one shows up for the party? In developing the FOB pathway, Congress assumed there was adequate financial incentive to entice entry by a large number of manufacturers. However, given the FDA’s lack of experience with follow-on biologics, high financial barriers to entry, and uncertain basis of competition, there is a risk that a limited pool of competitors will choose to pursue the FOB pathway. Since the passing of PPACA, few companies have signaled their interest publicly. In spite of this, we believe that a clear competitive landscape could emerge when FDA provides more details regarding the actual pathway. As the science and regulatory process becomes more standardized and understood, costs could decline which would increase the competition pool. To date, follow-on biologics manufacturers have focused primarily on the unregulated markets of the developing world, where products can be brought to market inexpensively under less stringent manufacturing oversight and without conducting expensive clinical trials. These are mostly small companies which lack the resources and capabilities required to commercialize FOBs in more regulated markets. The less-controlled regulatory environment in these countries allows a significant cost advantage for the FOB manufacturers over the innovators, but increases risk to the patient. The biosimilar regulatory environment in Europe resembles what we expect to see in the US. However, the high financial barriers to entry, branded price competition and physician reluctance to switch patients has resulted in a market which has been very slow to materialize. The first FOBs hit the European market in 2006 and by 2009 the European FOB market was still less than $150 million23 in revenue and consisted of only three molecules, filgrastim, epoetin alpha and growth hormone.
  • 10. 8 The follow-on biologics market: Enter at your own risk In the United States market, FOBs will be expensive to manufacture and test, and will require marketing similar to that of branded products. The barriers of entry are high and only a handful of companies have the capabilities and financial resources to pull it off. For this reason, we expect to see leading global pharmaceutical companies dominate the market, especially those manufacturers with both branded and generic commercial resources. To date, companies have been guarded in discussing their US biosimilar pipelines, but public statements suggest that the industry pipeline might have up to 20 biosimilar projects in late stage development. While the target molecules for about half of these projects are undisclosed, companies have publicly announced focus on a handful of targets: Neupogen (filgrastim), Neulasta (pegfilgrastim), Epogen/ Procrit (epoetin), and Rituxan (rituximab). These reference products had a combined US revenue of $10 billion in 2010, representing only a small portion of the $58 billion biologics market. At the same time, we’ve seen signs that some of these players may be moving away from the FOB pathway for a number of reasons. As far as small molecule generic manufacturers are concerned, Hospira has cited the need to get to market quickly and the FDA’s slow pace in making the pathway available as the primary reasons for moving forward with the BLA pathway. In 2011, Hospira’s Chief Scientific Officer Sumant Ramachandra said “For us to wait may cause us not to be ready when the market opens up...so we need to move now” in reference to plans to move its biosimilar version of Epogen into US Phase III studies.24 Sandoz similarly has been moving forward with the traditional BLA pathway rather than waiting for the FDA to announce the FOB pathway. Finally, it seems that Teva is also moving forward with the traditional BLA route for filgrastim and rituximab rather than waiting for the FOB pathway. Will the savings be enough to satisfy patients and payers? The Congressional Budget Office estimates that the American people will realize cumulative savings of $25 billion by 2018 through the use of FOBs. While this figure sounds substantial at first glance, it represents only a small savings as a percentage of the total market and will barely put a dent in the growth rate of the rapidly expanding biologics market, which is expected to expand from today’s $58 billion to $94 billion on an annual basis in 2018 after the impact of FOBs. Figure 5. Projected savings from follow-on biologics $Billions 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 55.0 58.1 61.5 66.4 71.4 77.0 80.9 84.1 89.1 94.1 1.2 2.7 4.3 6.3 10.5 120 100 80 60 40 20 0 Projected savings from FOB Biologics
  • 11. 9The follow-on biologics market: Enter at your own risk We question whether the actual FOB market will develop as quickly as the CBO estimates. For their math to work, about 1/3 of biologic product usage by 2018 will need to be FOBs if we assume a 40% price discount from the innovator brand. Today’s pipeline suggests the introduction of FOBs for a much more limited set of products indicating that savings could be less than half of the CBO estimate. The primary question that politicians and market participants should be asking themselves is whether or not this savings level will be high enough to satisfy patients and payers. If the answer is ultimately “no,” the question shifts to the government: will they take additional legislative action to stimulate the market? Many will argue that the FOB market will evolve over a longer time-horizon, perhaps 15 to 20 years, and legislators should be patient and will see much more substantial impacts in the long-term. Will insurers actively encourage the use of follow on biologics? Private insurers will have a vested interest in encouraging the pervasive use of biosimilars as a means of creating price competition. We expect they will put formulary controls in place to drive usage of biosimilars in the hospital, infusion clinic and physician office setting. Today, most high priced biologics reside on a “specialty tier” which can have coinsurance in the range of 25-33%. We could expect to see payers develop a new “biosimilar tier” with co-pays lower than specialty products but higher than Tier 3 small molecule brands in order to drive patient and physician behavior toward biosimilar usage. Similarly, Medicare Part B may change reimbursement rules going forward to financially incent biosimilar usage. There is great uncertainty in the biosimilars space from a regulatory, judicial, and market perspective. If the market is slow to develop, I believe that we will see additional action by the federal government to encourage biosimilar entry. The federal government has aggressively encouraged the use of small molecule generics and may be equally as aggressive with that of biosimilars if they turn out to reduce prices and not compromise quality. – Dr. Tomas Philipson, Daniel Levin Professor of Public Policy Studies, University of Chicago (Source: Deloitte Interview, May 27, 2011) Should we expect future government stimulus? Despite their inherent differences, the market benefits of FOBs will be measured against those of small molecule generics. With that said, the current success of the generic market was not achieved immediately upon the enactment of the Hatch-Waxman Act. It took over ten years of collective analysis and legislative reform to reach today’s brand erosion and price-reduction rates. Shortly after the enactment of the Hatch-Waxman Act in 1984, the FDA released a succession of regulations aimed at streamlining bioequivalency requirements favoring in-vitro clinical testing. In addition, the Medicare Prescription Drug Improvement & Modernization Act of 2003 (“MMA”), which mandated the use of generic alternatives in provider plans, provided clarity on the usage of §505(b) (2) applications, as well as the allowance of multiple- stay and -exclusivity periods. These provisions acted as a stimulant for the small molecule generic market increasing its market share and value significantly. We should expect the Federal government to remain committed to nurturing the nascent biosimilars market and anticipate stimulus if needed – mainly in four specific areas: • A reduction in the 12-year data exclusivity period for innovator products • Market exclusivity for the first FOB to market for a given molecule • Research & Development tax credits for FOB manufacturers • Mandatory favorable formulary placement for FOBs
  • 12. 10 The follow-on biologics market: Enter at your own risk Data exclusivity periods The Obama Administration has been actively pursuing a reduction in the data exclusivity period (“DEP” or “DEPs”) for originator biologics from 12 to 7 years. DEP refers to the period of time after FDA-approval of a new molecule and before a generic or follow-on manufacturer can access the clinical trial data that was submitted by the innovator during the approval process.25 DEPs are designed to provide incentives for innovation, while maintaining strict safety compliance by offering new molecules intellectual property protection without regard to the terms of a patent. It is our belief that lowering the DEP period would act to accelerate market launch for FOBs, but it would not address the central issue of lowering the investments required to enter the market. In addition, premature price- competition and brand erosion derived from a lowered DEP may reduce innovator market entry. Market exclusivity for FOBs Given low probability of interchangeability at launch, the federal government may be able to stimulate the FOB market by enacting a more comprehensive market exclusivity period (MEP) that includes biosimilars. The government could grant the first-to-launch biosimilars a distinct MEP to boost revenue potential. The time extension should take into account the high costs of investments for a FOB and the low brand erosion rates. It can be argued that MEP at any level dissuades competition amongst follow-on players, especially with extended periods. Analogous to the Hatch-Waxman Act’s 180-day exclusivity period, a balanced MEP term would account for the time necessary to profit from a first-to-launch perspective and preserve an attractive investment period for follow-on competitors.  Research & development tax credits The maximization of valuable R&D tax credits has been difficult to achieve for small molecule generics in comparison to that of innovative manufacturers. Simply stated, R&D investments may qualify for IRS tax relief it is deemed to satisfy the Federal governments and state’s innovation and scientific process requirements.26 The R&D behind small molecule generics often fails to meet this burden. It has even been argued that the mere usage of an abbreviated new drug application, as opposed to a NDA, should disqualify small molecule generics manufacturers who apply for the credit. However, the fact that FOBs will most likely undergo thorough clinical trials and possess unique manufacturing design may satisfy the innovation and scientific process requirements. Additionally, the speculation that various FOB investors will file a unique BLA provides more merit to the argument that R&D investments should qualify for these credits. Favorable usage and interpretation of the federal credit alone can provide significant savings on each dollar allocated towards R&D. These savings can increase exponentially when coupled with advantageous state tax credits, such as those available in California.27 In the event that FOBs do not qualify for tax credits, the government could amend these regulations accordingly and provide a direct stimulus to the market. Mandatory favorable formulary placement It is also feasible that the government could mandate that FOBs be granted a favorable formulary status in relation to innovators to encourage patients and physicians to utilize the FOB, which ultimately would accelerate adoption rates and boost revenue, while lowering the marketing and sales burdens of entrants.
  • 13. 11The follow-on biologics market: Enter at your own risk Follow-on biologics company strategies While the biosimilars market may be less attractive for entrants and savings for payers may not be as great due to less significant price-discounting than expected, the market opportunity remains fairly substantial. There are still billions, if not tens of billions, of dollars in revenue to be made for the companies that eventually succeed. So what will it take to overcome the barriers to entry and win market share? We believe there are a number of key requirements to success: • Select the right products to pursue • Get to market first for your chosen pipeline projects • Discourage competition by publicly communicating your pipeline • Aggressively raise awareness among prescribers at launch • Rigorously defend market share by owning the low price position in the market • Develop a manufacturing cost advantage over the reference product First, and foremost, will be the need to select the right product targets to pursue through a broad market and financial evaluation. Significant revenue potential will be required to overcome the high financial barriers to entry and long development cycle. Competitors will need a relatively robust new product planning capability to evaluate market potential, physician interest in using the product and their data requirements so that clinical trials can be designed to satisfy physicians. An evaluation of the branded company manufacturing cost structure and ability to lower price in order to compete will also be critical. This evaluation will need to be conducted before investment in product development and will require significant investment in market research and competitive intelligence. We believe it will be difficult for FOB entrants to be profitable if there are more than one or two competitors already on the market for the same reference molecule. Therefore, it will be critical for biosimilar competitors to publicly signal intent to pursue a target and to get to market first. It will also be critical to commercially promote follow-on biologics with physicians to raise awareness. Since most biologics are physician administered, and because they won’t be deemed interchangeable, they cannot rely on automatic substitution at the pharmacy level. Because biosimilars are not chemically identical to the reference product it will be important to share the clinical data with physicians to make them comfortable in using the product. This will require a field sales force and possibly a medical science liaison (MSL) team. I’m going to treat biosimilars just like any new branded product. Before using them, I’ll require strong backing of data including clinical evidence from phase III trials for each indication… regardless of what the FDA requires. Sales calls from reps will be necessary. – Hematologist/Oncologist, New York (Source: Deloitte Interview, May 24, 2011)
  • 14. 12 The follow-on biologics market: Enter at your own risk Ultimately, in order to win, a biosimilar must be able to own the low cost position in the market and defend it. This means undercutting the reference product’s price at launch and maintaining a significant discount to the brand if it lowers prices in an attempt to close the pricing gap. This could result in a price war, which pushes price toward an unprofitable level. The biosimilar manufacturer will most likely have lower commercial costs and corporate overhead than the branded product. However, for the biosimilar to be able to maintain a significant pricing advantage over the brand, a manufacturing cost advantage will be required. Small molecule generic companies tend to have lower cost manufacturing than the brand through economies of scale and strong capabilities in the manufacturing and sourcing of low cost API. Finding a low cost manufacturing technology for biologics can be viewed as the Holy Grail for biosimilars and will be hard to achieve. There are numerous techniques or technologies that could allow for a cost advantage in the future. For example, current biologics manufacturers might be able to reallocate spare capacity on the cheap assuming the biosimilar uses a similar cell line. Another option could be to move production into a different cell line that produces a higher yield of API. For example, many companies are looking at low cost biosimilar production via plant based production. However, if the manufacturing process strays too far from the reference product it may be necessary to pursue approval through the BLA route. Additionally, whatever technology is discovered will only provide a temporary advantage as the brands are likely to mimic it. While low cost biologics manufacturing is a high risk strategy and may not play out, it should be investigated. What about Biobetters? Another option that some companies are following is to not enter the biosimilars market at all and adopt a strategy called “biobetters”, which are new therapies that belong to the same drug class as the reference product and seek to be safer, more effective or easier to use. Biobetters are approved via the BLA route and is essentially a new name for an old strategy of developing “second generation” products. One can argue that the very first biotech product, genetically engineered insulin, was a biobetter of porcine insulin (pig-derived) and Neulasta is a longer-acting biobetter of Neupogen, and the list goes on and on. A rose by any other name would smell as sweet. What the biobetters strategy tells us is that the costs and risks of developing a follow-on biologic are more similar to a branded product, but the revenue potential may not be high enough to justify investment. The challenge is that the second generation molecule strategy is already being rigorously pursued across the industry and doesn’t represent a new opportunity. Those who are only considering entering now are late to the game and may want to reconsider. Figure 6. U.S. biologics revenue Investment/ risk (Incremental) Biosimilar 2nd generation “Bio-better” Innovative biologics Market adoption rate
  • 15. 13The follow-on biologics market: Enter at your own risk Closing thoughts The follow-on biologics market will be tenuous for potential market entrants given the expected high barriers to entry. While we won’t know the specifics of the future pathway until it is announced by the FDA, it appears that Phase III studies will be a requirement for market acceptance by physicians at a minimum. Despite the barriers, the market holds the potential for billions of dollars of revenue for the companies that can succeed. The time to investigate market entry is now, as there will be a first-mover advantage and companies will need to be ready to proceed rapidly into late stage clinical trials once the FDA pathway is announced.
  • 16. 14 The follow-on biologics market: Enter at your own risk Endnotes 1 Deloitte analysis based on IMS-provided revenue values and market life cycle projections 2 An AB-rated generic is a (small-molecule) generic drug which is determined to be bioequivalent per standards established by the Food and Drug Administration (FDA) and is therefore authorized to go through an abbreviated new drug application (ANDA) process and is eligible for substitution with a branded product without physician authorization. 3 “The Use of Medicines in the United States: Review of 2010,” IMS Institute for Health Informatics, April 2011 4 United States. Congressional Budget Office. Cost Estimate, “S. 1695 Biologics Price Competition and Innovation Act of 2007,” June 2008 5 United States. Federal Trade Commission. “Emerging Health Care Issues: Follow-on Biologic Drug Competition,” June 2009 6 United States. Office of Management & Budget, 2009 7 Deloitte Consulting Estimate 8 Pharmaceutical Research and Manufacturers of America (PhRMA)website <http://www.phrma.org/research/ drug-discovery-development> 9 United States. Federal Trade Commission. “Emerging Health Care Issues: Follow-on Biologic Drug Competition,” June 2009 10 United States. Federal Trade Commission. “Emerging Health Care Issues: Follow-on Biologic Drug Competition,” June 2009 11 United States. Federal Trade Commission. “Emerging Health Care Issues: Follow-on Biologic Drug Competition.” June 2009 12 United States. Federal Trade Commission. “Emerging Health Care Issues: Follow-on Biologic Drug Competition,” June 2009 13 John Lane, Vice President, Biologics, Hospira, at FTC Roundtable on Follow on Biologic Drugs: Framework for Competition and Continued Innovation, November 2008 14 United States Federal Trade Commission, “Pay-for- Delay: How Drug Company Pay-offs Cost Consumers Billions, An FTC Staff Study,” January 2010, (see Page 10, study discusses the fact that market demand and consumer savings are 90% and 85%, respectively); “IMS Market Prognosis 2009-2013, Noth America USA.” IMS Health, March 2009. 15 United States Federal Trade Commission, “Pay-for-Delay: How Drug Company Pay-offs Cost Consumers Billions. An FTC Staff Study,” January 2010, (see Page 10, study discusses the fact that market demand and consumer savings are 90% and 85%, respectively); “IMS Market Prognosis 2009-2013, Noth America USA,” IMS Health, March 2009 16 “Efficient frontier” refers to a concept in financial portfolio theory developed by Harry Markowitz describing the set of states – the frontier – where a portfolio of assets realizes the best possible expected return for its level of risk. 17 Buckley, Ted, “Biosimilars: The Potential for the U.S. Market,” Bloomberg Government, August 2010 18 RBC Capital Markets. “Analyzing Litigation Success Rates,” January 15, 2010, (see Page 8); Deloitte Analysis utilizing publically available legal data on pharmaceutical patent challenges derived from ANDA Paragraph IV certification. 19 Bob Billings, interim executive director of the Generic Pharmaceutical Association in an interview to BioWorld. “Biosimilars Are Not Yet a Threat to Brand Patents,” Bioworld Today, March 9, 2011 20 “Follow-On Biologics Patent Litigation: Using Additional Patents and REMS to Protect Market Share,” FDAnews website. May 2009 <http://www.fdanews.com/ conference/detail?eventId=2762> 21 21 U.S.C. §355(j)(2)(B)(iv) 22 42 U.S.C. §262(l)(2)(A) 23 MIDAS Sales Data, IMS Health, March 2010 24 Gryta, Thomas, “Biosimilar Development Progresses, Without FDA Guidelines,” Dow Jones Business News, August 16, 2010 25 www.fda.gov; Center of Biologics Evaluation and Research 26 IRC §41 27 IRC §41
  • 17. 15The follow-on biologics market: Enter at your own risk Acknowledgements Acknowledgements The authors wish to thank the following collaborators for their contributions to this paper: Victoria Boegh Director Deloitte Tax LLP Matthew Hudes Principal & Managing Director, Biotechnology Deloitte Services LP Paul Keckley, PhD Executive Director Deloitte Center for Health Solutions Robert Rouse Specialist Leader Deloitte Consulting LLP Lakshman Pernenkil, PhD Manager Deloitte Consulting LLP Elizabeth L. Stanley Research Manager Deloitte Center for Health Solutions Sanjay Modi Senior Consultant Deloitte Consulting LLP Anushree Agarwal Consultant Deloitte Consulting LLP Alexander Greenhouse, CPA Associate Deloitte Financial Advisory Services LLP Authors R. Terry Hisey Vice Chairman and U.S. Life Sciences Leader Deloitte LLP Rob Jacoby Senior Manager Deloitte Consulting LLP Ted Hoffman Specialist Leader Deloitte Consulting LLP Anjan Chatterji Senior Associate, Business Valuations Deloitte Financial Advisory Services LLP
  • 18. This publication contains general information only and is based on the experiences and research of Deloitte practi- tioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www. deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright © 2011 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited

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