By Donald Zuhn --
On Tuesday, Alex Brill (at right), a principal at Matrix Global Advisors, LLC and former chief economist to the House Ways and Means Committee, released a white paper which asserts that a follow-on biologics regulatory pathway providing a data exclusivity period of seven years would be "sufficient for maintaining strong incentives to innovate while fostering a competitive marketplace." The 12-page paper, entitled "Proper Duration of Data Exclusivity for Generic Biologics: A Critique," was funded by Teva Pharmaceuticals (see Teva press release), which also funded a report on data exclusivity released last September (see "BU Economics Professor Releases Report on the Impact of Marketing Exclusivity on Biologics Innovation").
In arriving at a seven year data exclusivity period, the Brill paper finds fault with some aspects of an earlier economic model described by Duke University economist Henry Grabowski in a paper published last May in Nature Reviews Drug Discovery (see "Follow-on biologics: data exclusivity and the balance between innovation and competition"). According to Mr. Brill, Professor Grabowski's model estimates that a biologic's "break-even" point (i.e., "the number of years required for an average portfolio of biologic drug investments to recoup all development and fixed production costs and to also reward the investors their expected (double-digit) rate of return") is between 12.9 and 16.2 years. Mr. Brill finds that "with more plausible assumptions regarding the cost of capital and the contribution margin, the 'break-even' period is considerably shorter," and further, that "because innovator drugs can be expected to continue to earn economic profits in a market open to biogeneric competition, optimal data exclusivity will always be less than the 'break-even' point." As a result, Mr. Brill proposes a break-even period of just under nine years, and then reduces this calculation to seven years to account for profits earned after the market is opened to generic competition.
In concluding that Professor Grabowski's break-even was too high, Mr. Brill altered two "key" variables: cost of capital and contribution margin. Figure 2 (below) of Mr. Brill's paper presents a range of results based on additional simulations of Professor Grabowski's model using alternative assumptions. According to Mr. Brill, the simulation based on the most plausible assumptions (i.e., a 10 percent discount rate and a 60 percent contribution margin) yields a break-even point at just under nine years (represented by the teal line on Figure 2). Mr. Brill contends that this 9-year break-even point should not be equated with the optimal data exclusivity period because "the break-even duration will always be greater than the optimal duration of data exclusivity in a market such as biologic drugs, where it can be expected that the innovator drug will continue to earn economic profits following the entrance of biogeneric competition." After further adjustment of the plot in Figure 2, Mr. Brill concludes that "seven years is a reasonable duration to balance incentives for innovators with the market benefits of competition" (Mr. Brill notes that a 7-year data exclusivity period raises the break-even point from nine to ten years, but that beyond ten years, the innovator continues to earn profits in excess of the required rate of return).
In Teva's announcement regarding the release of Mr. Brill's paper, the generic pharmaceutical company noted that the data exclusivity period calculated by Mr. Brill was only half "the 14 years currently supported by the Biotechnology Industry Organization (BIO)," which Teva contends "widely touted" Professor Grabowski's economic model in arriving at the 14-year period.
For additional information regarding this and other related topics, please see:
• "BU Economics Professor Releases Report on the Impact of Marketing Exclusivity on Biologics Innovation," September 18, 2008
• "Congressional Fact-finding on Follow-on Biologics," August 13, 2008
• "CBO Releases Report on Senate Follow-on Biologics Bill; BIO Calls for Congress to Pass Biologics Bill in 2008," July 1, 2008
• "Follow-on Biologic Drugs and Patent Law: A Potential Disconnect?" March 25, 2008
• "New Follow-on Biologics Bill Introduced in the House," March 18, 2008
• "Dr. Robert Shapiro Discusses Follow-on Biologics Report," February 19, 2008
• "BIO CEO Provides Update on Patent Reform and Follow-on Biologics Legislation - Part II," February 14, 2008
• "Biologics Legislation Faces Unresolved Issues," December 28, 2007
• "Senate Committee Passes Biologics Legislation" July 5, 2007
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