Drugs May Cost Too Much, But Patents Are Not the Cause

By Kevin E. Noonan --

For at least a decade, Congress has been concerned (not to say obsessed) with drug costs (understandably so, no matter how ineffectively; see "FTC to the Rescue Regarding High Drug Prices and Patents"; "Even More Ill-Conceived Remedies from Congress Regarding Prescription Drug Costs"; "More Ill-conceived Remedies from Congress Regarding Prescription Drug Costs"; "A Solution in Search of a Problem"; Senate Once Again Tries to Address Drug Pricing).  A consequence has been a focus on patents and their contribution to the crisis.  Recently, David Gaugh, Interim CEO of the Association for Accessible Medicines (formerly the Generic Pharmaceutical Association) wrote an article entitled "Congress is Ignoring the Best Solution to Reducing Drug Prices" on realclearpolicy.com challenging if not rebutting much of this rhetoric by identifying more relevant sources for increases in drug pricing.

Mr. Gaugh not surprisingly asserts that the only way to reliably reduce drug prices is generic and biosimilar competition.  This case can certainly be made for generic drugs, which have an almost 40-year track record leading to the statistic that "generics and biosimilars account for 91% of prescriptions filled in the U.S. but only 18% of prescription spending."  But Mr. Gaugh argues that these gains are at risk from problems with sustainability of the generic (and biosimilar) drug industries.  As Mr. Gaugh explains, often "the price of generic medicines has fallen to an unsustainably low level, resulting in market exits and creating the optimal conditions for shortages," which shortages are appearing in the aftermath of the economic and supply chain disjunctions caused by the pandemic.  (This statement is ironic albeit truthful, because Mr. Gaugh also quotes FDA statistics that generic competition results in "an astounding 95% price drop on a mature market."  This suggests that the meme that high prices for branded drugs were solely caused by pharmaceutical company greed was incorrect.)

Even the newer generic and biosimilar drugs are "being squeezed" by "historically slow adoption," Mr. Gaugh writes (although the reasons for this between these classes of drugs are likely not to be the same).  With regard to biosimilars, the financial benefits are patent, being "on average more than 50% less than the brand price was when the biosimilar launched" (for drugs that although representing only a fraction of prescriptions, drive almost half of all drug spending) and yet are "woefully underutilized."  Mr. Gaugh uses Humira® as an example, which starting July 1st of this year is subject to competition by several biosimilars (see "The New York Times Is at It Again Regarding Patents").  But who will benefit may not be patients; Mr. Gaugh identifies "middlemen" as being able to exact greater rebates from Humira® sales while formularies are expected (by Mr. Gaugh) to "sideline" these biosimilar equivalents.

Mr. Gaugh uses Semglee, the first interchangeable insulin biosimilar, to illustrate the effect of the market and its participants on this failure of biosimilar substitution to reap the benefits promised by passage of the Biologics Price Competition and Innovation Act (BPCIA) as part of Obamacare.  According to the article:

Semglee has two different prices, one with a slight decrease in price compared to the brand and a high rebate, and another with a major (65%) decrease in price.  Although the lower list price would have translated into lower costs to patients, PBMs have largely stuck with the higher priced brand insulin rather than encouraging use of the lowest list price.

In addition to these economic consequences, Mr. Gaugh also argues that "manufacturing and regulatory challenges, runaway price deflation driven by middlemen market consolidation, and government policies in Medicaid, Medicare and 340B that reduce the financial viability of generic manufacturing."

While conceding that there is no "magic bullet" for correcting (or at least improving) these circumstances, Mr. Gaugh argues that adoption of the following options could provide some solutions:

• Improving FDA internal collaboration between inspectors and its drug shortage staff (DSS) and between the agency and manufacturers working to avoid a shortage,

• Creating a reserve capacity supply of key medicines as well as creating incentives for hospitals to purchase reserve supply at sustainable, long-term fixed price and volume contracts,

• Improving Medicare drug formulary coverage of new generics and biosimilars, and

• Removing financial burdens such as the Medicaid inflation penalty and 340B that make continued production of low-margin generics unsustainable.

Mr. Gaugh concludes his article that both the branded and generic/biosimilar drugs industries are businesses driven by investment and "if government policies continue to penalize low-cost generic medicines and block adoption of new generics and biosimilars" decreased investment may follow.  Which of course will just exacerbate high drug prices and increased shortages that burden the health care system.

While the message of Mr. Gaugh's article are anything but hopeful, it was refreshing for a change to have problems with drug pricing in the U.S. not to focus on (or even mention) patents as being the cause.  That may be a popular refrain from the media and some politicians (see, e.g., "The New York Times Is at It Again Regarding Patents"; "Faux-Populist Patent Fantasies from The New York Times"; "The More the Merrier: The Journal Joins the Times in Complaining about Patents"; "New York Times to Innovation: Drop Dead"; "Science Fiction in The New York Times") but Mr. Gaugh's assessment provides a welcome, informed alternative to what people think "everybody knows."

Comments

[Tony George]

The comments to the linked-thread are closed (https://www.patentdocs.org/2023/01/the-new-york-times-is-at-it-again-regarding-patents.html)

I disagree with the statement:

"The real issue is that the development cost of biologic drugs is much higher than traditional small molecule drugs as is the cost of producing them. "

The cost of developing biosimilars is certainly less than the cost of developing generics, but the cost of innovator drugs may be similar, possibly lower for biologics. I would like to see the data. Biologics have been invested in at the expense of small molecules, in-part due to their "newness", but likely also due to their lower-cost/overall chances of success, real or perceived.

[Paul F. Morgan]

An interesting discussion of several different issues other than patents re this subject of huge total U.S. drug costs. One could add to the suggestion of better FDA coordination with manufacturers an improved FDA inspection of the foreign sources of drug manufacture starting materials, which has led to concerns re some generic drugs.

[Girish Malhotra]

Mr. Gaugh's observations are correct. We in US do not have generic drug competition. Drug distribution is controlled by PBMs and being on the Formulary Lists.

PBMs to preserve their profits have driven manufacturers out as they cannot make their profits on the drugs. As a result if producers cannot meet their internal profit goals, they will stop production.

If we take out the PBMs and have direct sales to patients product quality will rise due to better manufacturing technologies and overall costs will come down. Law of Economics will dictate the playing field.

PBMs have killed every attempt for direct generic sales as they will lose their cash cows. http://bit.ly/2IXHiY6 could be used as a model.

Executive Orders have been ignored. To bring drug manufacturing home an alternate approach is needed. https://bit.ly/3nxOlIz is a pathway.

PBMs, FDA and Legislators will prevent direct sales and USA will increasingly suffer from shortages and high generic drug prices.

[Kevin E Noonan]

Tony: one source for the statement is from the FTC, which in a 2009 report estimated a cost of $1-5 million for a small molecule generic but ~$100-200 million for a biosimilar. (See, https://www.patentdocs.org/2009/06/no-one-seems-happy-with-followon-biologics-according-to-the-ftc.html).

In practice these costs may have turned out to be less; I think part of this cost estimate included building a production facility which has been avoided by biotech companies like Amgen and Genentech (which presumably have such facilities) producing biosimilars.

Thanks for the comment

[skeptical]

The ENTIRE system - top to bottom, ship to stern - needs be dragged into the sunlight.

Nowhere is the adage of "follow the money" more penetrating than in the Pharma space.

Will this happen? Of course not - there is simply far too much embedded grift for the reset that is needed to take place.

[Tony George]

I made an "unfortunate" error and should have said "The cost of developing biosimilars is certainly MORE (not less) than the cost of developing generics".

My objection relates to the statement on the cost of biologics versus the cost of small molecules:

"The real issue is that the development cost of biologic drugs is much higher than traditional small molecule drugs as is the cost of producing them."

The link referred to is apparently about biosimilar v generics. (The link does not connect with the report?)

[Greg DeLassus]

Step away from all of the detail about the patent coverage on this drug or that, and just look at the big picture. How different is U.S. patent law from (e.g.) EP patent law or JP patent law? Very small differences. Often the claims granted on a given drug are essentially identical in US/EP/JP.

Now, how different are the prices of that drug in the US compared to the EP or JP? Frequently US consumers are paying multiple-fold the price that EP or JP consumers are paying---even while the drug is on patent in all three jurisdictions.

Clearly, then, the patent law is not main driver of the cost differential. If you are trying to combat drug prices by fiddling with patent law, you are like the proverbial drunk looking for his car keys under the street lamp because that is where the light is better.

[Nancy J Linck]

Our healthcare costs -- including those for drugs -- is driven by insurance companies. Affordable healthcare was readily available before insurance companies got involved and regulated prices. My folks never had insurance -- we went to the doc for $6/visit and spent days in the hospital for less than $200. Now those without health insurance have to carry the burden for those insured. How can such a system be justified?