Industry Trend Analysis - Biosimilar Market Threatened By Current Market Practices - APR 2018

BMI View: The FDA has emphasised a mission to improve regulatory processes in order to facilitate competition to drive down prices, but has consistently noted that it has no power over pricing. Commissioner Scott Gottlieb's speech to the AHIP Conference is notable for taking aim at pricing practices and his allegation that current models will not allow a biosimilar market to flourish is a clear warning. Whilst market consolidation amongst payors has compounded the situation in his view, this also means that it will only require a few players to change practices to make a significant difference.

Scott Gottlieb, MD, the FDA's Commissioner, has given a speech at the America's Health Insurance Plans (AHIP) National Health Policy Conference in Washington, DC, in which he raised concerns over the biosimilar market in the US. Gottlieb commented: '...while we see a growing number of sponsors pursuing biosimilar development programmes, the economics of development are currently unstable; and the pipeline of biosimilar products that we hope for could be dramatically affected by the weakening of market incentives to bring these products to patients.'

According to Gottlieb, whilst it can cost around USD10mn to develop a generic version of a small molecule drug, the complexity of manufacturing and testing biosimilars means that it can typically cost USD100mn to USD250mn per biosimilar programme. The cost of developing biosimilars will always be substantially more than the cost of developing a generic, but biosimilars can not only present opportunities for significant cost savings, they can also dramatically expand patient access to therapies. Consequently, millions of US patients stand to benefit from utilising biosimilars. Gottlieb stated: 'Strong market incentives are critical to future biosimilar development in the same way these incentives are key for the development of innovator drugs and biologics.'

Concerns Over The Functioning Of The Biosimilar Market

Gottlieb commented that in competitive insurance markets, savings from competition between branded drugs, generics, biologics and biosimilars should be passed on to patients, employers and payors, or used to enable the coverage of new generations of innovative drugs. However, the FDA Commissioner added that he is concerned that in some cases this is not the way the market operates, and that it is a particular concern with regard to biologics. According to the Commissioner, current rebating and contracting practices, coupled with increasing consolidation in the drug supply chain, has produced some 'misaligned incentives.' The top three pharmacy benefit management (PBM) companies control over two-thirds of the market, whilst the top three wholesalers control over 80% and the top five pharmacies over 50%. Gottlieb argued: 'Market concentration may prevent optimal competition....Too often, we see situations where consolidated firms - the PBMs, the distributors, and the drug stores - team up with payors. They use their individual market power to effectively split some of the monopoly rents with large manufacturers and other intermediaries rather than passing on the saving garnered from competition to patients and employers.... In the long run, the interests of patients, providers, and manufacturers are not well served by these arrangements...'

Gottlieb commented that as with small molecule drugs, the FDA also works to provide Congress's intent to balance innovation and competition with regard to biologics, adding: 'And this is an area where I have some of my most significant concerns about the long-term impact of the pricing and rebating mischief.' According to Gottlieb, around a third of new drugs approved by the FDA are biologics, and taken together, biologics account for around 40% of all US drug spending, and 70% of spending growth from 2010 to 2015. The growing importance of biologics led to Congress creating a regulatory pathway for approving biosimilars.

However, Gottlieb argued: '...if we're not able or willing to support the development of this market as it matures - and pursue policies and practices that encourage sponsors to invest in biosimilars by enhancing regulatory predictability and encouraging market acceptance of the products - then the resulting competition we seek, and that patients need, will be derailed. We must do more to ensure that the current pipeline of biosimilar products reaches patients as safely and efficiently as possible, and that the full potential of biosimilar products to improve patient health is realised once products meet the FDA's high standards for approval.'

Consequently, the FDA is considering what additional steps it can take to encourage biosimilar competition; Gottlieb noted that bringing more drug competition to the market and addressing the high costs of medicines is a top priority for the Administration and the Secretary of Health and Human Services. The FDA is also committed to educating clinicians and patients about the safety and effectiveness of FDA-approved biosimilars; Gottlieb noted that physician and patient confidence in biosimilars is critical to their market acceptance. Gottlieb further commented that the FDA recognises that creating efficient economies of scale for biosimilars requires a global market. This entails harmonising requirements for their development and sharing regulatory experiences across national boundaries. As a result, the FDA is particularly focused on strengthening partnerships with regulatory authorities in Europe, Japan and Canada.

Gottlieb told the AHIP conference that the FDA has so far approved nine biosimilars, including five in 2017, of which two were the first to be approved for the treatment of cancer. As of January 2018, 60 biosimilars were enrolled in the FDA's Biosimilar Development Program. The Agency has so far received meeting requests to discuss the development of biosimilars for 27 different reference products. Despite the Agency's effort, however, only three of the nine approved biosimilars are currently marketed in the US. Gottlieb commented that delays can be partly attributed to ongoing litigation, but added that whilst the pipeline is rich, it is not as robust as it ought to be, adding: 'And this is where the industry's rebating and contracting practices combine to raise another, perhaps even more insidious barrier to biosimilars taking root in the US, and gaining appropriate market share.'

The 'Rebate Trap'

Gottlieb noted that pay for delay tactics have been used to delay access to generics, adding that many insurers and PBMs have spoken out against such practices as being anticompetitive. Yet for Gottlieb: '...the crux of these pay for delay schemes are also taking root in the biologics market. Except this time, in these biosimilar pacts, the tactics are dressed in the guise of rebates and contracting provisions between manufacturers and PBMs that discourage biosimilar market entry. This is a position that some observers have dubbed the 'rebate trap'.'

According to Gottlieb, currently, PBMs and insurers profit from the spread between Wholesale Acquisition Cost and the actual rebated price. Manufacturers typically tie these rebates to volume, or having a health plan maintain a drug on a preferred formulary status. As a result, if a health plan puts a biosimilar in that preferred formulary position, the plan might lose the rebate on their entire volume of the innovator biologic, and this lies at the heart of the problem. Gottlieb commented: 'When biosimilars launch, their initial discount is typically on the order of 15% or 20%. And unless the plan can switch all their patients over to the biosimilar, the cost of the lost rebates on the patients who remain on the original biologic won't be offset by value of the discount on the biosimilar, and the smaller number of patients who are started on it.'

Gottlieb continued: 'This is especially true since the number of patients who'll immediately migrate to biosimilar therapy is likely to be small, making it difficult for biosimilar sponsors to launch with deep, volume-based rebates. This means that PBMs have a significant financial incentive to limit the uptake of biosimilars to continue the flow of large rebate payments. And health plans have a big disincentive to switch to the biosimilar, and lose the incumbent rebates paid on the innovator biologic.'

Pfizer Has Initiated Litigation Over Similar Issue

Gottlieb's contention has already been backed up by litigation. In September 2017, Pfizer filed a lawsuit against Johnson & Johnson, alleging that J&J's exclusionary contracts and other practices Pfizer described as anticompetitive have denied US patients access to therapeutic options and undermined the benefits of 'robust price competition in the innovative and growing biologics maketplace' for patients. The lawsuit further claims that J&J's 'systemic' efforts to maintain a monopoly in connection with Remicade (infliximab) by 'inappropriately excluding biosimilar competitors' violates federal antitrust laws and undermines the principal goals of the federal Biologics Price Competition and Innovation Act (BPCIA).'

Pfizer's complaint argues that insurers originally classified its biosimilar infliximab product, Inflectra, at parity with Remicade, meaning that there was no medical reason to favour Remicade over Inflectra. However, Pfizer alleges, insurers reversed this position after J&J threatened to withhold significant rebates unless insurers agreed to 'biosimilar-exclusion' contracts that effectively block coverage for Inflectra and other infliximab biosimilars. Additionally, J&J is alleged to have offered providers anticompetitive contracts conditioned on the providers not purchasing biosimilar versions of Remicade in exchange for discounts on Remicade. These alleged practices have prevented physicians from trying and patients from accessing biosimilar versions of Remicade. According to Pfizer, J&J's exclusionary contracts have also caused insurers not to cover Inflectra, even though the biosimilar is available at a Wholesale Acquisition Cost that is 19% lower than that of Remicade, and has an Average Selling Price that is more than 10% lower, with Pfizer also offering additional pricing concessions to compete against Remicade's market dominance.

Payment Systems Will Need To Change

Gottlieb noted that he is on record as advocating that companies move away from rebate-based contracts, adding that more transparent pricing signals would encourage the rapid market uptake of lower cost products and force manufacturers to better establish the real value of their products relative to price. However, payors will need to decide whether they want short-term profits that come with rebates or in the longer term a system that functions better for patients, providers and those who pay for care. Additionally, payors will need to decide whether to continue to benefit from monopoly rents, or help generate a biosimilar market that can help reset biologic pricing, and drug pricing more generally, through competition.

Gottlieb told the meeting: 'If we're serious about seeing the market for biosimilars take shape, it's going to require a payment system that gives products that are currently in the pipeline a chance to enter the market once they're approved. The more that biosimilar makers see that the current system is stacked against them, the fewer new entrants that will cross into this space.'

Gottlieb concluded that whilst the FDA can smooth the regulatory pathway to optimise biosimilar development, it will be down to payors to create financial systems that make biosimilars the default option in order to enable the market to flourish. Additionally, payors can also help with educating clinicians about the safety of biosimilars in order to encourage their uptake. Gottlieb added: 'We'll know that we've been successful when there's a biosimilar market that can sustain multiple competing biosimilar and biologic options. For instance, in an FDA analysis of the market for white-blood cell stimulating ... we've seen pricing relative to the incumbent biologic, Neupogen (filgrastim, marketed by Amgen), decline by 34% after the approval of two competitors, with the competitors capturing nearly 50% of the market share, and saving payors USD150mn annually.'