The stakes are high in the debate over follow-on biologics

After years of ongoing debate, Congress has brought forward legislation to create a regulatory pathway for the approval of “follow-on biologics” (FOBs). Two bills have been introduced addressing the issue of FOBs, and each is based at least indirectly on the model of the Hatch-Waxman act of 1984 that created an abbreviated approval process for chemical generics. Proponents of the new legislation argue that, like the Hatch-Waxman bill of 1984, an abbreviated regulatory pathway for FOBs will reduce spending on therapies by increasing price competition in the highest-volume and highest-cost areas of drug therapy.

Yet disagreement around the potential elements of FOB legislation is widespread; key issues are highly technical and analytically complex. Still, the essential debate encompasses two broad issues—patient safety (revolving around “biosimiliarity”) and industry economics (how to encourage competition while also maintaining sufficient economic incentives to foster scientific innovation).

What the New Legislation Might Do

Given the significant differences between today’s biotechnology industry and yesterday’s pharmaceutical industry, what impact can we expect from the introduction of an abbreviated approval path for follow-on biologics?

It is likely that follow-on biologics will introduce price competition and lower the overall cost within the specific treatment areas in which they are introduced. Competition generally lowers prices, but it is less clear how much of a price reduction the market can expect, due again to some fundamental differences between chemical-based drug manufacturing and biologic-based manufacturing.

One of the unintended consequences of the Hatch-Waxman Act can be called the “blockbuster effect.” Given an ever-increasing cost for drug development, but a capped period of patent protection during which to achieve most return on investment, innovators will concentrate on the development of drugs with the highest revenue potential, i.e., blockbusters.

Once a compound is patented, it has a limited amount of time to get to market and earn a return; after trials and approvals, what remains for the average compound is roughly 12 years to recoup the cost of investment in its development. Add to this equation the average cost of developing a novel drug: roughly $1 billion. Further adding to the calculation a conservative cost of capital over the 25-year span (the total lifespan allowed under Hatch-Waxman) shows that just to break even the average drug must achieve average annual revenue of roughly $150 million. That much revenue cannot reliably be achieved unless a drug targets a large population of patients, or comes at a high cost per treatment. This blockbuster effect has led pharma companies generally to focus development efforts on only the largest potential indications.

The logic of the blockbuster effect is almost inexorable. Since protected time on market is capped, the economics of drug development essentially forces innovators to focus on drugs with the largest possible market potential — in this way, again, what was true for pharma innovators will be true for biotech innovators. But the risk here, which has not often been noted, is that this effect runs exactly counter to the direction and promise of the science of biotech, which has the potential to create more highly targeted and therefore more efficacious therapies. As therapies become increasingly targeted their commercial viability becomes increasingly uncertain, because while the size of patient populations gets smaller, the costs associated with drug development do not change.

In order for personalized medicine to become a reality, drug innovators will need a regulatory environment that allows a return on their investments in research and development. It would be unfortunate if new regulations unintentionally circumvented the advances that now appear to be possible in medical science by putting in place economic incentives that rule out everything but blockbuster investments.

Adapted from “Avoiding No Man’s Land: Potential Unintended Consequences of Follow-On Biologics.” The full report is available at Deloitte.com.

> Jim Hollingshead is Principal, Strategy & Operations, Deloitte Consulting