j.birchenough, barclays
June 11, 2009
Biotechnology
Market Commentary/Strategy
FTC Report Notes Multiple FOB Barriers
Sector View:
New: 1-Positive
Old: 1-Positive
Investment Conclusion
We are maintaining our 1-Positive rating on the US Biotech sector following review of a report by the Federal Trade Commission (FTC)
on expectations for follow-on-biologic (FOBs) competition in the US biotech space. While not surprisingly the commission has taken the
hardest stance on data exclusivity recommendations, we would note acknowedgement of the central role of the FDA in FOB review,
unlikely direct substitution of "pioneer biologics" by FOBs, the important role of patent protection and a projection of ultimate FOB market
share of no more than 10-30% as painting a more realistic view of future FOB risk than that assumed in current biotech valuations.
Contrary to the FTC's recommendation, we do expect data exclusivity of at least five years to provide additional protection to "pioneer
biologics" and see limited fundamental risk to current FOB legislation.
Summary
?? The Federal Trade Commission (FTC) released recently a report entitled " Follow-on Biologic Drug Competition" that proposed
recommendations on regulation of FOBs and suggested limitations on data exclusivity currently afforded pharmaceutical peers. In
recommending against any specific data exclusivity period, FTC suggests that strategies for promoting competition under Hatch-Waxman
legislation are not relevant for FOBs and that market forces will more appropriately guide biologic pricing and relative market share for
FOBs and "pioneer biologics". Key market forces highlighted by FTC include the substantial cost of biologic manufacturing capacity which
could limit the number of FOB competitors, likely slow adoption of FOBs due to lack of direct substitutability, potential concerns regarding
relative safety and efficacy of FOBs, and market incentives against low cost injectable drugs
?? In suggesting that competition between "pioneer biologics" and FOBs will more closely resemble current brand-to-brand competition in
the biopharmaceutical space FTC estimates eight to 10 years for FOB development, average cost of $100-200M, no more than two to
three potential FOB entrants, ultimate market share of no more than 10-30% market share and likely market expansion. While FTC
argues that Hatch-Waxman data exclusivity of five years is not necessary given these dynamics, we expect arguments for data
exclusivity periods between five and 12 years to prevail and afford further protection for "pioneer biologics". As suggested in our recent
sector upgrade, we believe that FOB concerns are overdone, that depressed valuations for innovative "pioneer biotech companies" offer
a compelling entry point and that sustainable product franchises should support multiple expansion over time.
June 11, 2009
Biotechnology
Market Commentary/Strategy
FTC Report Notes Multiple FOB Barriers
Sector View:
New: 1-Positive
Old: 1-Positive
Americas
Healthcare
Biotechnology
??
Equity Research
2
The Federal Trade Commission (FTC) has recently released a report entitled “Follow-on Biologic Drug Competition” which outlines market
dynamics that could impact FOB adoption and makes recommendations regarding the path for follow on biologics (FOBs). The document
can be found at ftc.gov. Given the FTC’s mandate to support competition, it is perhaps
not surprising that the report recommends short-cuts to ensure a fast path to market for follow-on biologics (FOBs). The Commission shies
away from commenting on the specifics of the approval process, however, noting that FDA is the appropriate body to approve FOBs.
The Commission presents what we believe to be a realistic outlook for FOBs, where biologic-pioneer companies keep much of their market
share and profit. Working backwards from this outlook, FTC has taken a practical stance by analyzing the key components of Hatch
Waxman that were developed to enhance competition for small molecule generics and suggested differences for follow on biologics (FOBs).
In short, FTC suggests that the situation facing FOB sponsors is so different from the small molecule drug experience that the strategies
associated with promoting competition under Hatch-Waxman are simply not relevant to FOBs. The Commission suggests that the FOB–
biologic pioneer dynamic will resemble the current brand–brand dynamic and thus should reflect that of a largely unregulated market. Given
this stance, FTC does not recommend a particular period of market exclusivity or strategies to accelerate patent dispute resolution. The
Commission does however suggest that FOBs will bring considerable savings to the consumer and will help to expand the market. FTC
further suggests price decreases for FOBs limited to 10-30%, with brand companies likely to match these price decreases to retain the
majority of their current market share. We would note, however, experience in Europe with Biosimilars where price discounts up to 30%
have not been followed by pioneer brand biologic price decreases and where market share gains for bio-similars has been limited to 5-10%.
Key conclusions from the Commission’s report are summarized below:
The substantial costs to obtain FDA approval, plus the substantial costs to develop manufacturing capacity, will limit the number of
FOB competitors
The lack of automatic substitution between a FOB and a pioneer-biologic will slow the rate at which FOBs can acquire market
share
A FOB may also have difficulty gaining market share due to concerns about safety and efficacy differences with the pioneer
biologic
Biologics currently are not reimbursed according to strategies that insurers often use to encourage the use of lower-priced drugs
further impacting projected savings from FOBs
As a result of these factors, FOB entry, although important, will be less dramatic than generic small molecule competition;
Only two or three FOB manufacturers are likely to attempt entry for a given pioneer drug product. These entrants are unlikely to
introduce their drugs at discounts any larger than between 10%and 30% of the pioneer-biologic’s product’s price
FOB entry is likely restricted to biologic markets larger than $250 million in annual sales given the associated costs and small
returns
The effect on pioneer-biologic manufacturers when FOBs enter the market will be different to their experience with small molecule
generics. Pioneer-biologic manufacturers are expected to respond to FOBs by offering competitive discounts to maintain market
share and thus are likely to retain 70 to 90 percent of their market share and will “continue to reap substantial profits”, after FOB
entry.
The Commission’s overriding view is that competition between a pioneer-biologic and a FOB is much more likely to resemble brand to brand
competition than traditional brand to generic competition. This conclusion is driven by :
Substantially increased resources required to develop a FOB which are estimated to take eight to 10 years and $100-$200M
compared to three to five years and $1-$5M for small molecule drugs. In the opinion of FTC this will limit the number of entrants
per FOB to two to three. According to the Commission, these competitors could well include pioneer-biologic manufacturers
themselves that are likely to become FOB competitors for markets where they currently do not compete. Given the overall costs
and resources, FTC suggests that FOBs will probably only make sense in markets with sales >$250M. The cost imperative is
exacerbated by the absence of automatic substitution for FOBs which added to the inherent skepticism from customers about the
safety and efficacy of FOBs will slow their market penetration in the view of FTC.
The Commission notes that the broad use of pioneer-biologics as part of a medical benefit does not allow the insurance companies
to use traditional pressure points such as co-pays and tiered formularies to encourage use of the least expensive alternative.
Further, outside of a medical benefit the current ASP reimbursement strategy used by CMS is counter productive as it encourages
the use of the most expensive drugs.
Equity Research
3
Taking all of this into account the Commission believes that brand companies will be able to match the 10-30% discount in price likely to be
offered by FOB sponsors and in doing so would keep 70-90% of product revenues. Despite these modest savings, a 10-30% saving on a
$48,000 course of Herceptin could be significant and could lead to both an expanded market and increased consumer access. That being
said, we are again sceptical that a share above 10% would be seen for an FOB to complex antibody products like Herceptin.
The Commission’s assumption that FOB competition with pioneer-biologics will reflect the current brand-brand competitive dynamics
negates the need for special legislative incentives to assist FOB approval. Rather, continued reliance on the patent and market-based
pricing systems is in keeping with the Commission’s view of the competitive dynamic likely to ensue as FOBs enter the market. In fact, the
Commission notes that special legislative incentives such as the 180-day market exclusivity will suppress rivalry and could actually harm
consumers. Similarly, the Commission does not believe that the 12- to 14-year exclusivity period sought by brand companies is necessary
because of the protections offered by the patent system and market-based pricing models. The exclusivity period offered to small molecule
drug developers stimulates the development of new drugs and indications where market-based pricing is an insufficient incentive according
to the Commission’s viewpoint. The Commission believes that there is no evidence regarding the lack of patentability of new biologic drugs
which combined with market pricing models negates the need for a lengthy period of exclusivity, and in fact FTC avoids proposing a specific
length of exclusivity.
The Commission opines that special procedures are not required to resolve patent litigation between FOB sponsors and pioneer-biologic
sponsors, noting that the Hatch-Waxman procedures have been the subject of extensive litigation. Further unintended consequences from
Hatch-Waxman such as “pay-for-delay” tactics have actually delayed generic entry preventing consumers from enjoying the benefits of price
competition in the opinion of FTC. The need to obtain rapid resolution of patents for small molecule drugs was necessary given the potential
for triple damages payable to the brand companies for an at-risk launch by small largely inexperienced companies circa 1984. In contrast to
1984, the Commission assumes that many FOB companies will in fact be pioneer-biologics companies that have significant resources and
expertise to judge the risks for an at-risk launch, just as they do currently when bringing a new branded biologic to market. The need for
special patent procedures is also considered unwise by the Commission due to the broader complexity of biologics patenting than is the
case for small molecules. In fact the Commission believes that any FOB-specific procedures are unlikely to resolve all pertinent patent
issues prior to FDA approval noting that:
1. Patents for the pioneer product may issue after the FDA pre-approval process has begun and or after FDA approval
2. The FOB manufacturer’s application and product also may change during the approval process
3. Absent a mechanism to enforce the rules of a pre-approval resolution process, there is no guarantee that litigation started
prior to FDA approval will end earlier.
In summary FTC believes that FDA regulation, market dynamics, manufacturing costs, clinical development requirements, physician and
patient acceptance and patent protection all serve as substantial barriers to FOB entry and that further data exclusivity provisions are
unwarranted. While we believe that the latter point will be difficult to maintain during the negotiation around FOBs, we believe that the
picture painted by FTC is more realistic than that currently contemplated by the Street and supports our view that FOB concerns are
overdone. |
