Why would a Big Pharma company want to remake itself as a biotech? In a recent Xconomy piece, I discussed the changes in Roche’s corporate culture brought on by their recent acquisition of Genentech, along with recommendations for creating an innovative biotech research culture. What I didn’t have the space to dive into was a discussion of why Roche is attempting to transform itself from Big Pharma to biotech (OK, Big Biotech). The answer can be summed up in one word. Biologics. Here’s how I see it all coming together:
Biologics are Hot, Hot, Hot
Plant-based drugs have been used by cultures around the world for thousands of years. Drugs based on chemical synthesis have been with us since the latter half of the 1800s. Now, the era of biologics—genetically engineered protein drugs made in living cells—is upon us. Biologics now account for 20 percent of the global drug market, according to market research firm IMS Health. In 2000, only one biologic made the top ten list of worldwide drug sales (Amgen’s recombinant erythropoietin in 4th place). By 2008, five of the top 10 drugs in sales were biologics, and by 2014 biologics are expected to occupy six of the top ten positions, according to EP Vantage.
The trend is clear: worldwide sales of biologics are on track to hit the $100 billion level by 2011. As recently as 35 years ago there were no recombinant protein drugs in the marketplace. Today the marketplace contains many types of recombinant proteins, including growth factors, monoclonal antibodies, soluble receptors, clotting factors, replacement enzymes, vaccine components, and immune system stimulators. Biologics comprise about 25 percent of new drugs, according to the Washington Post, and accounted for about 16 percent of total prescription drug spending in 2008, according to IMS Health.
Small molecules, however are not likely to go away anytime soon, because they retain one key advantage over biologics: the ability to act inside the cell. Biologics, because of their large molecular mass, generally function outside of the cell as agonists that stimulate some kind of desired activity (for example, binding to a receptor on cells to initiate a signal) or as antagonists (by blocking the binding of some molecule to a target, thereby blocking the signaling cascade). If the biological process you seek to block or enhance is within the cell, traditional small molecules made through chemical synthesis is still the way to go.
Yet to be seen is whether emerging technologies, be they older (such as gene therapy and antisense) or newer ones like RNA interference and cancer vaccines, can be developed to the point where they can enter the marketplace as serious contenders. If the technologies can be made to work in a clinical setting, the ability to control gene expression will rapidly supplant a host of other technologies in the marketplace.
Biologics Have No Generic Competition – Yet
Small molecules eventually go off patent, as do biologics. This loss of patent protection often leads to the introduction of generic drugs, which are usually priced at a small fraction of the cost of the branded drug. When small molecules lose their patent protection (or their patents are successfully challenged in court), their sellers can lose significant market share within days or weeks when they face a flood of competition from cheaper generic copies. Big Pharma’s solution to the generics issue has been to establish “pay for delay” agreements with generics manufacturers. They pay these companies NOT to challenge their patents and sell competing drugs, thereby preserving market share. The legality of this practice has come into question, since it is obviously anti-competitive and is designed to keep prices high for consumers. The Federal Trade Commission is currently working to promote anti-trust legislation to block this practice. Cost savings for consumers are significant: the introduction of generic competitors for just four brand-name drugs (Prozac, Zantac, Taxol, and Platinol) has been estimated to have saved consumers more than $9 billion. Eliminating “pay for delay” agreements will save US consumers $3.5 billion a year, according to FTC Chairman Jon Lebowitz.
Biogenerics Have No Straightforward Path to Approval
What about biologics? Big Pharma has good business reasons to enter the biologics arena, because there is no clear regulatory path forward for biogenerics (also referred to as follow-on biologics or biosimilars) to enter the market. This subject is currently being debated in great detail by the politicos in Washington, because there are significant savings to be reaped in the US healthcare system if a way can be found to lower the price of recombinant protein drugs. Biologics made up the top six drugs for Medicare Part B expenditures in both 2006 and 2007 by the US Government, as reported by the Washington Post. One can easily visualize the strong attraction to Big Pharma of selling biologics, where generic competition is not currently a threat.
Generic versions of small molecules are generally introduced into the marketplace without doing clinical trials. However, it is not at all clear that the same thing will happen with biogenerics. If makers of biological generics are required to run clinical trials before approval, then this only raises the bar higher to keeping out competitors. Even if biogenerics do make it onto the market, they won’t be priced as cut-rate bargains like traditional small-molecule generics, because the biologics will cost more to manufacture, and develop, according to a detailed analysis by the FTC. Partly because of their higher prices, biogenerics are predicted to capture much less market share than small molecule generics. As a result, makers of biologics will be much less concerned than makers of small molecules about a potential loss of revenue once the patents expire on their molecules. In addition, the barrier to entry in making biogenerics is significantly higher than with small molecules, due to much higher production costs as well as the yet undefined regulatory pathway.
Why is there no straightforward regulatory path for biogenerics? Biological molecules are significantly more complicated than small chemical compounds. Any seemingly minor modifications of the protein during manufacturing (like the pH or temperature being just a little bit inconsistent) can potentially result in a protein that is perceived by the immune system as foreign. The net result is that the body can make neutralizing antibodies against the protein drug—essentially rendering it useless over time. In the case of monoclonal antibodies, the consequences would be that they could only be used in one course of treatment. They would be ineffective if administered after that. In the case of administering proteins that naturally exist is the body but are either missing or present in reduced levels in various disease states (e.g. insulin for diabetes, erythropoietin for chronic kidney disease), the consequences can be much more severe because it would stop the effect of a drug that people’s lives depend on.
An example of this problem was seen in a small number of patients in Europe given recombinant erythropoietin in the late 1990’s. These patients developed a very serious complication known as pure red cell aplasia (PRCA). This happened because they developed neutralizing antibodies against not just the recombinant protein that they were being injected with, but also against the erythropoietin protein their bodies produced naturally. As a result, they needed frequent blood transfusions with red blood cells since they stopped making any of their own. What caused them to develop this disorder? After a lengthy investigation, it is believed that the development of pure red cell aplasia was likely caused by different stabilizers used in the formulation, the composition of materials in the syringe that contains the protein to be injected, and possibly even the route of administration as well. As a result of these issues, regulatory agencies are likely to be extremely conservative in approving generic versions of recombinant proteins.
Biogenerics Will Operate Differently From Small Molecule Generics
There are often many different brands of small molecule drugs that all attack the same target. For example, there are 12 different beta blockers for heart conditions and five brands of statins that your doctor can choose from to lower your cholesterol. Because there are often multiple drugs that exploit the same biologic target for a given medical condition like high blood pressure, the introduction of a generic version of any one member of the class can seriously erode sales of another drug within the same group. Let’s look at the No. 1 selling drug in the world, Pfizer’s cholesterol-lowering drug atorvastatin (Lipitor), which generated worldwide sales of more than $13 billion in 2008. The introduction of a generic version of Merck’s competing drug simvastatin (Zocor) took a big bite out of not just Zocor’s sales, but Pfizer’s Lipitor sales as well. These sales will really erode when generic versions of Lipitor hit the market, which will very likely happen in the next few years. Pfizer’s acquisition of Wyeth earlier this year was driven, in large part, by its need to plug this upcoming revenue gap.
This situation has no current parallels with biologics in the US, since no biogenerics have made it into the marketplace. Biologics can be roughly divided into two classes. The first class is made up of drugs that are genetically engineered copies of proteins found naturally in the body, and are agonistic in nature, meaning they stimulate or provide an important function. Examples are recombinant erythropoietin, insulin, blood clotting factors, replacement enzymes, and growth factors. In contrast to small molecules, where there can be many drugs that target the same enzyme, biologics of this type usually enjoy standalone, monopoly status in their markets. Only the recombinant protein is biologically effective. Small molecules or other biologics that have the same effect have, with a few exceptions, not been discovered. These types of drugs are virtually immune to competition.
The second class, which include most monoclonal antibodies, are antagonistic in nature and can be termed “neutralizing biologics”. They are designed to block the action of a naturally-occuring molecule.
The place where biogenerics have the strongest potential to cut into sales of existing drugs is in the “neutralizing biologic” arena. For example, there are currently three monoclonal antibodies as well as a soluble receptor that all compete in the rheumatoid arthritis arena by binding to and neutralizing an inflammatory protein called TNF. In this situation, the introduction of a biogeneric would be quite likely to cut into sales of all of the members of the class. The bottom line here: biological agonists will be more resistant (in a revenue sense) to biogenerics competition than biological antagonists.
Biologics Will Get Market Exclusivity – A Good Thing?
Aside from patent considerations, discussions are well underway in Washington as to whether or not biologics deserve a period of market exclusivity, and if so, how long a period this should be. Market exclusivity means that once a biologic is approved for a certain indication, no generic form of that molecule could be sold for the same indication during the period of exclusivity. Given that drug patents these days last 20 years, one might wonder what all the fuss is about. Many consider the point moot. The pharmaceutical industry has lobbied for a 12-year exclusivity period, arguing that it’s necessary to protect their financial interests and to provide an incentive to innovate. As currently written, this 12-year period has found its way into pending health care legislation in both the U.S. House of Representatives and the Senate. While I am not troubled about the time frame due to the overriding patent issues, I am bothered by the inclusion of clauses in this legislation that can essentially enable drug companies to extend these time frames multiple times by producing minor variants or by altering the manufacturing process. Thus, a 12-year period of exclusivity could easily morph into one that was 24 years. This can only succeed in keeping prices high for consumers by keeping competitors off the market.
Left out of any of the market exclusivity discussions that I have read is the positive effect that this legislation could have on legacy molecules discovered during the period I refer to as the cloning wars (roughly 1980-2000). During this time, competing biotech companies cloned a fair number of significant proteins that never made it into clinical trials, didn’t get properly investigated there, or failed outright. There are many reasons they didn’t work out. However, the chances of these molecules receiving further clinical investigation are presently very dim, because their patents have already expired, or will soon. Without patent protection, these molecules will not attract a financial commitment from industry. But if Congress suddenly grants them a new 12-year period of market exclusivity, then companies will have a reason to rescue at least some of these proteins from the biologic scrap heap and return them to the clinic. Given the likelihood that many diseases, such as cancer, will need to be treated simultaneously with a spectrum of drugs, rescuing some of these promising biologics will be a good thing.
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