Executive Summary

The U.S. spends well more on prescription drugs, per capita, than any other country in the world. This has long been a source of concern for American patients struggling to afford their medicines.

There are, however, those who argue that high drug prices are justified by a “social contract” under which drug companies can—and should—charge high prices while their drugs are protected by patent monopolies, in exchange for those medicines becoming effectively free once their patents have expired.

That social contract—while never perfect—works reasonably well for traditional, chemically synthesized, small molecule drugs. For these traditional drugs, when patents expire, generic drugs arrive on the market and rapidly bring prices down to commodity levels.

Our new research, however, makes clear that the social contract is broken for large biologic drugs: protein therapeutics harvested from living cells. Because biologic drugs do not face generic competition in the same way that small molecule drugs do, they enjoy lengthier monopolies, sanctioned by Congressional statutes and federal regulations, which enable their manufacturers to raise prices to higher and higher levels.

The emerging crisis of unaffordable biologic medicines can be illustrated by the two figures below. The first chart illustrates a stark fact: that, in 2018, biologic drugs represented 0.4% of U.S. prescriptions, but 46% of U.S. drug spending, net of rebates. The second chart illustrates that biologics’ share of drug spending is rising. Indeed, over the last four years, the entirety of U.S. prescription drug spending growth comes from the 0.4% of prescriptions for biologic drugs.

Biologic drugs represent fewer than 1% of U.S. prescriptions, but nearly half of all drug spending, net of drug rebates. One way to illustrate the disproportionate impact of high biologic drug prices on U.S. drug spending is to compare prescription share to revenue share. (Source: A. Roy / FREOPP analysis of IQVIA data)

Biologic drugs represent the entirety of U.S. net drug spending growth since 2015. Biologic drug spending is rising rapidly, due to regulatory barriers to competition. When traditional, small molecule drugs’ patents expire, they are subject to vigorous price competition from generic drugs; hence, overall spending on small molecule drugs is steadily declining. However, biologic drugs are not subject to the same competitive forces, leading to rapid price and spending increases. (Source: A. Roy / FREOPP analysis of IQVIA data)

Improving the competitive landscape for biologic drugs is far from impossible. Europe has a much more competitive system than the U.S., thanks to a more rigorous patent opposition system in which trivial and non-innovative patents can be challenged after they have been issued. In addition, the European Medicines Agency has been more forward-thinking, relative to the FDA, in approving biosimilar marketing applications. Finally, while U.S government programs like Medicare reward manufacturers for rapid price increases, European governments do not.

Indeed, we find that the difference between the U.S. and E.U. policy landscapes for biologic drug price competition has cost U.S. patients $5 billion from 2015 to 2020, and will cost U.S. patients an additional $25 billion over the next decade in the absence of reform.

A responsible agenda to rein in excessively lengthy biotechnology monopolies would increase innovation, because it would motivate companies to develop new medicines, instead of relying on price increases on older medicines to generate returns for shareholders.

The components of such an agenda should include:

• Enabling biosimilar drugs to launch without risk of treble damages, after a branded biologic drug’s composition of matter patent has expired, so that any additional intellectual property is licensed through private negotiation, rather than through a federal abolition of competition.
• Rationalizing biosimilar interchangeability, so that biosimilar medicines can be easily substituted for branded products after they have demonstrated that they are manufactured in the same manner as the original drug.
• Eliminating patent trolling, so that branded manufacturers cannot use thickets of trivial patents to block competitors.
• Aligning the BPCI Act with the Hatch-Waxman Act, so that the successful social contract for traditional, small molecule drugs can be applied to as many biologic drugs as possible.
• Reforming Medicare Parts B and D, so that taxpayer-funded subsidies to drug manufacturers do not grow faster than consumer inflation, and so that there are no “protected classes” where manufacturers can rapidly raise prices on seniors and taxpayers with impunity.
• Establishing maximum exclusivity periods for un-genericizable treatments, such as gene therapies, where a conventional generic or biosimilar market is infeasible, in effect replicating the price trajectory of biosimilar competition after a specified period of exclusivity.

Contrary to the conventional wisdom, the U.S. is not a “free market” for pharmaceuticals. The federal government strictly regulates what drugs can come to market, heavily subsidizes those that do, and mandates that private and government insurers pay for drugs regardless of their price or value. Most importantly, an array of federal laws create and enforce artificial pharmaceutical monopolies that have nothing to do with actual innovation.

It is long past time for Congress and federal regulators to engage in a systematic reexamination of these costly interventions. Affordable medicine for millions of U.S. patients hangs in the balance.

Introduction

The high price of prescription drugs imposes a significant burden on low- and middle-income Americans. U.S. prescription drug spending per capita is more than double that of its high-income peers. For those with private insurance, prescription drugs represent around one-quarter of total health spending.

Not all drugs contribute equally to the high cost of U.S. medicine. Over 79 percent of U.S. pharmaceutical prescriptions are for low-cost, unbranded generic drugs whose patents have expired. These generic medicines are subject to vigorous price competition under the Drug Price Competition and Patent Term Restoration Act of 1984, best known as the Hatch-Waxman Act.

The Hatch-Waxman Act is one of the most successful and farsighted health reforms in U.S. history, because it made the U.S. the world leader in generic drug utilization. But Hatch-Waxman has a critical weakness: it primarily applies to small molecule drugs; i.e., medicines formed from relatively simple chemical compounds that can be synthesized in basic laboratories.

As we have described in The Competition Prescription: A Market-Based Plan for Affordable Drugs, the most important driver of high U.S. drug prices is government-enforced monopoly power: that is, the degree to which the federal government restricts price competition in pharmaceutical markets. Nowhere is this problem of anti-competitive behavior more important than in biologic medicines.

Biologic drugs are much larger, with far more structural complexity, than small molecules. For example, a molecule of atorvastatin, a common cholesterol-lowering drug commonly known as Lipitor, weighs 559 Daltons (a standard measure of molecular weight). Erythropoietin, the core ingredient in a biologic drug called Epogen, weighs over 30,000 Daltons. Monoclonal antibodies, a common form of biologic drug, weigh around 150,000 Daltons. In addition, these large molecules are structurally complex. The exact configuration of large biologic molecules can change significantly in response to the surrounding chemical environment.

As a result of this complexity, and because of intense pressure from incumbent manufacturers of branded biologic drugs, the federal government has erected substantial barriers to the entrance of generic biologic drugs, or biosimilars. (The term “biosimilar” has become popularized by those who argue that generic biologic drugs are not sufficiently identical to the branded reference products.)

Biologic drugs represent fewer than 1 percent of all U.S. prescriptions, but 48 percent of net drug spending.

As a result of these barriers, a disparity has emerged between the growth of U.S. spending on small molecules vs. that on biologic drugs. Biologic drugs represent fewer than 1 percent of all U.S. prescriptions, but 48 percent of net drug spending.

According to IQVIA, between 2015 and 2019, U.S. net revenues from small molecule drugs declined by 7%, from $199 billion to $185 billion. Over the same period, spending on biologic drugs grew 52%, from $112 billion to $171 billion. In other words, from 2015 to 2019, biologic drugs represented 132 percent of the growth in net spending on prescription drugs.

Biologic drugs represent the entirety of U.S. net drug spending growth since 2014. Biologic drug spending is rising rapidly, due to regulatory barriers to competition. When traditional, small molecule drugs’ patents expire, they are subject to vigorous price competition from generic drugs; hence, overall spending on small molecule drugs is steadily declining. However, biologic drugs are not subject to the same competitive forces, leading to rapid price and spending increases. (Source: A. Roy / FREOPP analysis of IQVIA data)

The Hatch-Waxman Act created a relatively simple process for the abbreviated approval of generic small molecule drugs, whereby generic manufacturers simply had to establish that their versions of a drug had roughly the same dosage effect as the reference branded product (pharmacokinetic and pharmacodynamic studies). These studies are relatively inexpensive and straightforward to conduct; as a result, once the FDA approves generic versions of a small molecule drug, the price of the drug drops to commodity levels, making the drug near-universally affordable.

By contrast, for a long time, there was no clear regulatory pathway for the abbreviated approval of biosimilar drugs in the United States. This changed with the passage by Congress of the Biologics Price Competition and Innovation Act of 2009, enacted as Title VII of the Affordable Care Act. The BPCI Act was, in theory, supposed to be the biologic drugs’ version of the Hatch-Waxman Act, creating a streamlined regulatory system for the accelerated approval of affordable biosimilar medicines.

That has not happened.

Indeed, the sum total of federal policymaking—acts of Congress, rules issued by the Food and Drug Administration, and reimbursement policies by public programs such as Medicare—have all combined to heavily suppress the U.S. biosimilars market.

In the years before the BPCI Act became law, economists confidently predicted that in the 2010s, we would see tens of billions of dollars in savings to the U.S. health care system through the use of biosimilars. The Congressional Budget Office predicted $25 billion in savings from 2009–2018; other economists predicted savings as high as $108 billion. But from 2010 to 2019, biosimilars in the U.S. only saved patients about $1.8 billion in costs.

Americans stereotype Europe as a place where drug prices are low because of price controls. In fact, when it comes to biologic drugs, it is the U.S. that artificially inflates prices through government fiat, and Europe where vigorous competition is driving prices down.

Europe has vastly outperformed the U.S. on biologic competition

It is instructive to compare the U.S. policy approach to biosimilars to that of the European Union. Indeed, when it comes to competitive biologic drug markets, the European Union outperforms the U.S. in nearly every category. A March 2019 analysis by researchers at Morgan Stanley found that, over the three-year period encompassing 2016, 2017, and 2018, biosmilars gained a market share of 43 percent among large addressable market opportunities, compared to only 17 percent in the U.S. And the price discount for European biosimilars was 43 percent off of the brand price, compared to 32 percent in the U.S.

These figures belie the stereotype of Europe as a place where drug prices are low because of price controls. In fact, when it comes to biologic drugs, it is the U.S. that artificially inflates prices through government fiat, and Europe where vigorous competition is driving prices down.

Several factors account for why Europe has succeeded where the U.S. has—thus far—failed.

• Powerful incentives in the U.S. for increasing health spending. The uniquely inefficient structure of the U.S. health care system incentivizes rising health care prices. Medicare Part B actively incentivizes the use of expensive drugs by paying physicians more if they use costlier drugs; Medicare Part D mandates that insurers pay for certain “protected classes” of biologic drugs, regardless of their price or value. The entitlement-based design of Medicare’s mandatory spending makes it politically difficult for Congress to control spending growth. And Americans with employer-sponsored insurance are heavily removed from the price or value of the care they receive, due to the exclusion from taxation of the cost of that insurance. None of these incentives exist in Europe.
• Faster and earlier regulatory approvals of biosimilars in Europe. Today, the U.S. has approved 28 biosimilar drugs. But the European Medicines Agency has approved 61: more than twice as many. The E.U.’s lead has actually expanded over time. By 2015, the European Union had cumulatively approved 19 more biosimilars than the U.S.; by 2019, the E.U. had approved 33 more than the U.S. A big part of the problem is that the U.S. Food and Drug Administration requires costly and lengthy clinical trials from biosimilar manufacturers, far more than what is required for conventional generic drugs.

The U.S. is far behind the European Union in approving biosimilar drugs, leading to a suppression of prescription drug price competition. While the FDA has picked up the pace in recent years, with 22 approvals from 2017 through 2019, the European Medicines Agency approved 36 biosimilars over the same period. (Source: G. Girvan / FREOPP; Graphic A. Roy / FREOPP)

• European reimbursement policies incentivize price competition. While reimbursement policies for biosimilar drugs vary throughout Europe, the most successful countries have created consumer-driven incentives for patients to pick low-cost medicines without compromising on quality. For example, Demark deploys a reference pricing system in which the national health insurer will reimburse patients for 80 percent of the price of the lowest-cost version of a given biologic drug; if the patient chooses a higher-priced alternative, he or she pays the difference.
• European patent system rewards true innovations. In the U.S., pharmaceutical companies are able to obtain patents for marginal improvements of their products that do not represent real innovation. The European patent system has proven to be more immune to trolling and manipulation, enabling biosimilars to enter the market after an appropriate period of market exclusivity for the branded manufacturer. This is in large part due to a robust patent opposition process, whereby future competitors are able to challenge weak patents early in their life cycle.

All told, these policy areas — reimbursement policies, regulatory posture, and patent litigation — combine to create a U.S. biosimilar market that is far behind Europe’s. The end result is far greater cost, time, and uncertainty for biosimilar manufacturers seeking to enter the U.S. market.

The Core Problem: Monopoly Power

Distortion of monopoly power through ‘patent thickets’

As noted above, a major driver of high U.S. prices for biologic drugs is the manipulation of the patent system by manufacturers of branded biologic drugs. Because the molecular structure of biologic drugs is larger and more complex than that of small molecule drugs, branded biologic drug manufacturers have persuaded U.S. patent examiners to issue patents for marginal aspects of their drugs that do not represent true innovation, establishing a “thicket” of incremental patents that extend U.S. market exclusivity for the branded drug.

The classic example of this phenomenon is Amgen’s Epogen, one of the world’s first biotechnology drugs. Epogen is a biologically manufactured version of human erythropoietin, a naturally occurring hormone that stimulates the production of red blood cells. (Epogen became infamous for its use among professional cyclists, who found that it increased their stamina and performance.) While Epogen was first approved by the FDA on June 1, 1989, the FDA did not approve the first biosimilar to Epogen until May 15, 2018: 29 years later. In other words, while a typical branded small molecule drug enjoys around 10 years of market exclusivity before the onset of generics, Amgen received three times that amount: a monopoly worth tens of billions of dollars to Amgen.

A common joke among Wall Street investors was that, by the 2000s, Amgen was no longer a biotechnology company, but rather a “law firm with a biologic manufacturing plant.”

Why did it take so long for biosimilars to emerge for Epogen? A primary reason was Amgen’s aggressive legal strategy, in which the company filed patents for every minor tweak or new use of their drug, even if those uses or tweaks were obvious. A common joke among Wall Street investors was that, by the 2000s, Amgen was no longer a biotechnology company, but rather a “law firm with a biologic manufacturing plant.”

Most notably, in 2007, a jury in Boston blocked Swiss manufacturer Roche from launching its Epogen competitor, Mircera, in the U.S., ruling that Roche violated three of Amgen’s patents. As Andrew Pollack of the New York Times explained at the time, the three patents in question were not relevant in Europe due to “quirks” in the U.S. patent process:

The drugs are synthetic forms of erythropoietin, or Epo, a protein made by the kidneys that stimulates the body to produce more oxygen-carrying red blood cells. An Amgen scientist, Fu-Kuen Lin, isolated the human gene for Epo, allowing the protein to be produced in genetically engineered hamster cells.

The work was done in the early 1980s, and the first patent on that work expired late in 2004.

In Europe, where there was only one patent, competition is beginning. But in the United States, owing to quirks in patent law, Amgen received seven patents on the same work by Mr. Lin. Because some patents were not granted until years after Amgen applied, the patent protection could extend until 2015, longer than the 20 years contemplated by patent law. (Emphasis added.)

Patent process abuse through ‘submarining’ and ‘evergreening’

Amgen in part relied on a strategy called “submarining,” in which a branded drug manufacturer intentionally delays the filing and issuance of a patent so as to maximally extend the market exclusivity of a given drug. Prior to 1995, the term of a U.S. patent lasted for 17 years, starting from the date on which the patent was issued by the U.S. Patent and Trademark office.

Amgen and other companies took advantage of this technicality to file patents with the USPTO early on, but then delay a final decision from the agency through various procedural mechanisms. For example, Amgen gained an initial patent, issued in 1987, that preserved the exclusivity of Epogen through 2004, and then filed another patent on the same drug that was only issued by the USPTO in 1994, extending the exclusivity to 2011.

Importantly, the content of the patent application was kept secret until the patent was issued, making it impossible for others to know ahead of time if their research efforts were clear of intellectual property hurdles. This is why this strategy was called “submarining”: the patent only surfaced to the rest of the world after it had been issued.

An international agreement under the auspices of the World Trade Organization reformed these rules in 1995, whereafter the term of an issue became 20 years after the date that the patent application was originally filed. This reform diminished the value of the submarine strategy. But it left untouched another abuse of the patent system, called “evergreening.”

Evergreening is similar to submarining, except that the process takes place out in the open. Companies make minor changes to their drugs—such as to their manufacturing process or the formulation of the drug in its injectable form—get those changes approved by the FDA, and gain “patents” on the minor variations, lasting for an additional 20 years. Also, companies will often conduct clinical trials in diseases that are closely related to the one originally studied for FDA approval, and then “patent” the use of their drug in the second disease. Usually, these second or third diseases are obvious applications of the drug based on the underlying biochemistry of the disease, but the USPTO often grants the patents anyway. Alternatively, a company will develop lab tests that relate to a drug’s use in clinical practice.

Indeed, there is evidence to suggest that AbbVie intentionally made marginal tweaks to its manufacturing process solely for the purpose of generating new patents that could extend Humira’s U.S. market exclusivity.

Today, the world’s best-selling drug is AbbVie’s Humira, with $15 billion in U.S. sales in 2019 and $5 billion internationally. AbbVie has successfully replicated Amgen’s strategy of creating a massive thicket of marginal patents in order to block biosimilar competitors. Humira was first launched in 2002, and Humira’s core patents expired in December 2016.

But in the U.S., relentless patent litigation by AbbVie on marginal issues has forced most biosimilar manufacturers to delay their U.S. launches until 2023: a windfall for AbbVie of tens of billions of dollars. (Biosimilars launched in Europe in October 2018.)

Indeed, there is evidence to suggest that AbbVie intentionally made marginal tweaks to its manufacturing process solely for the purpose of generating new patents that could extend Humira’s U.S. market exclusivity. Many of these patents were filed in 2015 and 2016. Indeed, in a 2015 investor presentation, AbbVie boasted that the mere act of litigating these marginal patents would delay the launch of biosimilars by “4 to 5 years.” Biosimilar manufacturers say that the AbbVie strategy has increased the cost of patent litigation from around $10 million for a typical drug to more than $100 million for AbbVie’s Humira.

The European Patent Office’s opposition procedure helps to clear out these thickets of marginal patents, enabling biosimilars to enter the market after core composition of matter patents have expired on the reference branded product. For this and other reasons, Humira biosimilars have been on the market in Europe since 2018, and now have majority market share.

Broken U.S. biosimilar policies cost patients more than $24 billion. By comparing E.U. biosimilar performance from 2015–2020 with that of the U.S., and projecting out biosimilar competition in both regions from 2020–2029, we estimate that for eight drugs—Neulasta, Avastin, Lantus, Herceptin, Rituxan, Enbrel, Remicade, and Humira—the net cost to U.S. patients of excess biotech monopolies is greater than $24 billion. Note that this estimate is an undercount, because it only comprises the 8 drugs listed above, and not others.

The broken U.S. biosimilar market is a $30 billion lost opportunity

In order to assess the cost to patients of the gap between U.S. and European biologic drug competition policy, we estimated the excess spending in the U.S. on eight major biologic drugs. We estimate that the excess cost to U.S. patients on those eight drugs is $24 billion over the 2015–2029 time period.

Inclusive of all off-patent biologics, we conservatively estimate a total net cost to U.S. patients of $30 billion over the same time frame. Even this figure is an undercount, because it assumes that all manufacturer rebates to pharmacy benefit managers are passed onto patients in the form of lower prices.

To arrive at these estimates, we first examined biosimilar launches in Europe prior to 2020 for the eight drugs—Neulasta (pegfilgrastim), Avastin (bevacizumab), Lantus (insulin glargine), Herceptin (trastuzumab), Rituxan (rituximab), Enbrel (etanercept), Remicade (infliximab), and Humira (adalimumab)—by launch date, sales volume, and market share; and applied that information to the U.S. markets to estimate how much a European-style policy regime could have reduced U.S. biologic drug spending prior to 2020.

We then developed projections of European sales volume and market share for the 2020–2029 period, and compared those projections to comparable projections in the U.S. market, to calculate how much U.S. biologic drug spending would be reduced in future years if the U.S. adopted European-style policies.

We obtained sales and prescription volume data from Symphony Health; net revenue data from company quarterly and annual reports; Average Sales Price data from the Centers for Medicare and Medicaid Services (CMS); and additional reference data from equity research published by David Risinger, Matthew Harrison, and colleagues at Morgan Stanley.

Notably, our analysis does not take into account the potential savings from the difference between biosimilar performance in the U.S. vs. the E.U. for a number of drugs going off-patent in the 2020–2029 period, including Keytruda (pembrolizumab), Lucentis (ranibizumab), Opdivo (nivolumab), Repatha (evolocumab), Soliris (eculizumab), Yervoy (ipilimumab), and Eylea (aflibercept), among others.

The broken social contract for biologic prescription drugs

Policymakers in both Congress and the executive branch have important roles to play in increasing the level of competition in the U.S. biologic prescription drug market. Fortunately, we already have a framework for reform: the Hatch-Waxman approach to small molecule drugs.

The Hatch-Waxman Act balanced the economic interests of multinational pharmaceutical companies, who seek high prices and monopoly profits, and those of patients and consumers, who seek affordable treatments at low, competitive prices. 

Peter Kolchinsky

 has described this balance as “the biotech social contract”: the idea that it is appropriate for pharmaceutical companies to extract high monopoly prices while a drug’s patents remain valid, because once those patents expire, the drug is essentially free for the foreseeable future. In this way, innovators are rewarded for developing new drugs.

However, the notion of a “biotech social contract,” even in theory, is imperfect, because it does not explicitly establish a limiting principle to otherwise infinite pricing power for patented drugs. When we say drug companies should be able to charge high prices for new drugs, because of a social contract, how high should those prices go? $1,000 per dose, or $1,000,000? Should manufacturers be able to charge whatever they want, or should market- or non-market considerations take precedence?

Most importantly, the social contract does not actually exist today for the biologic drugs that most biotechnology companies develop, because, as noted above, biologic drugs are not covered by the Hatch-Waxman statute, but rather by the Public Health Service Act, as amended by the Biologics Price Competition and Innovation Act of 2009. As a result of intense drug industry pressure, the biosimilar regime mandated by Congress and federal regulators differs from Hatch-Waxman in critical ways, further damaging the already broken biotech social contract:

• Government-mandated 12-year monopolies. The BPCI Act imposes an automatic monopoly of 12 years on any FDA-approved biologic drug, regardless of whether or not the drug has any patents to its name. By contrast, the FDA only awards 5 years of automatic market exclusivity to unpatented small molecules. The difference is entirely arbitrary. The U.S. has worsened the problem by making the 12-year auto-monopoly a key sticking point in its trade negotiations with the Pacific Rim and with Canada and Mexico: demanding that other countries also adopt the same rule, regardless of underlying intellectual property. Those who favor an innovative pharmceutical market should oppose mandatory monopolies for which innovation is absent.
• Extensive clinical trial requirements for biosimilars. The BPCIA imposes a costly burden on biosimilar manufacturers by requiring clinical trials “sufficient to show that…the risk in terms of safety or diminished efficacy of alternating or switching between use of the biological product and the reference product is not greater than the risk of using the reference product without such alternation or switch,” a threshold not required of small molecule generics. These clinical trials that are required of biosimilars take a long time to enroll, because it is hard to find patients who are especially interested in joining a clinical trial under which they may be given a drug which is — at best — equivalent to a well-established brand. It can take two years or more to complete such trials.
• Lack of automatic substitution at the pharmacy level. Due in part to the much higher FDA standard for interchangeability between a branded biologic and a biosimilar, most biosimilars are not automatically substituted for branded drugs at the pharmacy. Such automatic substitution is a key driver of generic uptake under Hatch-Waxman.

More onerous structure for patent litigation. As noted above, manufacturers of branded biologics have been asserting a much broader patent estate over their drugs, leading to an order of magnitude higher costs for patent litigation compared to small molecules. The thicket of patents leads to a much higher level of uncertainty for biosimilar manufacturers. AbbVie, the manufacturer of Humira, is asserting 75 different patents in its litigation with biosimilar manufacturers. They only have to win once to torpedo the biosimilar companies’ costly up-front investments in their competing drugs.

• Additional business risks. Biosimilar manufacturers face a host of additional business risks which, when combined with the above policies, make it extremely difficult to compete in an open marketplace. For example, some branded biologic manufacturers have deployed “rebate walls,” or financial incentives to pharmacy benefit managers, to dump their products onto the market in a way that makes it impossible for biosimilar companies to recoup their costs. Also, biologic drugs are inherently costlier to manufacture relative to small molecules. While it is appropriate for the FDA to ensure that manufacturers adhere to best practices, the higher regulatory standard for biologic drugs compounds the other obstacles described above.

While biosimilar medicines are beginning to enter the U.S. market, for the reasons described above, they have not—and will not—achieve the kind of rapid adoption and robust price competition that small-molecule generics have, without substantial reforms to the BPCI Act.

The coming problem of permanent biotech monopolies

It is bad enough that biologic drugs enjoy unreasonably long, government-enforced monopolies that enable runaway price growth. But a new class of gene-based therapies may not be genericizable, even under a reformed system.

For example, in 2017, Spark Therapeutics, a biotechnology company, received FDA approval for Luxturna, a gene therapy that treates a rare form of blindness called biallelic RPE65 mutation-associated retinal dystrophy, a disease affecting approximately 7,000 individuals in the industrialized world. Luxturna works by using a genetically engineered virus to insert functional versions of the RPE65 genes into the retinas of patients with mutated, non-functional versions of the genes.

Such genetically engineered viruses are simply not contemplated by either Hatch-Waxman or the BPCI Act. Functionally, they resemble medical devices more than they resemble conventional pharmaceutical treatments. Because the first generation of gene therapies treat extremely rare diseases, there is unlikely to be a meaningful “biosimilar” market for such treatments, even though Spark is charging $850,000 for a one-time treatment.

Policy Recommendations

Restoring price competition to the biotech industry

It is essential that we restore price competition to biologic drugs and get rising spending under control. If we do not, millions more risk becoming uninsured as health coverage becomes increasingly unaffordable. There are a number of meaningful steps Congress can take to bring small molecule-like competition to the biologic drug market.

Enable biosimilar manufacturers to license brand manufacturers’ intellectual property without treble damages. Today, if a biosimilar manufacturer launches a drug without being absolutely certain that it is free and clear of all branded IP, under federal law it must pay damages equivalent to three times the lost revenue for the branded company. Congress should eliminate this penalty for non-composition-of-matter patents, and replace it with a requirement that branded manufacturers and biosimilar manufacturers negotiate a royalty for the relevant IP. If the branded and biosimilar manufacturers cannot agree, the matter should be referred to an arbitrator.

Rationalize biosimilar interchangeability. The single biggest driver of generic utilization for small molecules is automatic substitution at the pharmacy level. If a physician writes a prescription for Lipitor, a cholesterol-lowering drug manufactured by Pfizer, pharmacies are able to automatically substitute a generic version of atorvastatin—the identical drug—without need to gain formal approval from the physician or the patient. This is absolutely essential for moving a market to low, commodity-level prices.

When patient and/or physician approval is required to substitute a generic or biosimilar product for the identical branded drug, generic or biosimilar manufacturers must build costly sales forces and marketing campaigns to persuade doctors and patients to adopt their version of the drug.

Today, the FDA requires biosimilar manufacturers to undertake costly clinical trials to prove that their drugs are interchangeable with branded (reference) biologics. Notably, the Hatch-Waxman requirement is far simpler: small molecule generic manufacturers simply need to show that their active pharmaceutical ingredients enter the human body at roughly the same rate and proportion as with the branded drug, without the need to do large, costly clinical trials to demonstrate efficacy and safety.

Branded manufacturers of biologic drugs argue that the complexity of large molecules requires a stricter regulatory standard. But the standard for biosimilars should be no different than that for branded biologic manufacturers that set up a new manufacturing facility for an existing drug. By rationalizing the standard for interchangeability, biosimilars will be able to enter the market with a reduced up-front financial risk while still ensuring patient safety.

Encourage biosimilar adoption. A bill reported out of the Senate Finance Committee in 2019, the Prescription Drug Pricing Reduction Act, would increase doctors’ commissions from 4.3% to 8% for prescribing biosimilars instead of the branded biologic. The Acting to Cancel Copays and Ensure Substantial Savings for Biosimilars Act (ACCESS), sponsored by Rep. Scott Peters, would eliminate co-pays for patients who choose a biosimilar over a branded biologic in Medicare Part B.

Eliminate patent trolling through a robust opposition process. As the examples of Epogen and Humira show, U.S. biotechnology companies are very good at manipulating the patent system in order to gain lengthy, government-enforced monopolies. They do this by gaining issued patents for trivial tweaks to their core drugs: tweaks that do little to nothing to improve patient efficacy or safety, but a lot to extend market exclusivity. This practice is often called patent trolling.

In Europe, as noted above, patent trolling is heavily curtailed through a patent opposition process, whereby potential competitors have the ability to litigate patents shortly after they have been issued, thereby clearing away patents that do not represent genuine innovation.

In 2011, at the urging of Silicon Valley technology companies that had become frustrated with patent trolling, Congress passed the America Invents Act, which significantly enhanced the ability of market participants to weed out patent trolls through inter partes review, or IPR.

While many hoped that IPR would bring a European-style opposition process to the U.S. pharmaceutical market, this has not happened in practice. Notably, investor Kyle Bass built an organization called the Coalition for Affordable Drugs that sought to invalidate over 30 pharmaceutical patents covering 14 different drugs using the IPR process. He only succeeded in invalidating patents for three of the drugs, in part due to an aggressive lobbying campaign from the pharmaceutical industry.

Improving the U.S. patent opposition process does not require an act of Congress. Patent examiners at the U.S. Patent and Trademark Office should apply stricter scrutiny to patent applications for pharmaceutical methods of use and manufacturing processes, to ensure that minor, obvious improvements do not lead to additional 20-year monopolies. In addition, more research on the pernicious effect of patent trolling can aid the members of the USPTO’s Patent Trial and Appeal Board in removing non-innovative patents.

Aligning the BPCI Act with Hatch-Waxman. One far-sighted element of the Hatch-Waxman process for approving generic drugs is that generic manufacturers generally know ahead of time which branded drug patents they must avoid in order to legally launch in the United States, because key patents are publicly listed by the federal government. By contrast, biosimilar manufacturers are unable to gain visibility into the branded patents they may be infringing. Indeed, branded biologic manufacturers are often able to file new patents in response to the activity of biosimilar manufacturers, who are required to notify branded companies of their work under the Biologics Price Competition and Innovation Act. The BPCI Act should be modified to work identically to the Hatch-Waxman Act for small molecules.

Another arbitrary difference between Hatch-Waxman and BPCI is mandatory exclusivity. Under Hatch-Waxman, any new chemical entity that gains FDA approval is automatically granted 5 years of market exclusivity, regardless of the quality of its intellectual property. For biologic exclusivity, under the BPCI Act, that exclusivity lasts 12 years—an absurdly long time for non-innovative drugs to gain government-enforced monopoly status. Congress should reduce mandatory exclusivity for U.S. biologic drugs to no more than 5 years. Rep. Bruce Westerman’s Fair Care Act would accomplish these goals. Rep. Jan Schakowsky’s Price Relief, Innovation and Competition for Essential Drugs Act (PRICED) would reduce the exclusivity period to 7 years.

In 2019, Sens. John Cornyn and Richard Blumenthal of the Senate Judiciary Committee introduced the Affordable Prescriptions for Patients Act, which would limit the number of patents a branded biologic manufacturer could use to block competition, much as Hatch-Waxman requires small molecule patents to be listed in the FDA’s Orange Book in order to be deployed to block competitors. By making these patents public, generic and biosimilar manufacturers can work to engineer their products around those patents. If they do not know what patents the branded manufacturer intends to assert, it becomes impossible to develop competitors.

Eliminate anti-competitive ‘protected classes’ in Medicare Part D. When the Medicare Modernization Act of 2003 created Medicare’s retail prescription drug benefit, also known as Part D, Congress required that participating Part D insurers pay for six “protected classes” of drugs regardless of their price or clinical value: antidepressants, antipsychotics, anticonvulsants, immunosuppressants for treatment of transplant rejection, antiretroviral drugs (such as those used to treat HIV), and anti-cancer drugs.

While this may seem like an attractive policy for patients, the actual result is profoundly unattractive. Branded drug manufacturers can raise their prices as much as they want, knowing that insurers have no choice but to pay those prices. Most of the higher premium costs are passed onto seniors and taxpayers.

Both the Obama and Trump administrations attempted to reform the protected class provision, but backed away after industry lobbying. The Department of Health and Human Services should move forward with plans to eliminate protected class status for any drug that raises prices faster than the consumer price index (CPI-U).

Replace inflationary pricing policies in Medicare Part B. Today, the Medicare Part B program powerfully incentivizes higher manufacturer prices, by rewarding physicians for prescribing costlier drugs, in the form of a 4.3% commission on a drug’s average selling price, or ASP. As we describe in What Medicare Can Learn From Other Countries on Drug Pricing, Congress and the U.S. Department of Health and Human Services should replace the ASP+4.3% formula with a reimbursement rate that is aligned with the international market price, such as the “most favored nation” price, for a given drug paid for by Medicare Part B. In September 2020, President Trump proposed such a system for both Medicare Parts B and D.

Level the playing field between drug manufacturers and payers. Certain northern European countries, like Germany and Switzerland, grant an antitrust exemption to insurers at the regional level who can band together to jointly negotiate prices with monopoly pharmaceutical companies. This balances the market between the monopoly supplier of a given medicine and the otherwise fragmented payer community. In 2019, then-Rep. Mark Meadows introduced a bill, the State-Based, Market-Oriented, Prescription Drug Negotiations Act, to achieve this goal.

Constraining biotech monopolies where competition is absent

In the absence of the above reforms—or even, in some cases, in their presence—branded biological drug manufacturers will take advantage of government-enforced monopolies to raise prices at double-digit rates.

Cap manufacturer subsidy inflation in Medicare Parts B and D. Medicare Parts B and D should not grow their reimbursement rates to monopoly drug manufacturers faster than the rate of general inflation (CPI-U). Doing so would keep seniors’ Medicare premiums in check and also save taxpayers billions of dollars per year. The Senate Finance Committee bill from 2019, the Prescription Drug Pricing Reduction Act, contemplates just such a move.

Maximum exclusivity periods. Where biosimilar competition is impossible or unworkable, Peter Kolchinsky has proposed directly mandating significant decreases in the prices of biologic products, after a certain period of exclusivity has concluded (e.g. 10 years). Such an approach is likely unavoidable for gene therapies, and as Peter Bach and Mark Trusheim suggest, we may need to contemplate such policies for other biologic drugs where competition proves impossible.

Restoring a free market for medicines will make them affordable

Contrary to the conventional wisdom, the U.S. is not a “free market” for pharmaceuticals. The federal government strictly regulates what drugs can come to market, and heavily subsidizes those that do. Regulations increase the cost of bringing drugs to market, and restrict competition for those already available. Subsidies incentivize manufacturers to raise their prices, because they know that patients will not directly feel most of the effects of those price increases.

Most importantly, an array of federal laws create and enforce artificial monopolies that have nothing to do with actual innovation. Not all patents represent an equal amount of innovation, and yet all patents impose the same 20-year federal monopoly. Other laws—including the Biologics Price Competition and Innovation Act, the Orphan Drug Act, and the Food, Drug, & Cosmetic Act—impose additional monopolies and increase patient costs.

It is long past time for Congress and federal regulators to engage in a systematic reexamination of these costly inefficiencies. Affordable medicine for millions of U.S. patients hangs in the balance.