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The Follow-on Biologics Market

Since the debate began several years ago, the policy and politics of follow-on biologics (FOB) have been driven by assumptions and projections of the anticipated market. In my opinion, there has been a lot of fuzzy thinking about what type of companies will be players and how they will position themselves. The Federal Trade Commission report, released last week, is just the latest illustration.

My own analysis suggests there will be multiple market entrants vying for market share and creating price competition. It will take some patience until we get there, but it will happen. In this environment, it will be important to stimulate investment in new, innovative biological products. Without reasonable time to recoup costs, new product development will slow.

I started to think about the nature of the FOB market last year when predictions about FOB’s started to jar my sensibilities. The FTC’s report is just a larger platform for advancing questionable analysis. There are two economic principles that are central to understanding the issues.

First concept: shadow pricing. The first generic drug is usually priced about 20% to 30% below the innovator product. The innovator doesn’t compete on price because they know that the generic will be continuously re-priced to stay the same increment below the innovator’s price. This is called “shadow pricing.” As each new entrant joins this market, competition erodes this structure until prices fall significantly. FTC believes that there will only be one or two competitors in each segment and shadow pricing will limit price competition.

Second concept: barriers to entry. Generally speaking, the more it costs to be a part of a market, the fewer players will enter it. At this moment, generic drugs have a low barrier for entry. In contrast, the FTC believes that there will be significant barriers to entry in the generic biologics market. Only the largest biologic products will draw any competition. And only a handful of companies will develop FOB’s because of the expense of putting together a safe and effective product, combined with the $250M to $1B estimate for a new facility to make these products.

There are two significant errors in the FTC analysis. First, FTC fails to recognize the generic drug market evolved into what it is today because of the way it was structured in 1984. The key Hatch-Waxman trade-off–additional patent protection for market access for generics—has worked extraordinarily well. If FTC had made the same comments in 1984, there would be neither an innovative pharmaceutical industry nor a booming generic drug industry today.

Second, FTC fails to account for the likely impact of innovation in the FOB marketplace. For example, more refined methodologies will evolve for characterizing biologics. Ways will be found to build facilities less expensively and to streamline production.

FTC states that lack of interchangeability and direct substitution will limit market penetration for FOB’s. The problem with this viewpoint is that the market is already saying otherwise. Teva and Sandoz (Novartis’ generic subsidiary) will be in the FOB market from the beginning. Merck, J&J, Pfizer, Amgen and others are positioning themselves to join within a few years. All are well-financed and have experience competing in crowded markets. Why would they commit billions to a market that can’t be penetrated?

Over time, innovation will bring costs down. Competition will bring prices down. It seems unlikely that shadow pricing and high barriers to entry will characterize the FOB market in ten years.

My vision of a multi-player FOB market with price competition does not answer the question: how much intellectual property protection is needed for innovators? It does say the FTC is wrong to argue for none.


FTC’s testimony to the House Energy and Commerce Committee is at:


3 Responses to “The Follow-on Biologics Market”

  1. Joff says:

    Steven: New product development for unmet need will indeed be at risk if incentives are inadequate. Why so? Here are some specifics:

    * Some therapies will never be developed for addressable diseases given current orphan incentives.
    * Prospective commercial returns for orphan biologics are much lower than for other biologic drugs due to the significantly smaller addressable patient populations. Future pricing pressures will reduce incentives further.
    * Many of the larger orphan opportunities have already been addressed with approved and effective therapies
    * Greater commercial risks in remaining markets include diseases with high morbidity where there is little ability to understand a drug’s impact on life expectancy, a key driver of commercial return, prior to pivotal trials (after much of the investment has been made)

    Encouraging innovation for new biological products, especially for rare disease, requires longer exclusivity periods to compensate innovators for increased dvelopment and commercial risks in these challenging markets. Your question about intellectual property protection is part of the equation.

  2. sleestak3 says:

    As long as FOB manufacturers will be required to do some form of Phase III clinical trials (which they almost certainly will be required to do), barriers to entry will still be pretty high. Small-molecule generics have low barriers to entry because they are excused from these trials. Because a large protein cannot be fully characterized…it can not be guaranteed to be the same as the innovator…a follow-on cannot be given the same pass. At some point in the future, I imagine that we will be able to fully characterize proteins. But technology allowing us to do this is much more than ten years away.

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