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Follow-on biologics stymie FDA

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Esoteric, but important

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In a panel meeting that ended yesterday, the FDA began its exploration of how to approve generic biologics. This is a big issue given the retail price of many biologics are particularly susceptible to price competition. These are often the most expensive drugs available, running $20,000-$40,000 per year or per treatment course. Insurance companies and government payers are eager to see generics arrive on the market to force down these prices.

With a small molecule drug, slight differences between a generic and the original do not usually amount to a change in patient outcomes. With biologics, their specificity means small changes may completely alter the patient outcome. Herein lies the problem.

The process of creating generics for non-biologics is relatively simple. Molecular structure for these small molecule drugs is very well understood and, therefore, easy to replicate. Manufacturing is very straightforward. Mechanics of the drugs' behaviors in the body are typically also well understood. Simple clinical trials to prove the generic acts the same in the body, plus a boatload of scientific and manufacturing data, are sufficient to approve a generic version.

Contrast that to the biologics. While targets are well-understood, the structure of the protein itself rarely is. Manufacturing is intensely complicated, with a recurrent problem of keeping consistency between manufacturing lots. This makes creating an exact duplicate of the protein from scratch exceptionally difficult. Rarely are the mechanics of the drugs' behaviors well understood, even though scientists often know very well what these drugs attack, where they attach, or what they block.

This issue was brought to a head when Sandoz, a subsidiary of Novartis (NVS:NYSE), was turned down by the FDA for a humanized growth hormone product. The FDA acknowledged Sandoz's application was complete, but cited "uncertainty regarding scientific and legal issues" in the "no-action letter" to Sandoz. Commentary by the FDA shows the agency is not even sure they have legislative authority to approve generic biologics.

The FDA is not the only agency grappling with this issue. The EU is wrestling with the problem as well, though they are farther along in the process. The EU Parliament passed legislation that seems to imply generics must perform a complete set of clinical trials in order to achieve approval. The European Medicines Evaluation Agency (EMEA, the EU's version of the FDA) gets the final say, however, as the typically generic legislation requires the EMEA to fill in considerable blanks.

In the initial FDA panel, nothing much happened. This is good for manufacturers of humanized growth hormone and recombinant insulin, among the first biologics to come off patent and be exposed to generic competition. If I was handicapping this process, this is what I'd expect:

• 1H-2005: Second FDA panel meeting to explore the issue.
• 2H-2005: Either a formal FDA Advisory Panel meeting to set internal FDA policy or an FDA request for authorizing legislation to Congress.
• 1H-2006: If the FDA decides they can do this without authorizing legislation, rules for generic biologics would go into effect, starting the clock for anyone who wants to create these drugs.
• Late 2006/early 2007: Congressional authorization of FDA legislation. This would likely still require the FDA to adopt rules, adding 3-6 months to when final rules would be published.

As you can see, we're likely some ways off before we see generic biologics. This is an issue worth watching, however, as generic competition will affect margins considerably for these drugs. For the next couple of years, however, biologics producers are likely to get a free pass - at least in the U.S. - even if their drugs come off patent.

No positions in stocks mentioned.

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