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Rx for an Industry.

As Biotech Drug Prices Surge,
U.S. Is Hunting for a Solution

Proposals Include New Role For Generics; Let Uncle Sam Bargain; Streamline Trials
Lilly: Don't Kill Incentives

By GEETA ANAND
Staff Reporter of THE WALL STREET JOURNAL
December 28, 2005; Page A1

The most innovative part of the drug industry is generating its most explosive prices.

Spending on specialty pharmaceuticals -- biotechnology drugs and other expensive medicines prescribed by medical specialists -- is growing twice as fast as traditional prescription drugs, according to Medco Health Solutions Inc., one of the largest pharmacy benefits managers. Insurers project it will grow by between 20% and 50% annually. It reached $42 billion in 2004 and will rise to almost $69 billion next year, when spending on specialty pharmaceuticals is projected to make up 25% of the nation's pharmacy bill, according to Health Strategies Group, a New Jersey consulting firm.

Employers and the government, which bear most of the cost for these medicines for diseases like cancer, rheumatoid arthritis and multiple sclerosis, are struggling to pay. They're increasingly making patients pay up to 50% of the costs of treatments that can run several thousand dollars to $600,000 per patient annually. These "blunt instrument" approaches are spreading and will ultimately take these life-saving medicines out of reach of the average American, says Scott Howell, an internist who serves as vice president of pharmacy affairs at Highmark Inc., a Blue Cross and Blue Shield company in Pittsburgh.

The drug industry explains the soaring prices by pointing to the high cost of developing medicines and the expensive manufacturing process for biotechnology drugs. The U.S. has also created a protected market for the makers of these drugs, allowing some of them to make gross profits in excess of 90% long after patents expire. Besides any patent protections, new treatments for orphan diseases -- affecting 200,000 or fewer patients -- are granted seven years of market exclusivity. And competition is limited long after patents or other monopolies expire because the government doesn't allow generic versions of biotechnology drugs.

"It would be a national catastrophe if they can only be given to the wealthy," says Sen. Orrin Hatch, the Utah Republican who is writing legislation aimed at reducing prices by fostering competition in the biotechnology marketplace.

Here are four proposals for lowering these costs that Congress, the industry and patient advocates are working on:

Create a path for generic biotech drugs

Sen. Hatch is drafting legislation that would create rules for the Food and Drug Administration to approve generic biotechnology drugs after patents on the original products have lapsed. Barr Pharmaceuticals Inc., one of the largest makers of generic pills, has been lobbying legislators and business groups in support of the legislation, which it hopes will be introduced next month.

"It is the next step of the Hatch-Waxman Act," says Rep. Henry Waxman, the California Democrat who teamed up with Sen. Hatch in 1984 to write the law that transformed the generics industry for typical drugs, which are mostly made by mixing chemicals. The law doesn't apply to biotechnology drugs, which are usually proteins produced in live cells, because few such medicines existed when the law was written. Under the Hatch-Waxman Act, generic competitors of traditional pills need only prove their products have the same active ingredients as the branded version. They bring their drugs to market without spending millions on new clinical trials or on marketing, so the products compete on price rather than branding. Competitors of off-patent biotechnology drugs must conduct the same laboratory and clinical trials required for new medicines and must market the drug as a different product, which limits the competition and the price savings.

In a recent speech to makers of generic drugs, Sen. Hatch said the absence of a comparable route for biotechnology drugs, "essentially acts as a second patent to keep off-patent biological products off the market." Without competition, biotechnology prices often remain high for years after patents and other government-granted exclusivities expire. For example, Genzyme Corp.'s Gaucher Disease drug, Cerezyme®, is priced at $200,000 for the average patient today, 14 years after the first version came to market and four years after the expiration of its orphan-drug exclusivity.

Amgen Inc., one of the biggest biotechnology firms, has led the industry's lobbying effort to prevent an abbreviated route to market for biotech generics. The company emphasizes that biotechnology drugs are far more complex than typical pills and a slight change in manufacturing can produce a medicine with different results in human beings. "We need to have full tests to protect patient safety," says Kevin Sharer, chief executive of Amgen.

Supporters of clearing a path for generics note that the FDA has allowed biotech companies to change their own manufacturing processes without new trials. For example, Biogen Idec Inc., after a fallout with a business partner that manufactured the multiple sclerosis drug Avonex for clinical trials, changed to a different manufacturing process when it brought the drug to the market. The FDA required the company, based in Cambridge, Mass., to conduct extensive laboratory testing to demonstrate the two versions were therapeutically equivalent but didn't require additional clinical trials. James Green, head of preclinical and clinical development at Biogen, says the new product ended up being superior, causing less of an immune response in patients, but "it could very well have gone the other way." He believes some small clinical trials are prudent but doesn't think full-scale clinical trials are necessary.

The FDA, at a workshop last year, brought together academic scientists, government officials and members of both the branded- and generic-drug industry to try to hash out a consensus on how generic biotechnology drugs should be approved. For months, patient advocates, legislators and companies have been awaiting a document from the FDA cataloguing the scientific tools available for approving generic versions of biotechnology drugs.

Scott Gottlieb, deputy commissioner for medical and scientific affairs at the FDA, says the document has been delayed because of its complexity but that the agency is close to completing it.

Give government negotiating power

President Bush signed legislation in 2003 expanding the Medicare program to pay for prescription drugs, starting in 2006. Lobbied by the drug industry, Congress specifically barred the government from negotiating the price of the medicines

Many Republicans and Democrats in Congress have introduced legislation this year to remove the prohibition on the government haggling with companies over price. The legislative proposals have failed so far.

In November, Sen. Olympia Snowe, the Maine Republican, and three other legislators proposed the change in a bipartisan amendment to the Senate budget bill. It garnered a majority of votes but not the 60 needed to pass.

Rep. Waxman predicts Congress will be more receptive to empowering government to negotiate drug prices next year, as the cost of the drug benefit mounts. The new benefit goes into effect next month and already the Bush administration's price estimate has escalated from $400 billion over the next decade to $720 billion.

The Republican leadership remains opposed to such a change, echoing drug-industry concerns that government would exert too much of an influence on prices. Sidney Taurel, chief executive of Eli Lilly & Co., argues government would push prices down so far that it would kill profit incentives vital to innovation. But some current and former drug-industry officials increasingly acknowledge that finding a way to bring biotechnology drug prices down over time is important. Daniel Vasella, chief executive of Novartis AG, says he doesn't advocate government controls on pricing but points out that Japan's system of setting prices of new drugs relatively high and then lowering them over time forces drug companies to keep innovating and coming up with new drugs.

"Government negotiates the prices of toilet seats and everything else it buys. Why shouldn't it be able to negotiate the price of medicines?" asks Michael Raab, who helped launch Genzyme's biggest product, Cerezyme®, and is now a partner at venture firm New Enterprise Associates.

Create federal agency for assessing drug value

Federal regulators scrutinize a drug's safety and effectiveness. But they never address whether those benefits are commensurate with the price. In other words, would patients be better off taking a cheaper alternative?

One possible solution is the establishment of an independent federal agency for assessing the value of drugs, says Alan Garber, head of the Center for Health Policy at Stanford University and chairman of the Medicare Coverage Advisory Committee, which makes recommendations on which drugs and procedures government should pay for. Rep. Waxman says he plans to push Dr. Garber's idea in Congress because "the fact that we don't have enough information allows drug companies to promote supposed benefits of new expensive drugs over older, cheaper, better drugs."

Both hospitals and insurance companies try to evaluate the costs and benefits of new drugs and treatments. But all of these efforts are piecemeal and many studies are suspected of being biased because they are sponsored by manufacturers promoting products, or insurers trying to contain costs.

A model for a systematic, independent alternative, is the United Kingdom's National Institute for Health and Clinical Excellence, which goes by the acronym NICE, says Dr. Garber.

NICE, an arm of Britain's national health system, doesn't have the authority to mandate what doctors prescribe, but its recommendations are influential. The agency has reviewed 93 drugs since 1999. In eight cases, it advised doctors to stop prescribing treatments, judging that the cost exceeded the benefits. In 57 cases, it recommended restricting use of drugs. In 28 cases, the agency encouraged more use of drugs, including Lilly's antipsychotic drug Zyprexa, even though they cost more than older medicines.

Such information could be a tool for patients and insurers to help negotiate prices of specialty medicines.

Dr. Garber points to Erbitux, a new colorectal cancer drug, which came to market priced at about $38,000 for a four-month treatment, or $114,000 annually, when in early clinical trials it extended the average patient survival by only a few weeks or months. In contrast, Gleevec, a drug for a different cancer, has been shown to extend patients' lives for years, and is priced at $37,000 annually at the recommended dose. Bristol-Myers Squibb Co., which co-markets Erbitux, declined to comment.

Drug-industry executives are wary. Mr. Taurel, Lilly's chief executive, says he hasn't had a bad experience with NICE, but he fears "in the hands of people who control the drug budget, it could be used to deny access to innovation."

Reduce cost of developing drugs

The FDA has been holding meetings with scientists from universities and drug companies to lay the groundwork for making clinical trials shorter, cheaper and more effective.

Fred Hassan, chief executive of Schering-Plough Corp., says "improving the science of drug development and drug regulatory review" is vital. "In many industries, the cost of production goes down every year," he notes, but in drug development it keeps getting more expensive.

Despite enormous advances in understanding biology, it takes roughly the same amount of time today as it did 20 years ago to bring a new drug to market, according to Lilly. Companies follow essentially the same prescription for conducting clinical trials for proving safety and efficacy that they did in the 1950s. Today, the process costs about $200 million per drug, the company says.

The FDA has created selective short-cuts in some disease areas. In the 1990s, when the gay community was being decimated by AIDS and virtually no treatments existed, the FDA approved medicines based on abbreviated clinical trials. Many cancer drugs are approved based on shorter trials through what is called the FDA's "fast track" avenue for medicines for life-threatening conditions with few other options.

Companies making drugs for extremely rare diseases are lobbying Congress to legislate a similar, shorter route to market for their medicines, arguing that development costs push prices stratospherically high because they must recoup their investment through sales to such a small number of patients.

Emil Kakkis, senior vice president of business operations at BioMarin Pharmaceutical Inc., wants Congress to direct the FDA to approve drugs for "ultra orphans," diseases afflicting perhaps fewer than 2,000 people in the U.S., based on fewer, smaller trials. His Novato, Calif., company, in a joint venture with Genzyme, brought to market in 2003 a treatment he developed for the rare genetic disease, mucopolysaccharidosis-1CQ, or MPS-1, at a cost of about $175,000 for the average patient. He says the joint venture could have sold the drug for far less if the FDA had approved it based on encouraging results of a 1998 clinical trial in 10 patients.

But the FDA asked BioMarin to conduct a second trial. "When we were finished, it had cost us more than $100 million to develop the product," which is estimated to affect fewer than 4,000 people in the developed world, he says.

The FDA's Dr. Gottlieb says he can't comment specifically on BioMarin's application but adds the FDA's efforts to improve clinical-trial design should reduce development costs for all medicines. "If we could develop better science, there could potentially be smaller trials," not just those for ultra-orphan diseases but also for those affecting larger populations, he says.

Write to Geeta Anand at geeta.anand@wsj.com