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The fundamental tradeoff of intellectual property rights–like patents and copyrights–is that the inventor gets a government-protected monopoly for a period of time, as an incentive for innovation, but then the innovation passes into the public domain. For example, this is the moment when generic equivalents of pharmaceuticals can start competing with brand-name drugs.
The period when a lucrative invention shifts into the public domain is primed for politics and strategy, as the incumbent firm tries to hold on to its leading competitive position. In one famous example, the US Congress passed in 1998 what became known as the “Mickey Mouse Protection Act,” which extended copyright protection for Mickey and many lesser-known creations to last for 95 years–an extension of 21 years from the previous rule. A few decades ago, when generic drugs started to take over from previously patented drugs, there was a storm of litigation and antitrust action around questions like whether generics had to go through similar testing for safety and efficacy by the Food and Drug Administration, and how to judge whether a generic drug was the same–or perhaps just a little different–than the previously patented drug.
Now, 91% of US prescriptions are for generic drugs. By one estimate, this saves over $370 billion per year for US health care consumers. But almost all of those generic drugs are “small molecule” drugs, which essentially means that they are created by chemistry. Starting a couple of decades ago, a new wave of “biologic” drugs arrived. These begin by isolating certain components from humans, animals, or microorganisms, and then growing them through biotechnology or related techniques. They include “vaccines, blood and blood components, allergenics, somatic cells, gene therapy, tissues, and recombinant therapeutic proteins.” As one example, the COVID vaccines are biologics. The highest-revenue prescription drug of all time, AbbVie’s Humira–an injectable treatment for autoimmune conditions like rheumatoid arthritis–is a biologic. It can cost some patients $70,000 per year.
A number of biosimilars are remarkable advances in health care, and bring substantial benefits to patients. Many of them also have very high prices. Indeed, the rough estimates seem to be that biologics account for 2% of US prescriptions for drugs, but 40% of total spending on prescription drugs. Of the top 10 prescription drugs in the US in 2021 by revenue, seven are biologics–including two versions of the COVID vaccine. Industry projections are that in a few years, annual revenues from biologics will exceed those for small-molecule drugs by $100 per year or more. Again, part of the reason is that so many small-molecule drugs are now available in generic form, while many leading biologics are still on patent. Humira is just about to go off patent this year.
The generic equivalents for biologic drugs are called “biosimilars,” because the chemistry of these (“large molecule”) biologics often isn’t easy to define. They are often hard to manufacture, and susceptible to heat or contamination. As a result, the producers of the original biologics often obtain patents not just on a therapeutic molecule, but on a variety of manufacturing techniques, each of which produced slightly different chemical outcomes that can be patented as well.
For example, the AbbVie patent on adalimumab, the key ingredient in Humira, actually expired back in 2016. But given new manufacturing techniques and variations on the original formulation, AbbVie has actually obtained more than 100 patents related to Humira. In the antitrust biz, this is sometimes called a “patent thicket”–a term which refers to an ever-evolving body of patents, with old ones expiring and new ones coming into play, thus blocking new competition on an ongoing basis.
Back in 2010, the Biologics Price Competition and Innovation Act became law, with the goal of defining a path for biosimilar drugs to replace the original brand-name biologics, as patents expire, in the same say that generics have replaced so many small-molecule drugs in the last couple of decades. The law is based on language about whether the biosimilar is “highly similar” to the original, with no “clinically meaningful differences.” But of course, terms like “highly similar” and “meaningful differences” are basically catnip for lawyers, especially when billions of dollars of sales are at stake.
I don’t have any deep insights into how to write the rules governing when biosimilars can replace the original biologics. I readily acknowledge that there are some hard questions here, because we aren’t dealing with precise chemistry and small molecule drugs in this situation. There are legitimate questions about biosimilars being produced in safe ways.
But the overall goal here seems fairly clear: when patent protection expires, reasonably easy entry should be possible. If the rules for new biosimilars require extensive re-testing and long-term tests on patients, it will be much harder for biosimilars to gain a foothold. In some cases, makers of the original brand-name biologics also managed to sign exclusive deals with health care providers, where the providers agreed to use only the original biologic and to shun biosimilars. There are now 22 biosimilars approved for patients, with another seven scheduled to launch this year. But there have been essays in medical journals for several years now lamenting the slow pace at which biosimilars have been approved.
At present, Humira is the biggest test. At least eight other drug companies have plans to launch biosimilars. But along with the patent thicket that AbbVie has constructed around Humira, AbbVie is introducing two new biologics with similar effects, different active ingredients–and patent protection. Under current rules, a pharmacist can swap in a generic drug for a brand-name without needing a new prescription, but for biologics, a new prescription naming the biosimilar drug is needed. In some ways, the question of whether biosimilar competitors for Humira can become established in the market is a test case for the biosimilar industry as a whole, in the sense that it will affect whether firms see the biosimilar market as worth pursuing. But one big health care system is apparently ready to switch: “David Chen, who directs specialty drug use for Kaiser Permanente, said the insurer plans to stop covering Humira by the end of 2023. He expects at least 90 percent of patients to switch to the biosimilar alternative, and said Kaiser should save hundreds of millions of dollars a year.”
“A golden opportunity for a beleaguered biosimilars market” (Trade Offs, January 26, 2023).
Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.
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