Week May 30 - June 03, 2016

Biologics patent cliff - Challenges front-loaded, opportunities back-loaded...


Background - huge prospect waiting to be exploited

Biologic drugs are new generation drugs with far higher complexities and cost incidences vis-à-vis chemical drugs. These drugs have been in large scale commercial usage only since 1982 (first US marketing approval of human insulin). These are extracted from living organisms, which can be anything ranging from plants, animal cells, human cells to micro-organisms such as bacteria, virus or germs. Biologics are typically administered via an injection and used to treat cancers, immunological and inflammatory diseases like rheumatoid arthritis, multiple sclerosis and other debilitating chronic conditions. The decade of 2010-20 has been marked by maximum number of patent expiries in the US biologics space with drugs worth ~US$80 billion losing patent protection and, thus, creating opportunities for biosimilar (off-patented biologics) manufacturers.

Opportunity size

Yearly biologics patent cliff between 2010 and 2020 in US
Patent expiries by sales (US$ billion) Number of patent expiries

Source: Bloomberg, ICICI Securities

Trigger - Biosimilar approvals get kick-start in US

The USFDA in April 2016 approved a second biosimilar version of Johnson & Johnson's biologic Remicade (infliximab; autoimmune diseases), which was approved in the US in 1998. The approved biosimilar, Hospira/Celltrion's Inflectra (infliximab-dyyb), is the second biosimilar approved by the USFDA under the 351(k) pathway (biosimilar approval regulation). Note that in September 2015 US based generic major Sandoz launched the first biosimilar in the US following approval from the USFDA in March. Sandoz’ Zarxio is a biosimilar to Amgen Inc.’s Neupogen (filgrastim; white blood cell deficiency), which was originally approved in 1991.

Statute in US - In the US, the Biologics Price Competition and Innovation Act of 2009 (BPCI Act) was formally passed to create an abbreviated approval pathway for biological products that are demonstrated to be highly similar (biosimilar) to the USFDA approved biological product. The BPCI Act is similar, conceptually, to the Drug Price Competition and Patent Term Restoration Act of 1984 for generics (also referred to as the "Hatch-Waxman Act") which created biological drug approval through the Federal Food, Drug, and Cosmetic Act (FFD&C Act).

Progress much slower than generics for want of conceptual clarity…

However, so far, the USFDA has approved only two biosimilars since the passage of biosimilar regulation in 2009 even after more than 400 biologics approvals since 1982. In Europe, there have been only 20 biosimilar approvals since the passage of biosimilar regulation in 2004. The approval process for biosimilars is fraught with uncertainty and technical complications. Even regulators (USFDA, EMA and other country regulators) are still on a learning curve in terms of the conceptual clarity and acceptance issues. The trinity of regulators, manufacturers and payers (insurance companies, governments) are yet to arrive at a common stage of acceptance for biosimilars on a larger scale. With high cost and long gestation period, the biosimilar space is confined to a few dedicated players who have made biosimilars a strategic priority. Going forward, as conceptual clarity develops at the regulators, manufacturers and payer’s level, the biosimilar opportunity is likely to be exploited with better profit matrix than the generics. Thus, globally, the generic chemical drugs comprise 20% of the US$ 1 trillion chemical drugs but biosimilars account for hardly 1% of the total biopharma pie.

Comparison of patent cliff exploitation of biosimilar vis-à-vis generics

Source: IMS Health, ICICI Securities

Exploiting biologic patent cliff a difficult, time-consuming affair…

1) Technical capabilities the biggest hurdle

Order of biosimilar development Timeline for development of biosimilar pipeline

Source: Medicines-for-Europe_BIOSIMILARS_INT_web

Creating highly similar forms of biological molecules produced in living cells is technically difficult as biosimilar companies do not have access to the originators' know-how and trade secrets. This means there will be differences between cell lines, extraction and purification steps, leading to changes in the internal structure.

Extensive biological characterisation data, using multiple high-end techniques for demonstrating biosimilarity at the molecular level as well as extensive clinical studies, are integral to the development process.

2) Regulatory requirement far more stringent than generics- second significant hurdle

i) Interchangeability- the crucial determinant going ahead

Biosimilars are not by design interchangeable and require a separate prescription as per the regulation. Unlike a generic, a biosimilar will require analytical studies demonstrating that it is highly similar and has undergone animal studies, including the assessment of toxicity and at least one clinical study assessment of immunogenicity and pharmacokinetics demonstrating safety, purity, and potency in one or more conditions for which approval is sought.

Under both the US and European Union pathways for biosimilar approval, comparative clinical trials are required to show biosimilarity. The European Medicines Agency (EMA) and USFDA regulations, as well as scientific considerations, indicate that biosimilarity does not imply interchangeability. The manufacturer has to demonstrate that the biosimilar product can be expected to produce the same clinical result as the originator in any given patient.

ii) ‘’Patent dance’’ factor

The BPCI Act, along with the abbreviated approval process, introduced a lengthy scheme for resolving patent disputes for biosimilars products commonly referred to as the “patent dance’’.

Once the biosimilar application has been submitted to the USFDA, the biosimilar applicant and the reference product sponsor (innovator) exchange information regarding the applicability of the patent for the biosimilar. In particular, the parties exchange information regarding patents that may be the subject of litigation regarding the proposed biosimilar product. This information exchange may then culminate in two rounds of litigation- an immediate patent infringement action on agreed-upon patents, followed by a second round when the biosimilar applicant gives notice to the reference product producer not later than 180 days before the date of the first commercial marketing of its proposed biosimilar. Once the reference product sponsor receives notice of commercial marketing, it may seek a preliminary injunction on any patents that it identified during its information exchanges with the applicant.

iii) Cost in US – Clinical trials + marketing + agency charges higher than generics

For the US market, the cost of developing a generic drug is around US$2-3 million whereas biosimilars have been estimated to cost around US$75-250 million to reach approval largely due to the clinical studies and comparability exercise required to demonstrate biosimilarity.

Another cost that biosimilar companies need to bear in mind is that of marketing, especially in the US. Unlike generics companies, which can rely on substitution at pharmacy level in many jurisdictions, biosimilars will not always be substitutable. Hence, they may need to be marketed effectively as a new drug. In the US, the USFDA states that for interchangeability the biosimilar company needs to demonstrate that the biosimilar will produce the same response as the originator drug in any given patient. Once a drug is deemed interchangeable it can potentially be substituted but this is finally decided at state level in the US. Not many states in the US have adopted this. Biosimilar companies will also have to invest in publicity and communications, to persuade patient groups and physicians that their products are as safe and effective and to counteract any lobbying from originator companies. The fees prescribed under the Generic Drug User Fee Act (GDUFA) for generic drugs are also significantly lower than for biosimilars prescribed under the Biosimilar User Fee Act (BSUFA).

BSUFA fees far higher than GDUFA fees

Source: USFDA, ICICI Securities

Gradual built-up likely…

Three likely stages before full blown impact pans out…benefits back-loaded

Because of the long gestation period required by biosimilars, the optimum returns on investment are likely to flow down to the manufacturer with a significant lag, may be five years or beyond. However, the rewards are likely to be significantly higher than the generics on account of high entry barriers and lower competition. Following is the three stage scenario build up explaining the progress going ahead.   

First stage - In the short term, biosimilar companies are likely to engage with healthcare professionals regarding the safety, potency and efficacy of biosimilars. Sales and market intake will be driven both by the brand of the product and the reputation of the company promoting it. Lobbying of healthcare institutions, governments and key opinion leaders, as well as accessing a global network of sales representatives, will, therefore, be necessary at this stage.

Second stage - In the next stage, it is expected that all constituents of the biosimilar market, including regulatory bodies, national health systems, healthcare professionals and patients, are likely to feel increasingly more confident about the prescription of biosimilars. Lobbying of regulatory authorities could encourage the approval of legislation supporting the substitution of biologics. Sales at this stage may be more price sensitive, encouraging competition between all players in the biosimilars market.

Third stage - Eventually, in the long term, one can expect a mature biosimilars market showing similar dynamics to the current generics market, where sales are entirely driven by price. Therefore, generating economies of scale in manufacturing in order to lower production costs per unit, as well as acquiring global coverage through distribution channels, will be the key capabilities required to succeed.

Despite hurdles regulators determined to promote biosimilars…

Despite the initial hiccups and complexities, the biosimilars acceptance is likely to increase as explained in the third stage supra. Note that for generics to thrive in the US it took 10 years from 1980 to 1990. The concerns about quality and safety were similar to that of concerns about biosimilars. The added advantage in case of biosimilars will be the high entry barriers and investment requirements over and above the technical capability.

1) Governments across the globe pushed to the wall due to spiralling healthcare costs

High cost of biologics is one of the main reasons for budgetary strain on the healthcare spending in the US and other markets. Due to the unique nature of diseases the biologics cater to, there are fewer patients who avail the health benefits, making the per capita spend even higher. The governments will be inclined to expedite the approval process to save the ballooning healthcare costs.

Data from the USFDA and EMA show that late stage pipelines are swelling with more than 160 biosimilar products in different stages of development. US based leading distributor Express Scripts projects savings of $250 billion in 10 years should only the 11 likeliest biosimilars enter the market.

Potential saving to savers by use of biosimilars - strong case to expedite approvals

Source: IMS Health, Dec 2015, ICICI Securities

2) US biosimilar approvals- treading cautiously but likely to get momentum

Although it took six years for the USFDA to approve the biosimilar after the passage of the BPCI Act, the second biosimilar was approved by the USFDA in 20 months, much faster than the first approval. Similarly, in terms of complexity, it was much more complex than the first one. A similar kind of progress can be expected on the interchangeability front, the main hindrance according to the industry players. Recent rulings by a US district and Federal circuit on appeals ruling the ‘’patent dance’’ procedure optional also indicate some progress in the conceptual clarity at the judiciary level.

3)     Approval by extrapolation- significant leeway for multi-conditional biosimilars

In the BPCI Act, extrapolation for biosimilars is specifically defined as a regulatory approval process whereby a biosimilar is approved for each of the same indications as the branded biologic, irrespective of whether clinical testing has been carried out for each indication.

Because biological medicines are often authorised to treat more than one condition or indication, extending efficacy and safety data from one condition to another for which the reference product is approved is considered by the approving authority.

For extrapolation to be considered, regulatory agencies have to agree to the following requirements that must be fulfilled: a) the biosimilar has the same or highly similar mode of action as its reference product, b) comparability shows the biosimilar and the reference medicine to be comparable at the quality and biological level and c) conclusive evidence of similar safety and efficacy exists in at least one indication of the reference medicine.

4)     USFDA to expedite biosimilars review

According to the USFDA, by 2017, 90% of original and resubmitted biosimilar biological product applications will receive a review from the FDA within 10 and six months from the receipt date, respectively.

Select Indian players can rake in moolah; ‘moat’ can be complexity itself

Unlike generics, where most Indian players (both big and small size) have crowded the US market, the biosimilar space remains unconquered on account of high investments requirements, substantially higher R&D requirement and difficulty in reverse engineering. Exploiting the biologics cliff will require, over and above the capabilities for exploiting the chemical drugs cliff, biotechnological capabilities, deep pockets and patience as the time frame will be stretched. However, a handful of Indian players entered the space a few years back with a dedicated line of investments. These players are well poised to bear the fruits when the maturity level on the global biosimilars scale improves.


Disclaimer: We expressly clarify that this communication is neither a solicitation nor an invitation of any sort whatsoever from ICICI Securities Ltd. or any of its subsidiaries to create a client relationship. This communication is not intended to be a source of advertising or any specific advice; the recipient should always seek the advice of competent counsel licensed to practice in the recipient's country/state. In case this mail doesn't concern you, please Unsubscribe from mailing list.