Opinion | The Drugs at the Heart of Our Pricing Crisis

For around two decades, Roche’s breast cancer drug Herceptin has prolonged the lives of people with breast cancer, and AbbVie’s immunosuppressive drug Humira has eased the symptoms of rheumatoid arthritis patients.

Such are the remarkable benefits of biologic drugs — large molecules that are manufactured using living cells. These kinds of drugs are typically received either in doctors’ offices as an infusion, or self-administered by injection.

But for all their benefits, Herceptin, Humira and dozens of other older biologic drugs lie at the heart of the United States’ drug pricing crisis, racking up billions in annual U.S. sales from their persistently high prices.

It’s true that Congress grants monopolies to new drugs so that their makers can charge high prices. That is how drug companies reap financial rewards for their inventions. But that brief period of market exclusivity is supposed to be followed by competition that will ensure that those same drugs are affordable into the future.

This strategy worked well when drugs were mostly simple chemical pills or tablets. It was fast, easy and cheap for generic competitors to copy the brand product and then undercut it on price. As one example, a day’s dose of atorvastatin, a cholesterol lowering statin, fell from $5 to less than $1 once there were generics in the market.

But prices are not falling for biologic drugs as fast as they should, nor as much as they could. Billions in excess drug costs are shouldered by employers, taxpayers and patients as a result.

The United States needs a law that would yield comparable savings on older biologic drugs, and this law should require that biologic drug manufacturers lower their prices to affordable yet still profitable levels when their market exclusivity expires.

This new law would address the fact that Congress’s first attempt to reduce the prices of older biologic drugs is failing. The Biologics Price Competition and Innovation Act of 2009 envisioned a competitive market that replicated the success generic drugs have had in lowering the prices of older pills and tablets.

But the approach has been plagued by two fundamental challenges. The first is that biologics cannot be easily replicated. So Congress hoped a new category of knockoffs, called biosimilars, would play the role that generic drugs do in driving down the prices of pills and tablets.

But unlike the fast, easy and cheap manufacture of generic drugs, making biosimilar copies of biologics often costs hundreds of millions of dollars. Then they need to be extensively tested in long and expensive clinical trials. By our count, 85 percent of biologic drugs that should be squaring off against biosimilar competitors face none.

Even when a biologic drug encounters biosimilar competitors, prices don’t decline much at all. Herceptin today faces five knockoffs; even so the average price for trastuzumab (the general name for Herceptin) remains 26 percent higher than the 2007 price for branded Herceptin in today’s dollars. Back then it had no competitors.

The second challenge is that branded biologic drug companies have built impassable patent blockades. No biosimilar will take on Humira’s $16 billion in 2020 U.S. sales until at least 2023 because 257 patent filings stand in the way. Another biologic, Enbrel, on the market since 1998, will not have its $5 billion in sales challenged until the end of 2028.

Requiring lower prices of older biologic drugs will not upend the rewards Congress intends the drug companies to receive. Biologic drug companies successfully lobbied for a guaranteed minimum of 12 years free from competition. For perspective, pills and tablets only receive five to seven years of protection from competition when they come to market.

Here is how the new law, which we are calling Production Plus Profit Pricing, or “P-quad,” would work. After 12 years, and regardless of patents, the maker of the original biologic would set a price that guarantees a 10 percent profit over and above the cost of making and distributing its product. That’s still more profit than most U.S. industries generate.

Independent consultants at Milliman estimated that over the next five years P-quad could yield an additional $265 billion in savings when compared to the current model of biosimilar competition: $95 billion to the federal budget which funds Medicare and much of Medicaid and $170 billion primarily to employers, employees, states and patients. In the employer-based health insurance market annual premiums could fall by $160 per person on average.

There is already bipartisan political agreement that the prices of older drugs should fall to make room for new products that will themselves be high priced. As one example, Senators Jeanne Shaheen, Democrat of New Hampshire; Bill Cassidy, Republican of Louisiana; and Tammy Baldwin, Democrat of Wisconsin recently introduced a bill that would end monopolies early for rare-disease drugs that earn revenues in excess of what was anticipated. The pharmaceutical industry and its investors also describe the expectation that prices should fall eventually as a “social contract” to which they should abide.

Prices of new drugs will continue to make headlines, as well they should. But we must fix the problem that older biologic drugs have perpetually high prices, and do so by passing a law that ensures that at the appropriate time their prices fall fast, and they fall far.

Dr. Bach is the director of the Drug Pricing Lab and Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center. Mr. Trusheim is a visiting scientist at the M.I.T. Sloan School of Management, the strategic director at M.I.T. NEW Drug Development ParadIGmS (NEWDIGS) and the president of Co-Bio Consulting.

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