To his credit, Food and Drug Administration (FDA) Commissioner Scott Gottlieb is very serious about changing the trajectory of US drug prices and costs. He is perhaps uniquely positioned for this as a physician, an economist, and an industry insider who has a thorough understanding of the complex industry business model and a strong appreciation of scientific innovation.
While the administration recently floated the idea of Medicare using international reference pricing for drug purchasing, Gottlieb earlier this year put forth more far-reaching ideas to lower US prescription drug costs and address the higher price of drugs here as opposed to abroad. Under his leadership, the FDA is proposing drug importation to stimulate price competition among biologics and certain small molecule generics. This is a significant development that could change decades-old federal policy, and it is predictably generating industry pushback.
It is common knowledge that the cost of drugs in other countries can be substantially less costly in Canada, Europe, or Japan. The costs and total spending on pharmaceuticals are lower overseas because other governments take a more active stance on affordability and link a drug’s access to the market with affordable pricing.
Several state legislators and governors have also come to the conclusion that importation can stimulate badly needed price competition. State taxpayers are responsible for the pharmacy benefit of between 25 and 30 percent of a state’s population. That is without counting:
- The Medicaid annual federal “claw back” from states that funds low-income Medicare beneficiary Part D enrollment, which is tied to the rise in prescription drug coverage costs.
- State tax expenditures that exclude from income/income tax employer and employee health care premiums (which are increasingly driven up by prescription drug costs).
At the Brookings Institution on July 18, 2018 Commissioner Gottlieb rolled out the Administration’s policy proposal to stimulate the biosimilar market and improve competition in parts of the generic market.
In the briefest and most laic of terms, biosimilars are the follow-on, competitor products to an original biologic. Biologics, in turn, are complex medicines generally comprised of live organisms. Manufacturing with live organisms is complicated; quality control rises to a new level because of this difficulty and the variability that can occur among different specimens of “the same” live organism. These products are expensive, extraordinarily so in the US compared to other countries.
Gottlieb and many others believe that if the follow-on biosimilar market can develop, prices will decline. Commissioner Gottlieb stated in July that when one biosimilar enters the market in the European Union, price can drop 30 percent; price can decline up to 43 percent when there is more than one biosimilar on the market. This is very roughly analogous to how generic products generally bring down drug costs after the patent has expired on the original product.
The Commissioner has also proposed importation to address inappropriate pricing and price increases in the generic market, which can happen when there are too few manufacturers to stimulate price competition.
The Commissioner proposes to facilitate access to the ‘reference’ product (the original biologic that competitors hope to replicate) for would-be biosimilar producers. Currently, manufacturers can make it difficult for a potential competitor to buy the reference product, which is necessary to create a biosimilar. For instance, the original manufacturer can use a specialty pharmacy arrangement where it tightly controls sales/distribution, so that a competitor cannot access the product.
Even if a would-be competitor can get a hold of it, the reference biologic product is expensive. The high US price of the original product can account for up to half of the total cost of biosimilar development, which runs counter to the goal of creating a lower-cost competitor. Commissioner Gottlieb thus wants to find a path forward to allow would-be biosimilar manufacturers to buy the reference product from a lower cost, less restrictive, market, in the European Union (EU) or Japan or Canada. The biosimilar development proposal and the proposal to import generics for purposes of stimulating price competition are terrific ideas.