It is common opinion that the American health care system needs fixing. The United States has little to show for spending $2.6 trillion each year on health care – $8,402 per capita and nearly 18% of GDP. Despite paying more in medically-related expenses than any other developed nation, the US lags behind on key indicators of population health: it is 30th in infant mortality, 27th in life expectancy, and outside of the top 25 in physicians per capita.
Prescription drugs are an important part of that health care spending. They make up more than 11% of overall health care expenditures in the United States – at $307 billion, drugs are the third largest category of expense behind hospital and physician care. This can actually be a good thing – drugs are a powerful substitute for many more expensive health treatments. For this reason, more efficient health care systems often spend a larger portion than the US does on prescription drugs. Japan, for example, spent 18.4% of its health care budget on prescription drugs in 2003. Most other countries also pay less for their drugs – in 2008, the 30 most commonly prescribed drugs were three times as expensive in the United States as they were in New Zealand. The United States health care system needs to be fixed, and improving the usage and regulation of prescription drugs can be a major part of that solution.
Before devising the solution, it is important to understand the system. The prescription drug industry is vast and multifaceted. It is made up of two major types of producers: innovator and generic manufacturers. Innovator (or pioneer) firms invest millions of dollars in pharmaceutical research and development to engineer entirely novel drugs. Generic firms invest significantly less in R&D; instead, they reverse engineer molecules discovered and patented by innovator firms to produce cheap, unbranded versions of drugs. Both types of drugs are prescribed by physicians and paid for in a number of different ways: out of pocket by the patient himself, with the help of public insurers like Medicare, or with the help of private insurers. For drug manufacturers, revenue comes from retail pharmacies, hospitals, physicians’ offices, and other medical institutions. A complex and ever-evolving regulatory tangle governs this market.
Prescription drug regulation aims to guarantee safety, quality, and access for the consumer, while promoting responsibility and innovation on the part of drug manufacturers. In the United States, the Patent and Trademark Office (PTO), responsible for granting patents, has traditionally played the role of spurring innovation while the Food and Drug Administration (FDA) has sought to protect consumers from dangerous or ineffective products. Before any drug can be marketed, it must first earn FDA approval. This requires a lengthy and expensive series of animal and human trials, along with a protracted application review period. Legislative action throughout the last century has built these requirements on top of each other and expanded the FDA’s role as the gatekeeper for prescription drugs.
The Drug Price Competition and Patent Term Restoration Act of 1984, popularly known as the Hatch-Waxman Act, altered the FDA drug approval process and granted it additional powers in encouraging drug R&D. In a single stroke, it facilitated entry of generic drugs by creating a streamlined the approval process and essentially allowed for the formation of today’s flourishing generics market. Due directly to the Hatch-Waxman Act, generic drugs have expanded from nonexistence to a ~$70 billion market; in 2010, 78% of total prescriptions dispensed in the United States were for generic drugs. The increased usage of generics, in turn, lowered overall prescription drug prices and increased patient access to drugs. At the same time, the Act authorized extensions of market exclusivity for pioneer drugs beyond the lengths originally granted by the PTO. In doing so, it incentivized innovation and maintained a healthy pioneer pharmaceuticals industry alongside the newly surging generics industry. Over the last nearly three decades, the Hatch-Waxman Act, despite a number of revisions, has worked well to balance innovation and access to prescription drugs.
Today, however, the worldwide pharmaceutical industry is undergoing major change. In the decades since the passage of the Hatch-Waxman Act, there have been “quantum leaps in scientific research”. The traditional pharmaceutical industry seen declining revenue with the expiration of patent protection for several blockbuster drugs, the termination of drugs in later stages of development, and a dearth of new simple-molecule drugs in the research and development pipeline. Major pharmaceutical companies must contend with the rapid growth of the generic industry, made possible by the Hatch-Waxman Act, in the face of global pressure to reduce costs.
This breakdown of traditional big pharma has coincided with the rise of the biologics industry. Between 2005 and 2010, sales of biologics more than doubled – from $30 billion to $65 billion. Crucially, biologics are very different from their small-molecule counterparts in their complexity and production methods. While traditional pharmaceuticals can be made with straightforward industrial chemistry techniques and can be easily reverse-engineered, biologics are made by or from living cells, and the creative process can be both complex and unpredictable. It is extremely difficult to copy proteins – even small changes in the size of equipment used to manufacture biologics may cause the ultimate structures to have different functions. For this reason, “generic” versions of biologics are more accurately described as “follow-on biologics” or “biosimilars” – in the vast majority of cases, they are not quite the same molecule as the original biologic (the reference product). Bioequivalence as required by the Hatch-Waxman Act is simply unrealistic. The complexity of biologics also makes them more expensive to develop and produce than small-molecule drugs; while the average small-molecule drug costs about $800 million, the average biologic costs over $1.2 billion to create.
Given these differences between biologics and traditional drugs, the Hatch-Waxman Act can no longer adequately address the needs of an evolving pharmaceuticals industry. The standard of bioequivalence simply cannot apply to follow-on biologics. The Act’s patent term restoration terms do not account for the increased R&D costs associated with developing complex biologics. Reflecting the sentiments of professionals in the biotech and pharmaceutical industries, physicians, and insurers, the US Senate resolved in September 2009 that “Congress should build on the work of [the Hatch-Waxman Act] and enact legislation to create a pathway for approval by the Food and Drug Administration of safe and affordable generic versions of biologic medicines”.
In 2010, President Barack Obama signed into law the Biologics Price Competition and Innovation Act of 2009. The BPCIA, as it is commonly called, created a regulatory approval pathway for follow-on biologics while instituting data exclusivity for innovator biologics. In doing so, it seemed to provide an answer to the debate over how biosimilars should be regulated. On the one hand, biologics are much more difficult to produce than small-molecule drugs, and biosimilars are much less likely to be exactly similar than traditional generics; therefore, patent exclusivity should be extended and generic introductions slowed down. On the other hand, since biosimilars will generally not be perfect substitutes for brand-name biologics, brand-name biologics will continue to be able to command high prices even after patent exclusivity ends; since innovator biologics will continue to generate revenues high enough to support R&D without extended patent exclusivity, market protection should remain the same as with traditional pharma or even shortened. The BPCIA took the former approach: it provided pioneer biologics with twelve years of data exclusivity starting from the time of FDA approval – more than twice as long as the analogous Hatch-Waxman exclusivity period for small-molecule drugs. Given that the Act has only been in place for two years, it remains to be seen whether or not policymakers made the right decisions. Will the BPCIA stand the test of time? What potential issues could arise?
This essay seeks to use lessons learned from the Hatch-Waxman Act to comment on the BPCIA. Follow-on biologics represent uncharted territory for health care systems around the world; with very little precedent, it is hard to predict the societal impact of a facilitated biosimilars approval process and lengthy exclusivity periods for pioneer biologics. By evaluating the politics surrounding the passage of the Hatch-Waxman Act, as well as subsequent economic outcomes, I will project the impact of the BPCIA and highlight areas of concern. I will then propose a set of policy revisions to facilitate the growth of the follow-on biologics market. I hope to find the right balance between innovation, access, and safety. From an ethical perspective, which one is most important for society? How will the BPCIA shift the equilibrium established by three decades under Hatch-Waxman, and what does this shift say about American perspectives on health care? By analyzing the dialogue surrounding abbreviated biosimilars approval and reviewing the impact of the Hatch-Waxman Act, I hope to gain an understanding of the ethical, political, and economic implications of the BPCIA.
The various portions of this essay will explain and analyze the Hatch-Waxman Act and BPCIA, then apply the lessons of the landmark 1984 law to its recent successor. It will begin by briefly reviewing the history of the Hatch-Waxman Act and explaining the specific provisions of the law. This essay will then move on to the BPCIA: it will begin with a more in-depth overview of the biologics industry, then compare and contrast follow-on biologics with small-molecule generic drugs. Using this background information, I will help the reader understand the history and politics behind the act, as well as its specific provisions.
In the Discussion section, I will investigate the impact of the Hatch-Waxman Act on pioneer drug manufacturers, generic manufacturers, and consumer. I will then project the impact of the BPCIA on the industry and market for innovator biotech firms, follow-on biologics, and the American public. Using this information, I will compare and contrast the outcome of the Hatch-Waxman Act with the projected impact of the BPCIA to draw attention to particular issues that will arise when the BPCIA is implemented.
Finally, I will apply the lessons learned from the Hatch-Waxman Act to the BPCIA. Specifically, I will find that the abbreviated biosimilar approval pathway created by the BPCIA does not lower barriers to entry for biosimilars to nearly the same extent that the ANDA process did for generics. Due to continued high entry costs and an excessively long period of data exclusivity, it is likely that the hoped-for biosimilars market will be underwhelming in size and impact. Instead, would-be biosimilar firms may create “biobetters” that circumvent biologic patents and are approved through the non-abbreviated process. Ultimately, cost savings to consumers will not be nearly as high as those produced by the Hatch-Waxman Act.
I will conclude with a discussion of the ethical, political, and economic impact of making specific adjustments to the BPCIA. Should we prioritize innovation, access, or in the case of biologics, safety? While research-based pharmaceutical firms and many economists stress “the importance of patent protection in insuring the viability of future innovation… consumers want continued access to prescription drugs – at affordable prices”. This delicate balance is further complicated by the politics of health care costs, budget reductions, intellectual property, and support for business versus protection for consumers. Economically, this essay will assess the impact that a biosimilars market will have on micro-level decision making by biologic and biosimilar firms, and on macro-level health care spending and its implications for the United States.
 Centers for Medicare and Medicaid Services. Data for 2010.
 “OECD Health Data.” Data for 2009.
 IMS Institute for Health Informatics
 “Drug spending in OECD.” Japan spends just 8% of its GDP on health care.
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 Or at least somewhat novel. Innovator firms also often create “me-too” drugs that make incremental improvements on already-existing drugs.
 Strongin 2
 Bioequivalence allows the FDA to assume that because one small-molecule drug is molecularly identical to another, it will test similarly for safety and efficacy. This concept will be explained more later on.
 “Honoring the 25th” 3
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