Follow on Biologics Market

Life Sciences
The follow-on
biologics market:
Enter at your
own risk

18 The follow-on biologics market: Enter at your own risk
Contents
1 Introduction
2 The potential regulatory pathway
4 The future market
11 Follow-on biologics company strategies
13 Closing thoughts
14 Endnotes
15 Acknowledgements

1The follow-on biologics market: Enter at your own risk
Introduction
Follow-on biologics (FOBs), also known as biosimilars,
have gained tremendous attention in recent years as
biologics continue to increase their market presence, focus
on life-threatening diseases, and adopt high price tags.
In 2010, biologics accounted for 28% of new molecular
entities approved in the United States, and are expected to
comprise up to 60% of the top-ten selling drugs by 2014.1
For over a decade now, Congress and the FDA have been
contemplating a FOB regulatory pathway that would
increase consumer access to affordable biologic therapies.
With the passing of the Biologics Price Competition
and Innovation Act (BPCI) as part of the 2010 Patient
Protection and Affordable Care Act (PPACA), it seems that
the wait is almost over.
Entry into this market will be more challenging than
initially expected by Congress. Follow-on biologic
investors will face challenges ranging from the high
costs of market entry, to potential physician reluctance
of switching patients to biosimilars, to the likelihood of
price competition from branded products, and finally, to
unattractive patent challenge provisions. Despite these
barriers, we expect to see market-demand gradually
develop, given the tens of billions of dollars of revenue
potential that it offers; and also expect to see leading
global pharmaceutical companies with deep pockets
and branded commercial resources enter the space,
especially since FOBs will require extensive brand-like R&D
and marketing. Declining revenues associated with the
upcoming patent cliff and uncertain pipelines will make it
difficult for brand manufacturers to ignore an opportunity
of this scale.
While the exact nature of the pathway has not been
revealed, there is a growing consensus among experienced
industry observers that the market will look very different
than that of current small molecule generics. It is not
likely that we will see the same rate of FDA-approved
entrants, brand market share erosion, or generic product
price reduction. Instead, the market will grow slowly as
physicians gain comfort with the clinical attributes and
quality of biosimilars. Despite these roadblocks, we believe
the FOB market will eventually emerge and flourish and
competitors that lead the space will command multi-billion
dollar businesses with a sustainable revenue stream. The
key to success will be getting to market first with the
correct molecules, and selecting the right strategies to
help in that journey.

The flexibility Congress provided the FDA regarding the extent
of clinical trials required for FOB approval also could lead to
circumstances where innovator firms could be accused of
undertaking tactics to thwart or delay FOB entry. Innovator
firms are likely to raise substantive safety and efficacy concerns –
potentially through the FDA’s citizen petition process or through
other means – regarding the robustness of the FDA approval
scheme for particular FOB products or a particular FOB entrant’s
ability to comply with FDA’s trial requirements. It is likely that
we will see FOB entrants contend that such complaints are not
legitimate but rather intended to impede FOB entry.
– Seth Silber, Esq., Partner, Wilson, Sonsini, Goodrich, and Rosati
(Source: Deloitte Interview, May 13, 2011)
The potential regulatory pathway
The Hatch-Waxman Act of 1984 first enabled the
proliferation of small molecule generic drugs by creating
a regulatory pathway that approved products based
on bioequivalence data instead of clinical trial data.
It also allowed marketed AB-rated products2
to be
automatically substituted for the branded equivalent
at the retail pharmacy level. This quick and inexpensive
approval pathway combined with interchangeability at
the pharmacy has enabled small molecule generic drugs
to capture more than 78% of total prescriptions in the US
in 2010 with a market value of approximately $42B – a
600% increase over the last 15 years.3
However, biologics are larger, more complex molecules
than small molecule drugs. The molecular diversity of
large molecules is both a source of innovation and risk as
the market migrates towards follow-on biologics. While
an exact, identical small molecule generic can be reliably
manufactured, the manufacturing processes are more
sensitive and less repeatable for biologics. Additionally,
due to the complexity of development and manufacturing,
biologics have higher development costs which are usually
reflected in the consumer price. To increase consumer
access to affordable biologics, the BPCI seeks to lower
barriers to entry and encourage competition through
a new abbreviated FDA approval pathway for FOBs.
Accordingly, the FDA will be challenged with balancing
incentives for both follow-on and innovator manufacturers
and upholding patient safety, while properly regulating
the use of or perceived use of legal strategies intended to
impede follow-on approval..
Follow-on biologics may exhibit clinically meaningful
differences from the innovative reference product.
Therefore, a majority of industry analysts, including
several official estimates from federal agencies, expect
the FDA to require product and manufacturing quality
studies, as well as large safety and efficacy trials that
compare the biosimilar to the reference product in order
to grant approval. This is essentially the pathway that the
European Medicines Agency (EMA) put in place when
it began approving biosimilars in 2006. It is less likely
that the FDA will choose to enact a biosimilars pathway
with less stringent requirements. The FDA has been
under heightened public scrutiny over patient safety for
the better part of a decade due to some high profile
product withdrawals and safety concerns. As a result,
we have observed pre- and post-marketing clinical trial
requirements become more stringent.

Note: N / A = comment not available
Notes: R&D timeline includes Discovery through FDA approval; R&D costs include the costs of failures
The underlying manufacturing complexity is at the core
of the equivalence or similarity issue. FOB manufacturing
usually involves cell-lines that are distinct from that of
the innovator’s cell lines, which can create differences in
molecular structure and bioactivity. Unfortunately, these
impacts can only be measured via large clinical studies
similar to current Phase III trials. The expected requirement
for clinical studies would result in a clinical development
pathway for follow on biologics that more closely
resembles that of a branded product, as opposed to that
of a small molecule generic.
Figure 1. Government agency assumptions on the follow-on biologics pathway
Figure 2. Estimated R&D costs and timeline for follow-on biologics
Requirement for
large clinical trials
R&D Timeline
Interchangeability
R&D Costs
Congressional Budget Office4
Federal Trade Commission5
White House6
New Product (NDA or BLA)
Follow on Biologic (FOB)
Small Molecule Generic (ANDA)
Yes
Yes
Yes
10 – 14 yrs7
8 – 10 yrs9
3 – 5 yrs11
No
No
N/A
$1,300M8
$100M – 200M10
$1M – $5M12
FOB manufacturers have varying views on the costs
associated with product development. For example, John
Lane, Vice President of Hospira, stated “I would say for
the less complex proteins that we’re looking at, you could
expect anywhere between, maybe, $30 and $50 million,
and for the more complex proteins, it’s not inconceivable
that you could approach $75 to $100 million if you have
to do full development.13
In contrast, Sandoz’s head, Jeff
George, is less optimistic putting the cost as high as $250
million for difficult-to-copy large-molecule drugs.
In any respect, the higher costs of a FOB, as opposed to a
small-molecule generic, pose a significant barrier to entry,
while the expected longer development timeline increases
the risk that the innovator molecule will be supplanted
by a second generation technology before the upfront
investment can be recouped. The cost of developing a
marketed follow-on biologic is fractional when compared
to the aggregate cost inclusive of R&D failures.
Instead of waiting for the FOB pathway to be announced,
various pharmaceutical manufacturers are proceeding
with development of their follow-on products through the
traditional Biologics License Applications (“BLA”) route.
These manufacturers can move molecules through the
BLA pathway much cheaper than an innovative product
since the risk of development failure is lower. Not only is
the BLA route available today, its familiarity reduces the
risk of repeating studies due to design flaws. The BLA
route also provides data exclusivity from competitors and
incumbent biologics, which the FOB pathway does not.

The future market
While almost all small molecule drugs with annual
revenues in the hundreds of millions of dollars experience
generic competition upon loss of exclusivity, we anticipate
that only “blockbuster” biologics will face biosimilar
competition upon exclusivity loss. We believe that several
factors will ultimately deter FOB entry, including the cost
of entry, physician concerns around product switching,
legal barriers, marketing and support service capacity, and
expected price competition from brands.
High costs of entry
We expect to see high financial barriers to market entry.
First and foremost, we expect potential market entrants
to be required to invest in large scale safety and efficacy
trials, which can easily exceed $100 million in cost for
a single indication. For products with a large number
of indications, such as oncology therapies, the cost of
FOB development could be much higher if the FDA or
physicians demand trials for each indication.
Secondly, biologics require a much higher investment in
manufacturing capacity than small molecule generics.
The manufacturing costs of small molecule generics can
be very low since the active pharmaceutical ingredient
(API) can typically be purchased on the open market.
The only significant capacity investment is in formulation
/packaging and fill/finish for solids and injectables,
respectively. For generic manufacturers, these capacities
“Given these high entry costs, FOB entrants are likely to be large
companies with substantial resources, and it is likely that only
two to three FOB entrants will seek approval to compete with a
particular pioneer biologic drug.”
– Emerging Health Care Issues: Follow-on Biologic Drug Competition,
Federal Trade Commission Report, June 2009
are also readily transferrable from one product to another,
thereby creating economic scale and cost savings that
brand products cannot achieve. In contrast, biologics
manufacturing capacity tends to be much more expensive
and must be customized to the specific molecule. The
reconfiguration of capacity from one type of cell line to
another (e.g. between yeast, bacterial or mammalian cell
expression) requires significant re-tooling and capability
acquisition. As a result, biosimilar manufacturers will find it
more difficult to create a meaningful manufacturing cost
advantage over the innovator brand.
Once commercialized, FOBs will also be more expensive
to market, sell, and monitor than small molecule generics.
Given the low expectation of interchangeability and
the fact most products will be physician-administered,
FOB manufacturers will need to actively promote their
products, analogous to a branded biologic product, which
significantly increases costs and requires commercial
capabilities. Greater support services capacity and
competencies, such as medical communications and call
centers, will be required for FOB versus small molecule
generics in order to address questions regarding dosing,
administration, and side effects of complex biologics. Risk
evaluation and management will also be necessary if the
FDA requires a Risk Evaluation and Mitigation Strategy
(REMS) program. In this regard, branded pharmaceutical
companies will be at a significant advantage when
bringing FOBs to market.

Concerns over patient switching
Given the low probability of interchangeability at approval,
market share adoption for biosimilars will be fairly
gradual, occurring over a course of several years. For
small molecule generics, prescriptions are automatically
substituted at the pharmacy and the generic often
replaces more than 90% of the originator molecule’s
volume in the first year without any physician directed
promotional activity.14
The brand erosion curve will look
very different for biosimilars since biosimilars will not be
FDA approved to be interchangeable/substitutable with
the reference product. In addition, most biosimilars will
be physician-administered and be classified as Medicare
Part B drugs. The fact that there are currently no financial
or formulary mechanisms to encourage physician usage,
FOBs will not enjoy the steep adoption curve of small
molecules and must invest heavily in brand-like marketing.
Market adoption of physician-administered biosimilars will
require more time to gain traction due to concerns over
switching patients already on the branded therapy to the
biosimilar. Due to the molecular differences between the
innovator and biosimilar product, there is a valid safety risk
of triggering an immune response, running into tolerability
issues or needing to re-titrate the patient’s dosing upon
switching. Physicians may not want to subject their
existing patients to these risks simply for the sake of cost
reduction. This means that biosimilars, aimed at treating
chronic disorders, may be constrained to competing
primarily for new patient starts.
Weak basis of competition
From a high-level perspective, products can compete on
only two dimensions: differentiation and price. Because
biosimilar labeling will reflect equivalent efficacy and
safety with respect to the innovator product, it will not
be possible to differentiate on product efficacy and safety
attributes. Therefore, the remaining strategy will be to
compete on price.
Small molecule brands rarely compete with generics
on price today because automatic substitution at the
pharmacy will occur regardless of whether there is a price-
match. It has been more profitable to hold price steady
or increase price for the few percent of patients who
remain loyal to the brand. In the US, the average price
discount for a generic, in comparison to that of the brand
equivalent, is approximately 85%, although products with
lower production costs can reach price-discount levels well
over 95%.15
The CBO expects FOBs to discount price by 20-25%
below the innovator product in the first year, building
to 40% in four years. For biosimilars, we expect to see
brands compete aggressively on price in order to stay on
commercial formularies. The lower expected discount
ranges and relatively equal cost base will make it possible
for brands to maintain market share at a lower, but still
profitable price. The history of biosimilars in Europe and
the US has shown a willingness in most cases for the
brands to drop prices to effectively close the pricing
gap and maintain reimbursement. Without the ability to
establish price leadership, penetration of biosimilars in
these markets has been very limited.
Figure 3. Basis of competition for follow-on biologics vs. generics
Small molecule
generics Follow-on biologics
Advantage
Equal
Equal
Equal
Favorable
Equal
Equal
Equal
Disadvantage
Unfavorable
Price
Efficacy
Safety
Quality
Overall competitive position

Additionally, we expect the brand to attempt to
differentiate on quality by highlighting their established
track record of product safety and manufacturing
consistency compared to the biosimilar which is new and
unproven. Many physicians will have more trust in the
branded product because it has been tested clinically and
used commercially in a larger number of patients over a
longer time period, versus a new and relatively untested
product. Because the FDA does not guarantee biosimilars
to be “identical” it is conceivable that the manufacturing
process for the new product could be inconsistent or a
safety signal could emerge post-launch. For small molecule
generics, the AB rating from the FDA acts as an assurance
of identical quality and any physician concerns when
prescribing will be reversed via automatic substitution with
the generic at the pharmacy. If pricing between the brand
and biosimilar is close enough, then many physicians could
choose to stay with the better characterized molecule.
Figure 4. Efficient frontier16
of competition – biosimilars
Legal barriers to entry
The costs and time of litigation associated with patent
challenges will also be higher for FOBs compared to
small molecule generics. Under Hatch-Waxman, generic
companies bear relatively low costs and risks through
Paragraph IV filings and the resulting patent infringement
suits. These suits typically result in settlements that enable
generics to come to market without the hassle of costly
litigation. This has become such an industry norm that
between 2003 and 2009 there has been a 900% increase
in Paragraph IV-derived patent settlements.18
In contrast,
under the BPCI, the patent challenge process has been
revised to include an “open exchange” of patents and
information germane to the development process, a
negotiation period to determine what patents will be
challenged prior to FOB entry, and financial penalties to
those who step outside its guidance. This was enacted to
weed out the number of sham patent challenges prior to
litigation such that only the substantive challenges remain.
It is anticipated that FOB challengers will require numerous
years of hand-holding by outside counsel to properly
complete these provisions and subsequently enter into
patent litigation.
In regards to large molecule patent settlements, given
the surmounting investments and high revenue potential
of biologics and FOBs, the patent holder and challenger
actually bear very similar risks. This is in far contrast to
a small molecule patent challenge, where, typically, the
brand holds the majority of the risk, while the small
molecule does not. In many cases, a small molecule brand
may choose settlement over litigation without regard to
its actual patent validity and/or likelihood to prevail in a
trial. However, in a large molecule context, due to the
fact that risk is allocated symmetrically amongst large
molecule innovators and challengers, with imposing R&D,
manufacturing, and marketing costs on both sides, the
innovator is now incentivized to litigate based on the
validity of its actual patents and test the risk tolerance
of its challengers. As a result, we may experience far less
settlements and more successful litigation pursuits by
innovators, thereby creating an additional barrier to FOB
entry.
Brand has ability to narrow the price gap
Brand can differentiate on quality and reliability
Low cost
Biosimilar
Biologic brand
Biologic brand
Differentiated
Given the high barriers to entry, the uptake of biosimilars
has been fairly slow in most markets. However, biosimilars
have also met with considerable success in selected
markets. When Erythropoietin biosimilars were launched in
Germany in 2007, they captured nearly 60% of the market
of the reference product in 2 years, before levelling off in
2009.17

As we have mentioned above, the patent provision process
of the BPCI has numerous disadvantages for a FOB investor,
which can pose a potential barrier to entry in terms of
expenses and potential delays of launch. While a small
molecule is usually covered by an average of 8-10 patents,
biologics can have as many as 50-70 — covering everything
from the R&D to the manufacturing and method of use —
complicating the legal strategy for generic competitors19, 20
.
The BPCI contains detailed procedures for identifying the
patents relevant to the FOB application, as well as measures
to resolve disputes that may arise during this time. It is clear
the complex nature of this process will require increased
time to navigate and sizable expenses for internal and
external counsel. In addition, even prior to litigation, the
process is extremely intrusive in that the innovator must
receive a fully-disclosed copy of the application within 20
days of the FDA’s decision to review.
Under the Hatch-Waxman Act, a Paragraph IV certification
can be filed if the generic challenger believes the brand’s
patents, as listed in the Orange Book, are invalid or its own
patents do not infringe upon valid brand patents. It must
only substantiate this claim with a “detailed statement of
factual and legal basis for this opinion” to the innovator.21
In contrast, due to the fact there is no Orange Book in
the biologics universe, the Act provides for an exchange
of information designed to determine which patents may
be applicable for patent infringement. The scope of the
patents to be identified is extremely broad, as the applicant
must provide the innovator with the patents that claim the
biologic product and the methods of using it and “such
other information that describes the process or processes
used to manufacture.”22
Providing the innovator with all claim, method, and
process patents will expose the FOB investor’s unique
patents and trade secrets, which in the case of FOBs may
be of considerable value. After the brand receives all of
this information, both parties begin a negotiation process
regarding which patents the parties will actually litigate
over. Nevertheless, the fact that the FOB investor receives
no data exclusivity and must reveal all trade secrets and
patent information related to its FOB, regardless of actual
infringement, will create elevated risk for potential entrants
and create incentive to enter the market using a BLA.
What if no one shows up for the party?
In developing the FOB pathway, Congress assumed
there was adequate financial incentive to entice entry
by a large number of manufacturers. However, given
the FDA’s lack of experience with follow-on biologics,
high financial barriers to entry, and uncertain basis
of competition, there is a risk that a limited pool of
competitors will choose to pursue the FOB pathway.
Since the passing of PPACA, few companies have
signaled their interest publicly. In spite of this, we believe
that a clear competitive landscape could emerge when
FDA provides more details regarding the actual pathway.
As the science and regulatory process becomes more
standardized and understood, costs could decline which
would increase the competition pool.
To date, follow-on biologics manufacturers have
focused primarily on the unregulated markets of the
developing world, where products can be brought to
market inexpensively under less stringent manufacturing
oversight and without conducting expensive clinical
trials. These are mostly small companies which lack the
resources and capabilities required to commercialize FOBs
in more regulated markets. The less-controlled regulatory
environment in these countries allows a significant
cost advantage for the FOB manufacturers over the
innovators, but increases risk to the patient.
The biosimilar regulatory environment in Europe
resembles what we expect to see in the US. However,
the high financial barriers to entry, branded price
competition and physician reluctance to switch patients
has resulted in a market which has been very slow to
materialize. The first FOBs hit the European market in
2006 and by 2009 the European FOB market was still
less than $150 million23
in revenue and consisted of only
three molecules, filgrastim, epoetin alpha and growth
hormone.

In the United States market, FOBs will be expensive to
manufacture and test, and will require marketing similar
to that of branded products. The barriers of entry are high
and only a handful of companies have the capabilities
and financial resources to pull it off. For this reason, we
expect to see leading global pharmaceutical companies
dominate the market, especially those manufacturers
with both branded and generic commercial resources. To
date, companies have been guarded in discussing their US
biosimilar pipelines, but public statements suggest that the
industry pipeline might have up to 20 biosimilar projects
in late stage development. While the target molecules for
about half of these projects are undisclosed, companies
have publicly announced focus on a handful of targets:
Neupogen (filgrastim), Neulasta (pegfilgrastim), Epogen/
Procrit (epoetin), and Rituxan (rituximab). These reference
products had a combined US revenue of $10 billion in
2010, representing only a small portion of the $58 billion
biologics market. At the same time, we’ve seen signs that
some of these players may be moving away from the FOB
pathway for a number of reasons.
As far as small molecule generic manufacturers are
concerned, Hospira has cited the need to get to market
quickly and the FDA’s slow pace in making the pathway
available as the primary reasons for moving forward with
the BLA pathway. In 2011, Hospira’s Chief Scientific Officer
Sumant Ramachandra said “For us to wait may cause us
not to be ready when the market opens up...so we need
to move now” in reference to plans to move its biosimilar
version of Epogen into US Phase III studies.24
Sandoz
similarly has been moving forward with the traditional BLA
pathway rather than waiting for the FDA to announce the
FOB pathway. Finally, it seems that Teva is also moving
forward with the traditional BLA route for filgrastim and
rituximab rather than waiting for the FOB pathway.
Will the savings be enough to satisfy patients
and payers?
The Congressional Budget Office estimates that the
American people will realize cumulative savings of $25
billion by 2018 through the use of FOBs. While this figure
sounds substantial at first glance, it represents only a small
savings as a percentage of the total market and will barely
put a dent in the growth rate of the rapidly expanding
biologics market, which is expected to expand from
today’s $58 billion to $94 billion on an annual basis in
2018 after the impact of FOBs.
Figure 5. Projected savings from follow-on biologics
$Billions
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
55.0 58.1 61.5 66.4 71.4
77.0
80.9
84.1
89.1
94.1
1.2
2.7
4.3
6.3
10.5
120
100
80
60
40
20
0
Projected savings from FOB
Biologics

We question whether the actual FOB market will develop
as quickly as the CBO estimates. For their math to work,
about 1/3 of biologic product usage by 2018 will need
to be FOBs if we assume a 40% price discount from
the innovator brand. Today’s pipeline suggests the
introduction of FOBs for a much more limited set of
products indicating that savings could be less than half of
the CBO estimate. The primary question that politicians
and market participants should be asking themselves is
whether or not this savings level will be high enough to
satisfy patients and payers. If the answer is ultimately
“no,” the question shifts to the government: will they
take additional legislative action to stimulate the market?
Many will argue that the FOB market will evolve over
a longer time-horizon, perhaps 15 to 20 years, and
legislators should be patient and will see much more
substantial impacts in the long-term.
Will insurers actively encourage the use of follow
on biologics?
Private insurers will have a vested interest in encouraging
the pervasive use of biosimilars as a means of creating
price competition. We expect they will put formulary
controls in place to drive usage of biosimilars in the
hospital, infusion clinic and physician office setting. Today,
most high priced biologics reside on a “specialty tier”
which can have coinsurance in the range of 25-33%. We
could expect to see payers develop a new “biosimilar tier”
with co-pays lower than specialty products but higher
than Tier 3 small molecule brands in order to drive patient
and physician behavior toward biosimilar usage. Similarly,
Medicare Part B may change reimbursement rules going
forward to financially incent biosimilar usage.
There is great uncertainty in the biosimilars space from a regulatory, judicial, and
market perspective. If the market is slow to develop, I believe that we will see additional
action by the federal government to encourage biosimilar entry. The federal government
has aggressively encouraged the use of small molecule generics and may be equally as
aggressive with that of biosimilars if they turn out to reduce prices and not compromise
quality.
– Dr. Tomas Philipson, Daniel Levin Professor of Public Policy Studies, University of Chicago (Source: Deloitte Interview, May 27, 2011)
Should we expect future government stimulus?
Despite their inherent differences, the market benefits of
FOBs will be measured against those of small molecule
generics. With that said, the current success of the
generic market was not achieved immediately upon the
enactment of the Hatch-Waxman Act. It took over ten
years of collective analysis and legislative reform to reach
today’s brand erosion and price-reduction rates. Shortly
after the enactment of the Hatch-Waxman Act in 1984,
the FDA released a succession of regulations aimed at
streamlining bioequivalency requirements favoring in-vitro
clinical testing. In addition, the Medicare Prescription
Drug Improvement & Modernization Act of 2003
(“MMA”), which mandated the use of generic alternatives
in provider plans, provided clarity on the usage of §505(b)
(2) applications, as well as the allowance of multiple-
stay and -exclusivity periods. These provisions acted as a
stimulant for the small molecule generic market increasing
its market share and value significantly.
We should expect the Federal government to remain
committed to nurturing the nascent biosimilars market
and anticipate stimulus if needed – mainly in four specific
areas:
• A reduction in the 12-year data exclusivity period for
innovator products
• Market exclusivity for the first FOB to market for a given
molecule
• Research & Development tax credits for FOB
manufacturers
• Mandatory favorable formulary placement for FOBs

Data exclusivity periods
The Obama Administration has been actively pursuing a
reduction in the data exclusivity period (“DEP” or “DEPs”)
for originator biologics from 12 to 7 years. DEP refers to
the period of time after FDA-approval of a new molecule
and before a generic or follow-on manufacturer can access
the clinical trial data that was submitted by the innovator
during the approval process.25
DEPs are designed to
provide incentives for innovation, while maintaining strict
safety compliance by offering new molecules intellectual
property protection without regard to the terms of a
patent. It is our belief that lowering the DEP period would
act to accelerate market launch for FOBs, but it would
not address the central issue of lowering the investments
required to enter the market. In addition, premature price-
competition and brand erosion derived from a lowered
DEP may reduce innovator market entry.
Market exclusivity for FOBs
Given low probability of interchangeability at launch,
the federal government may be able to stimulate the
FOB market by enacting a more comprehensive market
exclusivity period (MEP) that includes biosimilars. The
government could grant the first-to-launch biosimilars
a distinct MEP to boost revenue potential. The time
extension should take into account the high costs of
investments for a FOB and the low brand erosion rates. It
can be argued that MEP at any level dissuades competition
amongst follow-on players, especially with extended
periods. Analogous to the Hatch-Waxman Act’s 180-day
exclusivity period, a balanced MEP term would account
for the time necessary to profit from a first-to-launch
perspective and preserve an attractive investment period
for follow-on competitors.
Research & development tax credits
The maximization of valuable R&D tax credits has
been difficult to achieve for small molecule generics in
comparison to that of innovative manufacturers. Simply
stated, R&D investments may qualify for IRS tax relief it
is deemed to satisfy the Federal governments and state’s
innovation and scientific process requirements.26
The R&D
behind small molecule generics often fails to meet this
burden. It has even been argued that the mere usage
of an abbreviated new drug application, as opposed
to a NDA, should disqualify small molecule generics
manufacturers who apply for the credit. However, the
fact that FOBs will most likely undergo thorough clinical
trials and possess unique manufacturing design may
satisfy the innovation and scientific process requirements.
Additionally, the speculation that various FOB investors
will file a unique BLA provides more merit to the argument
that R&D investments should qualify for these credits.
Favorable usage and interpretation of the federal credit
alone can provide significant savings on each dollar
allocated towards R&D. These savings can increase
exponentially when coupled with advantageous state tax
credits, such as those available in California.27
In the event
that FOBs do not qualify for tax credits, the government
could amend these regulations accordingly and provide a
direct stimulus to the market.
Mandatory favorable formulary placement
It is also feasible that the government could mandate that
FOBs be granted a favorable formulary status in relation to
innovators to encourage patients and physicians to utilize
the FOB, which ultimately would accelerate adoption rates
and boost revenue, while lowering the marketing and
sales burdens of entrants.

Follow-on biologics
company strategies
While the biosimilars market may be less attractive for
entrants and savings for payers may not be as great due
to less significant price-discounting than expected, the
market opportunity remains fairly substantial. There are
still billions, if not tens of billions, of dollars in revenue to
be made for the companies that eventually succeed. So
what will it take to overcome the barriers to entry and
win market share? We believe there are a number of key
requirements to success:
• Select the right products to pursue
• Get to market first for your chosen pipeline projects
• Discourage competition by publicly communicating
your pipeline
• Aggressively raise awareness among prescribers at
launch
• Rigorously defend market share by owning the low
price position in the market
• Develop a manufacturing cost advantage over the
reference product
First, and foremost, will be the need to select the right
product targets to pursue through a broad market and
financial evaluation. Significant revenue potential will
be required to overcome the high financial barriers to
entry and long development cycle. Competitors will need
a relatively robust new product planning capability to
evaluate market potential, physician interest in using the
product and their data requirements so that clinical trials
can be designed to satisfy physicians. An evaluation of
the branded company manufacturing cost structure and
ability to lower price in order to compete will also be
critical. This evaluation will need to be conducted before
investment in product development and will require
significant investment in market research and competitive
intelligence.
We believe it will be difficult for FOB entrants to be
profitable if there are more than one or two competitors
already on the market for the same reference molecule.
Therefore, it will be critical for biosimilar competitors to
publicly signal intent to pursue a target and to get to
market first. It will also be critical to commercially promote
follow-on biologics with physicians to raise awareness.
Since most biologics are physician administered, and
because they won’t be deemed interchangeable, they
cannot rely on automatic substitution at the pharmacy
level. Because biosimilars are not chemically identical to
the reference product it will be important to share the
clinical data with physicians to make them comfortable in
using the product. This will require a field sales force and
possibly a medical science liaison (MSL) team.
I’m going to treat biosimilars just like any new branded product.
Before using them, I’ll require strong backing of data including
clinical evidence from phase III trials for each indication…
regardless of what the FDA requires. Sales calls from reps
will be necessary.
– Hematologist/Oncologist, New York (Source: Deloitte Interview, May 24, 2011)

Ultimately, in order to win, a biosimilar must be able to
own the low cost position in the market and defend it.
This means undercutting the reference product’s price
at launch and maintaining a significant discount to the
brand if it lowers prices in an attempt to close the pricing
gap. This could result in a price war, which pushes price
toward an unprofitable level. The biosimilar manufacturer
will most likely have lower commercial costs and
corporate overhead than the branded product. However,
for the biosimilar to be able to maintain a significant
pricing advantage over the brand, a manufacturing
cost advantage will be required. Small molecule generic
companies tend to have lower cost manufacturing
than the brand through economies of scale and strong
capabilities in the manufacturing and sourcing of low cost
API. Finding a low cost manufacturing technology for
biologics can be viewed as the Holy Grail for biosimilars
and will be hard to achieve. There are numerous
techniques or technologies that could allow for a cost
advantage in the future. For example, current biologics
manufacturers might be able to reallocate spare capacity
on the cheap assuming the biosimilar uses a similar cell
line. Another option could be to move production into
a different cell line that produces a higher yield of API.
For example, many companies are looking at low cost
biosimilar production via plant based production. However,
if the manufacturing process strays too far from the
reference product it may be necessary to pursue approval
through the BLA route. Additionally, whatever technology
is discovered will only provide a temporary advantage as
the brands are likely to mimic it. While low cost biologics
manufacturing is a high risk strategy and may not play out,
it should be investigated.
What about Biobetters?
Another option that some companies are following is
to not enter the biosimilars market at all and adopt a
strategy called “biobetters”, which are new therapies that
belong to the same drug class as the reference product
and seek to be safer, more effective or easier to use.
Biobetters are approved via the BLA route and is essentially
a new name for an old strategy of developing “second
generation” products. One can argue that the very first
biotech product, genetically engineered insulin, was a
biobetter of porcine insulin (pig-derived) and Neulasta is a
longer-acting biobetter of Neupogen, and the list goes on
and on. A rose by any other name would smell as sweet.
What the biobetters strategy tells us is that the costs and
risks of developing a follow-on biologic are more similar
to a branded product, but the revenue potential may not
be high enough to justify investment. The challenge is
that the second generation molecule strategy is already
being rigorously pursued across the industry and doesn’t
represent a new opportunity. Those who are only
considering entering now are late to the game and may
want to reconsider.
Figure 6. U.S. biologics revenue
Investment/
risk
(Incremental)
Biosimilar
2nd generation
“Bio-better”
Innovative
biologics
Market adoption rate

Closing thoughts
The follow-on biologics market will be tenuous for
potential market entrants given the expected high
barriers to entry. While we won’t know the specifics of
the future pathway until it is announced by the FDA, it
appears that Phase III studies will be a requirement for
market acceptance by physicians at a minimum. Despite
the barriers, the market holds the potential for billions of
dollars of revenue for the companies that can succeed.
The time to investigate market entry is now, as there will
be a first-mover advantage and companies will need to be
ready to proceed rapidly into late stage clinical trials once
the FDA pathway is announced.

Endnotes
1
Deloitte analysis based on IMS-provided revenue values
and market life cycle projections
2
An AB-rated generic is a (small-molecule) generic drug
which is determined to be bioequivalent per standards
established by the Food and Drug Administration
(FDA) and is therefore authorized to go through an
abbreviated new drug application (ANDA) process
and is eligible for substitution with a branded product
without physician authorization.
3
“The Use of Medicines in the United States: Review of
2010,” IMS Institute for Health Informatics, April 2011
4
United States. Congressional Budget Office. Cost
Estimate, “S. 1695 Biologics Price Competition and
Innovation Act of 2007,” June 2008
5
United States. Federal Trade Commission. “Emerging
Health Care Issues: Follow-on Biologic Drug
Competition,” June 2009
6
United States. Office of Management & Budget, 2009
7
Deloitte Consulting Estimate
8
Pharmaceutical Research and Manufacturers of America
(PhRMA)website <http://www.phrma.org/research/
drug-discovery-development>
9
10
11
Competition.” June 2009
12
13
John Lane, Vice President, Biologics, Hospira, at FTC
Roundtable on Follow on Biologic Drugs: Framework
for Competition and Continued Innovation, November
2008
14
United States Federal Trade Commission, “Pay-for-
Delay: How Drug Company Pay-offs Cost Consumers
Billions, An FTC Staff Study,” January 2010, (see Page
10, study discusses the fact that market demand and
consumer savings are 90% and 85%, respectively);
“IMS Market Prognosis 2009-2013, Noth America
USA.” IMS Health, March 2009.
15
United States Federal Trade Commission, “Pay-for-Delay:
How Drug Company Pay-offs Cost Consumers Billions.
An FTC Staff Study,” January 2010, (see Page 10, study
discusses the fact that market demand and consumer
savings are 90% and 85%, respectively); “IMS Market
Prognosis 2009-2013, Noth America USA,” IMS Health,
March 2009
16
“Efficient frontier” refers to a concept in financial
portfolio theory developed by Harry Markowitz
describing the set of states – the frontier – where a
portfolio of assets realizes the best possible expected
return for its level of risk.
17
Buckley, Ted, “Biosimilars: The Potential for the U.S.
Market,” Bloomberg Government, August 2010
18
RBC Capital Markets. “Analyzing Litigation Success
Rates,” January 15, 2010, (see Page 8); Deloitte
Analysis utilizing publically available legal data on
pharmaceutical patent challenges derived from ANDA
Paragraph IV certification.
19
Bob Billings, interim executive director of the Generic
Pharmaceutical Association in an interview to BioWorld.
“Biosimilars Are Not Yet a Threat to Brand Patents,”
Bioworld Today, March 9, 2011
20
“Follow-On Biologics Patent Litigation: Using Additional
Patents and REMS to Protect Market Share,” FDAnews
website. May 2009 <http://www.fdanews.com/
conference/detail?eventId=2762>
21
21 U.S.C. §355(j)(2)(B)(iv)
22
42 U.S.C. §262(l)(2)(A)
23
MIDAS Sales Data, IMS Health, March 2010
24
Gryta, Thomas, “Biosimilar Development Progresses,
Without FDA Guidelines,” Dow Jones Business News,
August 16, 2010
25
www.fda.gov; Center of Biologics Evaluation and
Research
26
IRC §41
27
IRC §41

Acknowledgements
Acknowledgements
The authors wish to thank the following collaborators
for their contributions to this paper:
Victoria Boegh
Director
Deloitte Tax LLP
Matthew Hudes
Principal & Managing Director, Biotechnology
Deloitte Services LP
Paul Keckley, PhD
Executive Director
Deloitte Center for Health Solutions
Robert Rouse
Specialist Leader
Deloitte Consulting LLP
Lakshman Pernenkil, PhD
Manager
Elizabeth L. Stanley
Research Manager
Deloitte Center for Health Solutions
Sanjay Modi
Senior Consultant
Anushree Agarwal
Consultant
Alexander Greenhouse, CPA
Associate
Deloitte Financial Advisory Services LLP
Authors
R. Terry Hisey
Vice Chairman and U.S. Life Sciences Leader
Deloitte LLP
Rob Jacoby
Senior Manager
Ted Hoffman
Specialist Leader
Anjan Chatterji
Senior Associate, Business Valuations
Deloitte Financial Advisory Services LLP

This publication contains general information only and is based on the experiences and research of Deloitte practi-
tioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional
advice or services. This publication is not a substitute for such professional advice or services, nor should it be used
as a basis for any decision or action that may affect your business. Before making any decision or taking any action
that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related
entities shall not be responsible for any loss sustained by any person who relies on this publication.
About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee,
and its network of member firms, each of which is a legally separate and independent entity. Please see www.
deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its
member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP
and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public
accounting.
Copyright © 2011 Deloitte Development LLC. All rights reserved.
Member of Deloitte Touche Tohmatsu Limited

Follow on Biologics Market

Follow on Biologics Market

Follow on Biologics Market

Recomendados

Más contenido relacionado

Was ist angesagt?

Was ist angesagt?(16)

Similar a Follow on Biologics Market

Similar a Follow on Biologics Market(20)

Follow on Biologics Market