Investment Decisions Based on Biosimilar Programs, Part 2

This article is the second part of a two-part series examining the environment for third-party capital providers interested in investing in biosimilars. It describes three hurdles facing potential investors: access to capital, exclusivity and intellectual property and commercialization. This article complements Part 1 of the series, which provides an introduction to this complex area and examines three additional hurdles that must be addressed: manufacturing, immunogenicity and data generation.

Hurdle Four: Capital

Most partnerships involving biosimilars that have been announced to date involve generic companies and large pharmaceutical/large biotech firms or two large pharmaceutical companies. These partnerships focus on obtaining operational expertise and sharing the risk (and costs) associated with biosimilar drug development. Due to the perceived high risk associated with biosimilars, including the cost of litigation when originators (e.g., Amgen) fight to protect their lucrative franchises, third-party capital providers are proceeding cautiously, although they continue to be intrigued with the potentially lucrative market that biosimilars represent. This caution will undoubtedly continue in the near term, although as more experience is gained, more products come off patent and additional biosimilars receive approval (especially in the US), risks are likely to diminish.

Based on the authors' experience, companies that have forged ahead in biosimilar development without FDA guidance (until February 2012), while relying on EU guidance, are clearly ahead of the game compared with those that waited. However, this market advantage came at a price, including conducting trials and exercises not now required by FDA, and the costs associated with time delays while awaiting FDA guidance.

Investment capital is protected against excessive risk via the contracting process, which starts at the term-sheet level and is modified with the findings from the ongoing due diligence process. The deal is finally executed in a contract through which the capital provider seeks protection against the key risks identified in the due diligence process. 

Most deals have a return structure related to milestones (e.g., regulatory approval or successful completion of a Phase 3 trial), or royalties from the sale of the biosimilar once marketed. There are myriad ways for capital providers to protect their investment--and it is beyond the scope of the article to discuss the various return possibilities in detail. At a high level, to decrease their commercial risk, third-party capital providers can exit (e.g., get their returns) via milestones up to and including registration.

To leverage capital to advance biosimilars programs, investors may focus on dedicated manufacturing capabilities, single products or portfolios of products, to name a few examples. If a single source of capital is insufficient for a particular deal, syndication can be considered. It is highly advantageous to partner with a service company with the geographical scope needed to execute all clinically related work (PK/PD and clinical trials) required for 351(k) registration.

Hurdle Five: Exclusivity and IP

With passage of the Patient Protection and Affordable Care Act (PPAC Act), the biotechnology industry won its long fight over years of exclusivity for innovator products, but this decision may now be in question. The Biologics Price Competition and Innovation Act (BPCI Act) currently allows 12 years of market exclusivity for new biologics, whereas small-molecule drugs normally receive only three to five years of exclusivity based upon the clinical data submitted. However, in an effort to drive prices down, debate continues about reducing the biologic exclusivity requirements from 12 to seven years--more in line with other countries (e.g., Europe and South Korea provide eight years of exclusivity; Japan and Canada each provide six years; and Australia provides five).

Another factor to consider is that originator biologic manufacturers are implementing sophisticated lifecycle plans, including filing for new patents, to protect their branded products. Biosimilar sponsors will need to budget for defense against legal actions by originator companies as patents and other protections disappear. [media:1754:embed:left] 

If a company chooses the biosimilar route for approval under the PPAC Act, there is a complex scheme for resolving patent disputes. As shown in Figure 1, the biosimilar applicant (also referred to as a follow-on biologic, or FOB) and the brand company must exchange statements of the patents that will be the subject of the initial phase of patent litigation and patent lists prior to beginning patent litigation. The parties must follow detailed negotiation procedures if they cannot agree on which patents will be the subject of the initial phase of litigation. Failure to provide patent information on a timely basis to a biosimilar applicant may bar the brand company from bringing a patent infringement suit against the applicant. As in the provisions of the Hatch-Waxman legislation regarding brand-generic patent disputes, the PPAC Act permits the filing of a lawsuit prior to approval. 

Within 20 days of being notified by FDA that the application has been accepted for review, the biosimilar applicant must provide notice to the originator company and an offer of confidential access to the application and detailed information on the product and method of manufacture. Within 60 days of receipt of this notice from the biosimilar applicant, the originator company provides a list of patents that it believes could be asserted against the biosimilar product. The originator has an ongoing duty to notify the biosimilar applicant within 30 days of issuance or acquisition of any new, relevant patents. 

Within 60 days after the originator firm identifies the relevant patents, the biosimilar applicant must provide a written certification for each patent that indicates it will not market until expiration of the patent, or provide a detailed explanation as to why each patent is not infringed, invalid or unenforceable. The originator company and biosimilar applicant then engage in good faith negotiations to agree which patents should be the subject of an infringement action. 

If the parties fail to reach an agreement within 15 days of the start of the negotiations, the biosimilar applicant must notify the originator company of the number of patents it believes are subject to an infringement claim. Within five days of the notification, the parties must then exchange lists of patents each believes are subject to an infringement claim. The originator company cannot list more patents than the biosimilar lists. If the biosimilar applicant fails to provide a list, the originator can list one patent. 

If there is agreement on the list of patents subject to infringement action, the originator company must file suit within 30 days. If there is no agreement, the originator company must bring a patent infringement suit within 30 days after the lists are exchanged. If the originator company fails to bring suit within the 30-day period--or the case is dismissed without prejudice--the sole and exclusive remedy available is a reasonable royalty, and no injunctive relief will be available in any future litigation. 

If a company chooses to file a full Biologics License Application (BLA) for a product instead of seeking its approval as a biosimilar, normal rules of patent litigation apply. This means there is no mechanism for resolving any patent dispute prior to approval and none of the foregoing back and forth between the biosimilar and the originator companies concerning the patents at issue is required.

Hurdle Six: Commercialization

Unlike traditional generic pharmaceutical products, biosimilars are largely unfamiliar to key healthcare stakeholders such as physicians, payers and patients, and when these products are launched, biosimilar companies will be forced to market their products using commercial strategies and tactics that are markedly similar to late entrant "me-too" products or branded generics. Key strategies will include naming their biosimilar products to distinguish them from competitors. This is an evolving area, with biosimilars required to have a proprietary name in both the US and the EU, and current US regulatory documents referring to biosimilars by the brand or biologic name followed by the biosimilar sponsor's name. Other strategies are: creating clinically meaningful differentiation, in addition to price discounts, for biosimilars versus current and future originator brands and other biosimilar competitors; educating physicians, payers and patients to overcome anticipated safety and efficacy concerns regarding the use of the biosimilars; and creating patient support programs to address reimbursement challenges. These strategies and tactics will require a significant short- and long-term investment to drive market share. 

Biosimilar companies will face the difficult challenge of balancing high clinical development costs with substantial promotional investment and price discounts that will be required to drive utilization. Given the profitability challenges that biosimilar manufacturers will face, and potentially fewer competing biosimilar manufacturers entering the market, it is not anticipated that price discounts will be nearly as deep as is typical in the small-molecule generic space, where they can be as much as 90%. It is likely that biosimilar prices will be discounted in the range of 20%-30%.^{1, 2, 3} This limited price discount may not be a sufficiently strong enough incentive for healthcare providers, payers or patients to switch to a new, unproven biosimilar. The US marketplace may present a greater opportunity for biosimilar manufacturers than Europe over the longer term, as pharmaceutical and biologic pricing is higher there, creating an opportunity for higher profit margins. Additionally, new US healthcare policies may drive utilization of lower-priced biosimilars.

Interchangeability, or its lack, will also influence the commercial success of a biosimilar. Biosimilar manufacturers face a decision with high potential for both risk and reward as they determine whether to design clinical trials to seek regulatory approval for interchangeability. If interchangeability is not achieved, healthcare providers may be reluctant to switch stable patients, and payers will be unable to drive substitution. In this scenario, the target for the biosimilar would be limited to new patient starts, and payers would potentially apply the same formulary review rigor as for any new branded product entrant. Another important consideration for the healthcare provider as well as the payer will be the number of indications for the biosimilar product versus the originator. A lack of critical indications could significantly limit prescribing and payer reimbursement.

While biosimilar manufacturers are attempting to bring their products to market, originator biologics manufacturers will continue to invest heavily in innovations for existing products. They are expected to focus on achieving regulatory approval for new indications, new formulations/dosing or new delivery devices, or investing in new trials to heighten the level of robustness in their efficacy or safety data, essentially raising the bar for a biosimilar to gain traction. Additionally, completely new molecules may be in development or approved and being vigorously marketed, creating a very competitive environment for promotion of a biosimilar that may be perceived as an inferior product. Even if the originator biologics manufacturer is not focused on product innovation, it will undoubtedly continue promotion of its products when biosimilars enter a market. In fact, a biosimilar manufacturer should expect originator biologics companies will deploy tactics to increase innovator brand loyalty and effectively blunt the impact of biosimilars in advance of their launch. 

Summary

From the sponsor's perspective, biosimilars offer the potential to gain a share of the lucrative biologics market. However, several factors will continue to temper the impact and growth of biosimilars in the US. First, the requirements to receive an interchangeability designation from FDA are not clear, and without this designation, pharmacists would be unable to switch from an originator to a biosimilar without physician involvement. Second, the initial price discount for biosimilars is likely to be relatively small, making it less likely for physicians to switch due to pricing alone. Third, the US pharmaceutical market is driven by innovation, with physicians and patients quick to adopt innovative therapies such as originator biologics. However, as decision-making power gradually shifts from physicians to payers, biosimilars will likely play an increasing role.

In the US, it is still early days for biosimilars and their future is uncertain. The success of companies aspiring to manufacture biosimilars will be tied not only to the timing of expiry of the originator patents (or new patents as in the case of Enbrel) but also to the technical and financial ability of originator companies to manufacture comparable products successfully. Considerable resources are required to finance quality, nonclinical and clinical comparability studies prior to registration.

In Europe, the biosimilar market is predicted by Frost & Sullivan to reach $3.9 billion in 2017, representing a compound annual growth rate of 56.7% from 2010 to 2017.⁴  The main biosimilar market drivers are forecast to be patent expiries, increased demand due to targeted reduction in medical expenditures and emergence of new market participants. Market restraints identified by Frost & Sullivan are the reluctance of physicians to adopt biosimilars, lack of access to process information and a time-consuming approval process. The market research company projects that Germany will be the most attractive market for biosimilars over the long term due to its pro-generic policy environment and emphasis on cost containment.

Partnerships increasingly are being formed in the biosimilars arena. These have both advantages and disadvantages. On the plus side, partnerships offer a way to share (and dilute) risk; provide access to additional capital; make available additional expertise; and can increase the chance of gaining "first mover" advantage, where the biosimilar is first to market. Negative factors related to partnerships include potential loss of capital; the fact that the product may fail to reach the market if one partner fails to progress it as expected; the risk of moving ahead in the US without clear regulatory guidance; the potential for aggressive competition (which may reduce market share); and the fact that syndication/partnership dilutes potential upside, due to the need to share profits.

Looking ahead, companies that are well capitalized and have access to optimal biopharmaceutical manufacturing using state-of-the-art analytical methods, PK/PD expertise and access to world-class biosimilar clinical trials will be at an advantage over those that are smaller or less well capitalized.

References

1. Huml RA, Posner J. Chapter 38: Biosimilars. In: Textbook of Pharmaceutical Medicine. Chichester, West Sussex, England: John Wiley & Sons Ltd; 2013:744-750.
2. Sashidhar KS. Biosimilars in Europe: The Road Ahead. Analyst Briefing, 6 March 2012. http://www.slideshare.net/FrostandSullivan/biosimilars-in-europe-the-road-ahead#btnPrevious. Accessed 17 July 2013.
3. Emerton DA. Profitability in the Biosimilars Market. BioProcess International website. http://www.bioprocessintl.com/multimedia/archive/00212/BPI_A_131106SUPAR01_212417a.pdf . Published June 2013. Accessed 26 July 2013.
4. Op cit. 2.