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Biosimilars: the new hot topic in the US

The essential

2015 has been a big year for biosimilars (“highly similar” versions of biological therapeutics) in the US. Five years after the regulatory pathway (BPCI Act) was enacted under Obamacare, the FDA approved its first-ever biosimilar in March of this year, which was then launched in early September.

The US healthcare system needs biosimilars to control the rise in drug spending. Over the coming years, the FDA is expected to approve biosimilars of the simplest biologics (first generation) and to finalize its guidance documents on substitutability and interchangeability. This is important when it comes to gaining the trust of doctors and patients in accepting these products. Originators will fight back in Court, which could delay the actual launch of FDA-approved biosimilars. Meanwhile, innovators have started to step in as well, predominantly developing the most complex biologics (second and third generation) to make good use of their scientific and production knowledge. Theycould become major players in this new market.



Biosimilars? Highly similar to approved biologics

Biologics are therapeutic molecules produced by living cells (mammalian cells) or organisms (bacteria, yeast) that have been genetically modified to make them synthesize a certain protein which is then extracted and purified into an active medicine. Pioneered by Biotech companies in the early 80s (Eli Lilly developed the first recombinant human insulin), biotechnologies have emerged as powerful alternatives to the more traditional chemically-based manufacturing process of so-called “small molecules”, creating a whole new category of highly potent biological therapeutics, but at a higher degree of complexity and cost. As a result, better-targeted drugs (e.g. extremely complex and large monoclonal antibodies, MAbs) with fewer side-effects were developed. Their manufacturing process (type of cells used, culture medium, etc.) determines some of their pharmacodynamic/pharmacokinetic properties and potentially their immunogenicity (i.e. their ability to trigger an immune response when injected). Immunogencity is hard to predict because no animal has the same immune system as a human being. Even two batches of the same biologic produced by the same company can vary within a certain range.

This is why there is no such thing as “biogenerics”, only “biosimilars”. A biosimilar is a biological product deemed by the US Food and Drug Administration (FDA) to be “highly similar” to a reference biologic, with: 1) no clinically meaningful differences and 2) the same safety profile. Only minor differences in clinically inactive components are allowable.

Better treatments, but at a high cost

Thanks to biologics, many great improvements have been made in the treatment of inflammatory diseases (Multiple Sclerosis and Rheumatoid Arthritis) and different types of cancers. In fact, of the Top 10 best-selling drugs in the world last year, seven were biologics, totaling $61bn in sales.

This trend will accelerate in the next few years as: 1) a veritable therapeutic revolution is taking place in cancer. MAbs that target the interactions of a patient’s immune system cells with its tumours (Immuno-Oncology) have shown unprecedentedly high levels of efficacy and should become the standard of care over the next few years and 2) the few remaining “small molecule” blockbusters are reaching the end of their patent life (Crestor, Advair) and will face generic competition at some point. By 2016, more than 30% of global branded pharmaceutical revenues will come from Biologics (versus 10% in 2000).

However promising biologics are, they are several-fold more expensive than small molecules and will therefore become an ever increasing burden on government healthcare systems, as there are no “small molecule” equivalents. In the US particularly, the lack of “biosimilars” (only one product approvedso far) is challenging for Federal and States drug budgets, and the payers (insurance companies, pharmaceutical benefit managers, etc). Bear in mind that, in the US, a Pharmaceutical/Biotech company can freely set the price of its drugs, and can raise the price as often and as much as it wants (for a more detailed discussion on the US drug pricing system, please refer to the April 2015 Cross-Assets Investment Strategy article “Perversions and virtues of the US prescription drug market”). For example, the first two MAbs approved for use in immuno-oncology (Keytruda from Merck&Co and Opdivo from Bristol Myers Squibb) each have a listed price of $150,000 per year. Despite the high price tag, the pharmaco-economics are good, but it means spending more today and finding other ways to save money.

Cost savings would be readily available if the many “old” (off-patented) biologics were not still unchallenged due to the lack of FDA-approved biosimilars. This “first generation” of biosimilars should start to be available in the US this year, but real savings would call for approvals of “second-generation” biosimilars of monoclonal antibodies from the end of the decade. In contrast, in Europe, the European Medical Agency has already taken the lead in that it began approving biosimilars as early as 2006.

The BPCI Act established a regulatory framework in the US

For small molecules, the so-called “Hatch-Waxman Act” of 1984 (i.e. the Drug Price Competition and Patent Term Restoration Act) created a regulatory framework and introduced the concept of “sameness” (via the Abbreviated New Drug Application, ANDA) that led to the development of a strong generic industry. Generic manufacturers were then able to develop copies of branded and patented drugs without having to duplicate the pre-clinical (in animals) and clinical (in human) studies. Instead, they only had to demonstrate bioequivalence to the reference drugs. While less than two-thirds of all prescriptions for Medicare Part D (the Federal health insurance program for Americans over the age of 65) went to generics in 2007, this percentage rose to 86% last year following the industry “patent cliff” (i.e. the loss of patent protection) of 2012/13. This freed up resources to afford the most expensive therapeutics. However, the number of “small molecules” blockbusters that will reach the end of their patent life over the next five years is running out, and the current blockbusters are biological in nature.

The regulatory pathway for biosimilars did not exist in the US before March 2010. The enactment by Congress of the BPCI Act (the Biologics Price Competition and Innovation Act of 2009), with the passage of “Obamacare”, gave the FDA the authority to approve biosimilars and set the data exclusivity period for a new biologic at 12 years (i.e. the period during which the FDA cannot approve a biosimilar even if the patents have expired). The BPCI Act defined a fairly convoluted route for a company to get through the FDA biosimilar approval process (the so-called “351(k) procedure”).

Zarxio (Sandoz) is the first biosimilar in the US

Zarxio (Sandoz), a biosimilar of Amgen’s Neupogen (filgrastim, approved in early 1991, 2014 US sales of $840m), was the first − and so far only ) – biosimilar to gain FDA approval (in March 2015) via the new 351(k) pathway.

For Sandoz (Novartis’ generic division), there were two types of hurdles to overcome with Zarxio:

  1. scientific: establishing enough evidence (no clinically relevant differences with Neupogen in terms of efficacy and safety) for the FDA to approve the product, and
  2. legal: winning in Court against the originator (Amgen), which had sued − not over the patents (they had expired) − but over the interpretation of different key provisions of the BPCI Act. To quote Judge Lourie, a Federal Circuit Court of Appeals judge presiding over the Amgen vs. Sandoz case, the BPCI Act is “entitled to a Pulitzer Price for complexity or unclarity.”

To dance or not to dance?

One of the most criticized provisions of the BPCI Act detailed the interactions that the originator and the biosimilar company “shall” have over the patents. This so-called “Patent Dance” involves the exchange of patents and other information according to a precise timetable. Early in the process the biosimilar company is required to provide the innovator with its application, including detailed information (cell lines, culture medium, purification, etc.) on the manufacturing process (usually considered as trade secrets). Then the innovator (and its lawyers) has to indicate which patents and processes are infringed, in its view. In summary, this “Patent Dance” is so contentious that it can take several years after FDA approval is obtained to resolve the case in Court and get the biosimilar on the market. Of course, originators largely prefer taking the legal route to delay a biosimilar’s market release as long as possible. Sandoz chose to interpret the Patent Dance as being optional (there is another provision in the law stating what to do if the biosimilar company does not comply with the Patent Dance). Amgen sued Sandoz over its interpretation.

After several months of legal battles, in July 2015 the US Court of Appeals for the Federal Circuit ruled in favour of Sandoz that the Patent Dance is only optional. However, the Court ruled against Sandoz on the 180-day notice of application to the originator. Consequently, Zarxio was only launched in early September 2015 despite having been approved in early March. Zarxio’s listed price (i.e. before negotiated rebates) is 15% to 17% cheaper than Neupogen.

Substitutability and interchangeability

Zarxio is, however, neither substitutable for nor interchangeable with Neupogen. It has to display the brand name as well as an International Nonproprietary Name (INN) with an added suffix indicating its manufacturer (Sandoz), filgrastimsndz. This does not create the best environment for fast uptake: Zarxio will have to be promoted by a sales force. Doctors will have to be convinced to prescribe it, but at the same time will be bombarded with counter-arguments by the originator. This contrasts with the automatic substitution seen when “small molecules” become generics and with the fast uptake of generics leading in turn to a sharp decline in prices.

The FDA is skating on thin ice…

Although it already took five years to get the first biosimilar approved and launched in the US, there are still considerable challenges ahead for the FDA.

The agency is skating on thin ice and cannot afford any missteps:

the FDA has come under fire several times in the past, resulting in approved drugs being pulled from the market (e.g. Vioxx) and putting the agency under a lot of scrutiny. This time the FDA wants to get it right and knows how the withdrawal of a biosimilar from the market would be disastrous for the future of biosimilars in the US;

the pharmaceutical and biotech industries, which have considerable financial resources at their disposal, are mounting legal obstacles and raising the spectre of potentially lower efficacy or higher side-effects of biosimilars in life-threatening diseases. The FDA needs to have clear and sound scientific evidence to counter this message;

the FDA still has to issue guidance documents on important aspects for biosimilars (substitutability, interchangeability) and what type of clinical data will be required from companies to demonstrate these two attributes. The companies that are currently developing 57 biosimilars against 16 different reference biologics need these guidelines to decide which different studies might be needed;

depending what side they take, politicians are piling on the pressure. The Senate Subcommittee on Primary Health and Retirement Security held a hearing on 17 September featuring Dr. Janet Woodcock (Director of the FDA’s Center for Drug Evaluation and Research or CDER) to understand why the FDA still had not issued these guidance documents. The Subcommittee pushed hard for deadlines, but in vain. Although the CDER Director believes that interchangeability is feasible scientifically, she would not commit to a specific date as each biosimilar is a special case that requires careful assessment.

The future of US biosimilars is in the making

Zarxio is unlikely to be a major biosimilar in terms of sales; however, it is very important in the sense that it is leading to a clarification of the law (BPCI Act) as it should be applied in “real life”. As such, Zarxio is setting a legal precedent, but nothing is set in stone just yet: both parties have requested an en banc rehearing, each on the provision that was ruled against it, i.e. Amgen on the Patent Dance provision and Sandoz on the 180-day notice of application to the originator. The outcome of this case and others (e.g. Amgen is suing Apotex over peg-filgrastim, a filgrastim with a longer duration of action, despite Apotex having chosen to comply with the patent dance) will seal the fate of biosimilars in the US, hopefully before the very meaningful commercial opportunities represented by various monoclonal antibodies open up toward the end of the decade.

In Europe, biosimilars were first approved in 2006. The first biosimilar of Remicade, a MAb used to treat rheumatoid arthritis and Crohn disease (among other diseases), was approved last year, enabling additional patients to gain access to the treatment.

Biosimilars should ultimately be successful

We see at least four reasons why Biosimilars will become an integral weapon in the therapeutic arsenal in the US:

  • The regulatory pathway is being clarified and the application of the law is in the making. While the BPCI Act established the regulatory pathway for biosimilars to get approved by the FDA, many provisions were ambiguous and subject to interpretation and challenges in Court. The Amgen vs. Sandoz legal case over Zarxio, Sandoz’s biosimilar of Amgen’s Neupogen (filgrastim) helped specify (in July 2015) which provisions are mandatory and which ones are optional. This will set a framework of reference for other biosimilar developers;
  • Science and biological manufacturing processes have made tremendous progress. Analytical methods have become much more sophisticated and can help ensure that a large part of the similarity with the originator molecule is assessed in vitro or in animal models, ultimately requiring more limited clinical trials (i.e. with patients). Manufacturing processes have become more efficient and their yields (measured in grams of proteins obtained per liter) have tremendously improved over the past five years, driving down the cost of production;
  • Second and third generation biologics are expensive and come at a substantially higher cost to the system. Some savings could be generated on fi rst generation biosimilars, but the real cost-saving opportunity lies with second-and third generation biosimilars (e.g. anti-TNF alphas used in rheumatoid arthritis and anti-cancer MAbs). Anti-TNFs are by far the largest single component of the global biological market and anti-cancer targeted therapies the second largest (cf. graph 1 and 2);
  • Pharmaceutical and Biotech companies will take a big piece of the pie. Though off to a late start, biotech companies (which boast all the relevant scientific knowledge and in-house expertise) have partnered with Pharmaceutical groups to start developing the second and third generation biosimilars of many of today’s Top 10 monoclonal antibodies. In our view, this proves the business model is valid and shows that the industry sees it as inevitable.

2015 has been a big year for biosimilars in the US and should herald the birth of a new industry. More often than not, this industry will be owned by the pharmaceutical/Biotech industry itself (Sandoz is the generic division of Novartis). Most of the larger generic groups have more or less given up or had to strike deals with Biotech companies given that the time, knowledge and resources required to navigate this complex system have increased exponentially compared to what was expected a few years ago. We expect biosimilars to remain a major theme for investors over the next five years.













Thanks to biologics, many great improvements have been made in the treatment of inflammatory diseases







In Europe, the European Medical Agency has already taken the lead in that it began approving biosimilars as early as 2006
































Zarxio is setting a legal precedent













The real cost-saving opportunity lies with second-and third generation biosimilars



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LEOPOLD Marie-Hélène , Equity Analysis - Paris
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