Winners and losers in healthcare reform

New legislation has pros and cons for pharmaceutical industry

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WASHINGTON, D.C.—President Barack Obama recently scored a political victory in the form of the recently approved healthcare bill. Whether the new legislation will have the pharmaceutical industry smiling or feeling blue remains to be seen.

It is known that the Patient Protection and Affordable Care Act will levy about $80 billion in various fees on the major pharmaceutical players over the next several years. It should also stoke sales by expanding drug insurance coverage. The bill also extends the period of market exclusivity for makers of biologic therapies, which are far more expensive to manufacture than traditional medications, to 12 years.

The legislation does not call for drug price controls or the importation of cheaper drugs from other countries, two possible scenarios that had been feared by many investors.
Absent from the legislation are provisions that would allow American consumers to buy reimported drugs from abroad and let the federal government negotiate drug prices, two controversial issues that the industry has said would devastate their balance sheets.

The approval of the legislation was applauded by Wall Street and could benefit the stocks of drug makers in the short term.

"I was unable to find anything in there that would cause me to have anxiety if I were a shareholder in a pharmaceutical company," Ira Loss, a senior healthcare analyst at the research firm Washington Analysis, told the Wall Street Journal in the wake of the bill's signing.

National Pharmaceutical Council President Dan Leonard said in a statement that the legislation offers the opportunity for meaningful change.

"Helping to inform healthcare decision making through comparative effectiveness research ... has the potential for positively impacting patient health," notes Leonard, whose group sponsors such research.

Meanwhile, MedTRACK, a leading database of private and public biomedical companies, is predicting mixed news for the healthcare industry in the wake of the bill's approval. Sarah Terry, president of Life Science Analytics, which produces MedTRACK, says that key reform measures in the bill will have an impact on society, private insurers, branded pharmaceuticals and generics.

"Measures such as the individual mandate, premium subsidies, Part D donut hole discounts/closure and the biosimilars approval pathway will have both positive and negative effects on these stakeholders," Terry says.

Terry points out that there are always winners and losers with any new legislation, and the healthcare bill is no exception.

"Patients will hopefully be the biggest winners, although more coverage and more prescribing doesn't necessarily equate into better health in the long run," she says.

In the pharmaceutical industry, both branded and generics will experience volume growth. Generics, however, will face downward price pressures and later entry to market while branded pharmaceuticals will experience some hardships of their own. Reform measures will force branded pharma to endure greater cost-containment pressures along with drug discounts.

"The bill does stipulate data exclusivity for 12 years, which is better than the five years that was on the table," Terry notes.

The marketing activities of these companies will also suffer due to limitations the healthcare bill puts on marketing practices. The measure does include marketing restrictions, though Terry points out that more stringent requirements have been in place in recent years and enforcement likely will continue to rise.

"They will have to revisit their tactics," she says. "Warning letters were on the rise even before this reform. Last year, there were 108 warning letters, compared to 43 in 2008. Promotion-related fines are going to go through the roof."

The legislation also will speed the biosimilars approval pathway in the domestic market. With a regulatory approval pathway in place in Europe and substantial guidelines to support biosimilar development, the European biosimilars market is significantly more advanced than the United States, where plans for a biosimilar regulatory approval pathway have stalled in recent years.

"The biosimilars approval pathway is something we've known has been coming down the pike for many years now," Terry says. "It's available in Europe and there are guidelines in Canada, Japan and Australia. The U.S. is the last market to adopt this. Biosimilar manufacturers are going to be positively impacted, starting with some of the bigger ones. As well, large pharmaceutical companies with a large stake in this market will be positively impacted."

Competition is going to look different for international companies with branded biologics. They have already faced competition in other markets, now they will have to face that competition in the United States.

"If they can't compete on price, they just have to have a better product," Terry says, "That type of competition and driving of innovation isn't a bad thing for anyone."

Another component of the legislation, comparative effectiveness requirements, will mean that pharma is going to have to have broader, larger, longer clinical trials with stronger post-marketing surveillance and due diligence.

"That is where there is going to be more expense for large pharmas," Terry says. "It's not something we've really seen in the U.S. before. The U.K. has some sort of comparative effectiveness. I think it is going to be a struggle for us to implement effectively in the U.S. in the short term. I think in the long-term, we will see a lot of added cost pressures added that will ultimately be added to the cost of the drug."

The legislation also contains a new incentive for biotech companies: the Qualifying Therapeutic Discovery Project Credit ("Therapeutic Credit"), which will allow some businesses to claim a credit for 50 percent of their qualified investment in qualifying therapeutic discovery projects for 2009 and 2010. Two things set this incentive apart from similar programs: Only businesses with 250 or fewer employees may qualify; and taxpayers may elect to receive grants in lieu of tax credits.

The ability to receive grants, in particular, makes the Therapeutic Credit especially attractive to the many small biotech companies (including pass-through entities) that have been unable to take advantage of the tax credit due to losses or AMT.

According to David Ji, a biochemist and alliantgroup managing director, "This new Therapeutic Credit provides small biotechs with much-needed capital to sustain their R&D programs, and it couldn't have come at a better time, with the current investing climate. It has the potential to result in new treatments, new therapies, and life-saving cures."

Universities, nonprofit research institutes and foundations, and the like will be interested in this credit insofar as any spin-off for-profit entities formed to develop and market the results of their biotech research may be eligible for this credit.

Xconomy.com's Richard Gayle said in a statement that the Patient Protection and Affordable Care Act has given biotech everything it wants and more: Tax breaks for smaller biotech companies and some simplification of the regulatory process.

The Therapeutic Discovery Project Credit provides "an amount equal to 50 percent of the qualified investment for such taxable year with respect to any qualifying therapeutic discovery project," which would permit some of the costs of pre-clinical research, clinical trials and other research protocols to be reduced, Gayle says. But the more important part of the legislation is the Approval Pathway For Biosimilar Biological Products, which permits biologics to maintain 12 years of market exclusivity after FDA approval.

"The biotechnology industry breathed a sigh of relief with this section's passage because this clearly delineated time frame could have been much different," Gayle says.

Not only that, Gayle adds, but the companies would also get a first look at any competitor that might be attempting to create a follow-on biologic. "Biotechnology companies developing reference therapeutics should be ecstatic with the legislation," he says.
The top executives of two of Massachusetts' largest biotechnology companies offered differing views recently during the annual meeting of the Massachusetts Biotechnology Council, a trade group.

"I don't think this healthcare reform really addresses the fundamental underlying issues that are going to get after health care utilization," James C. Mullen, CEO of Biogen Idec Inc. in Cambridge, Mass., told the annual meeting. He warned that U.S. healthcare will "look a lot like the European system," where governments try to rein in costs through price controls on drugs and medical services.

Mullen, who is leaving Biogen Idec in June, also predicted biotech companies will face a more difficult regulatory process in the United States, the Boston Globe reported.
"The environment to launch new products... is going to be tougher, the pricing is going to be tougher, the probability (of drug approvals) is probably going to be more challenging," he said.

According to Henri Termeer, CEO of Genzyme Corp. in Cambridge, Mass., the new law has the potential to boost investment in biotechnology research through a 12-year data exclusivity provision that shields biotech drugs from generic competition. The bill also contains a therapeutic-research tax credit for biotech start-ups.

Unlike past pushes for health care overhaul that failed, "this particular set of discussions didn't focus on the cost of innovation," Termeer says. "It focused on the cost of access. In fact, you could say that innovation was somewhat talked about in a kind of benevolent way. There was support for the need to be able to take the risks that are necessary. This (Obama) administration is actually interested in innovation."



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