Exploration of Potential Economics of Follow-On Biologics and Implications for Data Exclusivity Periods for Biologics

Legislative efforts to establish an abbreviated regulatory approval pathway for follow-on biologics (FOBs), also referred to as biosimilars, have generated considerable attention and debate. Legislators expect FOBs to produce cost savings through competition, much like that seen in the U.S. generic pharmaceutical market. However, biologic products, which are large complex molecules, differ from pharmaceuticals in many ways, including their basic structure, composition, and their manufacturing processes. The economics behind the establishment of an FOB market involves a plethora of issues not encountered in the generic pharmaceutical marketplace. One of the most critical and controversial issues is the determination of an appropriate period of data exclusivity or data protection for a new biologic. Building on recent research by Grabowski (2008) and using contemporary models of risk and return from the finance literature, we determine that 17 years of data exclusivity for new biologics are required. In this paper, we review some of the basic economic differences between pharmaceuticals and biologics; the potential for short run cost savings from a FOB market; and the challenging patent issues biologic products encounter that make data exclusivity periods so critical. However, the main thrust of our paper is that the considerable financial risk of biotechnology R&D, and the sensitivity of R&D to expected returns, makes it critical that Congress provide adequate incentives for biotech R&D through appropriate periods of data exclusivity or data protection for biologics.