Johnson & Johnson's (NYSE: JNJ) one of the largest drugmakers in the world, and according to a lawsuit Pfizer (NYSE: PFE) has filed, it's leveraging its size to negotiate contracts that prevent insurers from paying for cheaper biosimilars to Remicade, its best-selling drug. Pfizer's suit reveals the lengths to which drugmakers are going to keep sales flowing in from drugs even after patents expire, so let's take a closer look to see what's at stake.
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First, some background
Patents protect drugmakers from generic competition. However, once patents expire, competitors are free to develop copycats that are equally as safe and effective.
In the past, most drugs that have lost patent protection and faced generic competition have been small-molecule drugs that can be easily replicated by following a chemical formula. However, increasingly, patents are expiring on large-molecule drugs, or biologics, that are created in living organisms and thus are impossible to precisely replicate.
Because of their complexity, biologics have escaped much of the competitive threat generic-drug makers pose. However, advances in technology and the establishment of rules allowing inexact copies, or biosimilars, to win FDA approval has sparked considerable interest in developing knock-off biologics.
A flurry of biosimilar research and development has already led to the FDA approval of a handful of biosimilars, including Inflectra, a biosimilar that launched last November to compete against Remicade for market share in rheumatoid arthritis, Crohn's disease, and other important indications.
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According to Pfizer's lawsuit, Johnson & Johnson enacted a "Biosimilar Readiness Plan" shortly after Inflectra's launch that's preventing it from securing insurance reimbursement.
Pfizer claims its inability to cut deals with insurers is due to Johnson & Johnson's inking contracts with them that either exclude Inflectra from their formularies or include "fail-first" language preventing Inflectra's reimbursement unless a patient tries and fails to respond to Remicade first.
In its lawsuit, Pfizer maintains that "fail-first" provisions are "spurious" (emphasis mine):
"The fail-first exception, which requires that Remicade has been tried by and failed with respect to a given patient before a biosimilar infliximab can be reimbursed, is medically inappropriate and illusionary in practice. If Remicade, which is an infliximab product, does not work in a patient, a physician would turn to a non-infliximab product, not to Inflectra, which also is an infliximab product and has no clinically meaningful differences from Remicade.
In effect, Pfizer maintains that including a fail-first provision is no different from outright exclusionary provisions, and therefore, Johnson & Johnson's contracts undermine free-market competition and the positive impact competition can have on drug prices.
Instead, Pfizer says that despite Inflectra's cheaper price, Remicade's price is increasing:
"Since the time the FDA approved Inflectra and J&J implemented its publicly stated plan to block biosimilars like Inflectra, J&J has raised the list price of Remicade by close to 9% and increased the amount the U.S. government reimburses for Remicade by more than $190 per infused dose."
Why are insurers playing along?
Pfizer argues that insurers are agreeing to these exclusionary deals to protect tens of millions of dollars in annual rebates on Johnson & Johnson drugs. Allegedly, Johnson & Johnson has tied insurers' ability to keep on collecting these rebates to its exclusionary contracts. Importantly, it's tied rebates on its other drugs to these contracts, too.
According to Pfizer:
"In effect, J&J says to insurers, 'If you want to receive attractive rebates on Remicade for all your existing Remicade patients ... you must agree to not reimburse for Inflectra, or to do so in the most limited of circumstances.' In short, insurers that decline J&J's offer face a substantial financial penalty, and those that accept receive a payoff (multimillion-dollar rebate payments) in return for their commitment to exclude biosmilars."
Pfizer says it's offered to guarantee a lower unit cost for Inflectra than for Remicade, but not even that offer has persuaded insurers to risk losing out on Johnson & Johnson's rebates. Instead, insurers have told Pfizer they'd cover Inflectra only if Pfizer agrees to offset any money lost if rebates disappear, something Pfizer suggests would cause it to lose money:
"Pfizer and other biosimilar firms cannot feasably make up the difference for the J&J rebates (on the existing Remicade patient base) that insurers would lose if they declined J&J's conditions. Insurers have stated a desire to support biosimilars -- and the lower per-unit prices they bring -- but realistically cannot do so without incurring a substantial financial penalty imposed by J&J and thus potentially placing themselves at a disadvantage to insurers accepting J&J's rebates."
Pfizer's suit may ultimately prevent it from using a similar tactic someday, and that suggests Pfizer believes the peak sales opportunity for its biosimilars is significantly bigger than the revenue it's currently generating from its biologics.
Pfizer's not wrong to think biosimilars represent a massive market opportunity. An estimated $100 billion in biologic drug revenue is coming up for grabs because of expiring patents over the next few years.
An even playing field is critical to maximizing the opportunity associated with biosimilars, but it's anyone's guess who will prevail in this case. If other drugmakers leverage their own rebate programs similarly, then they could turn biosimilars into niche drugs. That wouldn't be good for biosimilar drugmakers or patients' wallets.
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Todd Campbell owns shares of Pfizer. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.