Want Lower Drug Prices? Here's How the FDA Can Help

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Last week, presidential hopeful Hillary Clinton unveiled a series of proposals designed to rein in the high cost of prescription medicine. However, many of these cost-saving measures have been touted previously, and even if Clinton does win the presidential election, it's still years before these policies could affect drug spending.

Instead of waiting, the FDA could help lower drug prices if it prioritizes the approval of generic drugs in its backlog based on the price (and the pace of recent price increases) for the brand-name drug the generic drug would compete against.

An uphill battleBecause a tidal wave of widely used drugs was granted patents in the 1980s and 1990s and those patents are now expiring, generic-drug makers have flooded the FDA with abbreviated new drug applications, or ANDAs.

Given that generic-drug prices can be 80% cheaper than their brand-name alternatives, the surge in ANDAs is good news for patients and payers eager for new, low-cost alternatives. However, there's one big problem: The jump in applications has swelled the FDA's backlog, and since drugmakers need FDA approval before they can begin marketing their generic version, delays resulting from this backlog are costing patients and payers a lot of money.

In a bid to help the FDA come up with new ideas to tackle this problem, the Healthcare Supply Chain Association, or HSCA, sent a letter to the FDA in June suggesting that the agency start reviewing generic drugs with an eye on their potential cost savings.

Specifically, the HSCA notes that the FDA's approval time for generic-drug applications has increased to 42 months from 31 months in 2012 and that the number of generic approvals has fallen in each of the past three years. Because review times are growing and the pace of approvals is shrinking, the HSCA thinks it makes sense to fast-track applications addressing markets dominated by pricey medicine. Additionally, the HSCA suggests that the FDA might want to consider expediting the review of generics when the cost of a brand-name drug that's losing patent protection grows more quickly than inflation.

This prioritization scheme could make a lot of sense, especially because drugmakers tend to boost the price of their medicine in the years leading up to their patent expiration.

A 2011 study by AARP found that drugs with patents expiring in 2010, for example, saw their prices increase by a cumulative 51% in the previous five years and that the majority of the increase occurred in the final two years of a drug's market exclusivity.Another more recent price study suggests that this practice remains alive and well.

According to AARP's price trend report issued last year, the cost of a one-year supply of Bristol-Myers and Otsuka'sblockbuster antipsychotic drug Abilify increased to $11,755 in 2013 from $5,247 in 2006, before losing patent protection this year.

Similarly, the AARP found that the price ofSanofi'stop-selling diabetes drug Lantus, which also lost its patent protection this year, grew 27.4% year over year in 2013 alone.

Those increases significantly outpaced inflation and the average price increase associated with a basket of the most widely used prescription medicines in America.

Addressing the problemThe FDA's generic-drug backlog totaled 3,300 pending ANDAs in February, and while it's unclear just how big the backlog remains, or whether the FDA would consider such a prioritize-by-price plan, the FDA has set internal target action dates, or TADs, for first-to-file generic drugs targeting big markets.

TADs are an important step in the right direction because they increase the likelihood that a generic alternative will be ready to go when a brand-name drug's patent expires, but plenty of "big" indications are dominated by relatively low-cost small-molecule drugs and prices fall by the most when multiple generic drugs are available.

An increase in patent expirations on complex biologic drugs that typically cost significantly more than traditional medicine further compounds the problem: $67 billion worth of biologics may lose patent protection by 2020, and because specialty medicines like biologics make up just 1% of all prescriptions but account for nearly a third of all drug spending,it seems to me that prioritizing applications by price and price increases is an idea worth exploring.

The article Want Lower Drug Prices? Here's How the FDA Can Help originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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