In a February post, I summarized a new report by economist Robert Shapiro which purported to identify $378 billion in savings if the US creates accelerated pathway for the approval of follow-on biologics. A critical assumption underlying this projection is that competition will inevitably drive down prices. Apparently, however, at least one federal district court judge does not buy into this assumption. Last week, in a much anticipated decision by the district court in Amgen v. Roche, Judge Young entered a permanent injunction against Roche, based in part on his conclusion that the introduction of competition into the erythropoietin (EPO) market would likely result in no reduction in Medicare costs, and might actually cause prices to rise. Most EPO purchased in the US is ultimately paid for by Medicare.
This counterintuitive economic analysis was based primarily on testimony from Amgen's expert, Prof. Douglas Bernheim, who testified that under the current Medicare reimbursement scheme there are perverse incentives at play such that competition can actually lead to higher prices. This conclusion would presumably not apply to most drugs, but depends upon the fact that EPO is a physician-dispensed drug, and the actual purchaser is the physician or healthcare provider. According to Prof.. Bernheim, a healthcare provider is not incentivized to purchase the least expensive drug, but rather the drug that offers the largest difference between the amount a provider is reimbursed under Medicare and what the provider actually paid for the drug. Because the amount of Medicare reimbursement is determined by the drugs average sale price (ASP), a higher drug price can actually increase provider reimbursement and thus lead to higher sales, contrary to the classic free market where increase in price is assumed to result in a decrease in demand.
Roche offered the testimony of its own expert, Prof. Einer Alhauge, who argued that Prof. Bernheim's analysis “really assume[s] Medicare is irrational." Prof. Elhauge opined that Medicare would rationally approve reimbursement at a rate higher than that charged by Amgen only if Roche’s product (MIRCERA, a pegylated version of EPO) is of higher quality than Amgen's product, or if Medicare thought that MIRCERA’S entry was going to lead to lower prices over time and wanted to help fund the entry to make sure that it happened. However, ultimately judge Young appears to have been persuaded that Medicare is indeed irrational, and that at least for physician-administered drugs like EPO the introduction of follow-on competition will not likely lead to lower prices. This conclusion is not only inconsistent with the Shapiro report, but with the strong movement in Congress towards providing a statutory abbreviated approval process for follow-on biologics.
It should also be noted that Judge Young also cited more convincing reasons for denying Roche's request for a compulsory license. In particular, he pointed out that allowing Roche to enter the market would cause "immense, immeasurable, irreparable harm" to Amgen, there was no compelling evidence that Roche's product provides substantial clinical benefits not provided by Amgen's products, and permitting Roche to enter the market would severely undermine the incentives for innovation provided by patents, and so crucial to the success of the pharmaceutical and biotechnology industries.
More on the decision to follow.