In Europe, government health organisations like the UK National Health Service (NHS) make the big decisions about buying medicinal products, which are procured on the basis of public tenders. Who wins these tenders, and how much money gets spent on which diseases, have huge impacts on the health industry and citizens’ lives. This raises profound questions about what constitutes good value for public money.
Assumptions have consequences
Procurement policy guides the tendering process and this shapes decisions made across the whole industry landscape, from patent strategies to investments in manufacturing capacity and R&D. Outdated or erroneous assumptions made by policy-makers can therefore have all kinds of unintended consequences – especially on biologic medicines and their generic equivalents, biosimilars.
The importance of patents
Patents exist to incentivise innovation. They do this by restricting competition for a set time so that the innovator can profit from their invention. When patent protection on a drug expires, generic competitors enter the market and the price comes down, providing better value to the taxpayer. The original drugmaker however is losing an effective monopoly and the higher margins that come with it.
Biotechnology and pharmaceutical companies use various legal methods to extend their monopolies on a treatment. One method is to file a barrage of time staggered patents covering aspects of the manufacturing process. Another is to retain key know-how. On a practical level, both strategies make it much harder for generic medicines such as biosimilars to enter the market and drive down prices.
A European take on tendering
European policy-makers have responded to this challenge by evolving a variation of the tender system. Tenders entrust decision-making to public bodies such as the National Institute for Clinical Excellence (NICE) instead of the free market. Experts assess various treatments offered by biotechnology and pharmaceutical companies in a competitive bidding process – and will sometimes pick a winner if they think it justifies the allocation of public money.
Biosimilar suppliers bid on price, quality, security of supply and in some circumstances value-added services. They must obtain regulatory approval for their various manufacturing processes, and convince regulators that their end-product is bioequivalent, meaning that it is sufficiently similar to the original molecule.
Sophisticated cost and benefit analysis by government-appointed experts provides an overall assessment of value. If the outcome is positive, then the health organisation might proceed to negotiate a contract using their scale, prestige and purchasing power as leverage to obtain a lower price. By deploying a sophisticated competitive tendering process, European negotiators can sometimes obtain price reductions of between 20 to 40 percent.
Does tendering deliver value for money?
A 20 to 40 percent discount may sound like good news for taxpayers. Many biologics provide optimal treatments for a range of diseases and conditions, but they can be expensive and the gross margins are rumoured to be very high. In terms of long term value, however, the picture’s not so clear.
First, security of supply is a big consideration for European tenders. Serious bidders need to invest in expensive manufacturing capacity that’s credible and suitably regulated. This up-front expense tends to work against a well-attended bid because the costs of losing are so high. Fewer participants in a bid reduces the pressure on those who are competing, enabling them to raise both their price and their margins.
Second, the existence of secret know-how among manufacturers puts up another barrier to competition, especially for technically complex biologics. The tendering process does little to foster transparency or sharpen market dynamics. Bidders might temporarily reduce their margins to win a tender, but can then relax their guard until the next round, which is not the case in a free and competitive marketplace.
Manufacturing innovations may force change
The European tender system was designed for the present paradigm of manufacturing capability. But a new era of multi-parameter optimisation is coming to the field of recombinant protein manufacture. Quantitative Trait Loci (QTL) technology enables manufacturing strains to be developed that create and customise recombinant proteins with characteristics that are tailor-made to dominate their chosen market.
QTL technology can deliver consistent quality and exact bioequivalence at a lower cost of manufacture – with significantly less plant required. Even in cases where know-how has been retained by the developer of the original reference compound, QTL technology can make the commercial manufacture of recombinant protein therapeutics viable.
This suggests that a recalibration of the European tender system might be needed to ensure that QTL technology’s enormous commercial potential translates into lower prices for the wider public. For example, will drugs that are currently prohibitively expensive become immediately and affordably available upon patent expiry without the European public being held to ransom by tactics such as ever-greening and patent thickets?