The Multibillion-Dollar Fight Over a Definition

Drugmakers are now embroiled in an epic battle over the length of the exclusivity period that biologic drugs can enjoy before generic competition joins the fray. In addition to the usual suspects -- branded- and generic-drug makers -- everyone from legislators to pharmacy benefit managers to health insurers has weighed in on the debate.

This is big bucks, Fools, with major ramifications for different players in the health-care industry.

But first, a little history
Drugs come in two flavors: small molecules, which are synthesized chemically, and protein-based drugs called biologics, which are produced in living cells. Small-molecule drugs are approved by the Food and Drug Administration under the New Drug Application (NDA) process; biologics are approved under a process called a Biologic License Application (BLA).

There's a process for generic-drug companies to gain approval of their copycats of drugs that were approved under an NDA. The application, called an Abbreviated New Drug Application (ANDA), uses the efficacy and safety data of the brand-name drug, and simply proves that the generic version is the same as the branded counterpart.

Generic drugmakers obviously can't sell their versions of a drug before its patent runs out, but the legislation that established the ANDA process also extended the data exclusivity for five years beyond approval. Thus, a drug can enjoy at least five years of competition-free marketing before a generic version can be approved.

The corresponding Abbreviated BLA doesn't exist yet, but the FDA is working on one. Last year's health-reform bill required that the agency establish a pathway to approve generic versions of biologic drugs. They're referred to as biosimilars, because the complexity of making the drugs means the generics won't be an exact copy of the original.

Biotechs argued that because the drugs are harder to develop, they should get exclusivity that's longer than the five years given to small-molecule drugs. After much debate, the biotechs won 12 years of exclusivity.

And thus, the debate begins
Unfortunately, the bill doesn't define exactly what "exclusive" means. Is it market exclusivity, which would allow generic-drug makers to launch 12 years and one day after the original approval, provided the patents were already expired? Or is it data exclusivity, which would delay entrance considerably longer, denying the generic-drug makers access to the data until 12 years has elapsed.

In addition to the generic-drug makers, on the "market exclusivity" side we have:

• Bipartisan support from the U.S. Senate.
• CVS Caremark (NYSE: CVS), whose pharmacy benefit manager business makes more money off generic drugs than brand-name ones.
• Health insurers -- Aetna (NYSE: AET) and Humana (NYSE: HUM) specifically -- who will obviously benefit from lower-cost medications.

Among biotechs, Amgen (Nasdaq: AMGN) has been particularly outspoken, joined by another set of bipartisan senators who think that the bill refers to data exclusivity.

Stuck in the middle are plenty of drugmakers like Merck (NYSE: MRK), Pfizer (NYSE: PFE), and Teva Pharmaceuticals (Nasdaq: TEVA). They've said they plan to develop biosimilars, but also sell biotech drugs. They're in a win-win or a lose-lose situation, depending on how you look at it.

Who's right? It's tough to say, and I doubt the confusion will get cleared up anytime soon. This one seems destined for the courts or a rewrite of the law before it gets resolved. The first debate over how long the period should be was so contentious that I doubt the latter is a viable option.

If the fight goes on long enough without any decisions made, biotech drugmakers will get to continue with their de facto exclusivity. A savvy investor might consider investing in a basket of biotechs as a hedge against paying for high-priced medications in a few years, should biosimilars remain delayed.

Buffett thinks this "picks and shovels" company should profit, regardless of Congress' health-care reforms.