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Intermountain-led generic drug venture faces big hurdles, could forge new regulatory and political ground

Group will face higher-than-average costs, uncertainty related to supplier competition and evolving technology, key manufacturing decisions.

Beth Jones Sanborn, Managing Editor

The group of hospital systems led by Intermountain Health that in January announced plans to form a nonprofit generic prescription drug manufacturer, will face higher-than-average costs, significant regulatory and manufacturing hurdles, according to a Health Affairs report.

There is uncertainty related to competition from incumbent suppliers, evolving technology and key decisions, including whether to manufacture the drugs themselves or to contract out to current makers.

[Also: VA, 4 health systems to form generic drug company]

The group's path will draw a roadmap, and perhaps a cautionary one at that, for other large systems looking at similar ventures or which simply desire to bring more of their pharmaceutical operations in-house.

Those decisions and more await Intermountain Healthcare as well as Ascension, SSM Health and Trinity Health as they go deeper into the process, wrote a pair of University of Chicago researchers, Rena Conti and Joseph Krongold, for Health Affairs. They called the venture a "credible threat of entry into the supply of these drugs" that could affect pricing and availability.

One pivotal decision the group will have to make is what drugs to target. The group has said previously that their plan is to market roughly 20 generic drugs. Conti and Krongold pointed out that even when the prices are set high, the revenue from these drugs will likely be small thanks to the fixed costs of production, rendering them largely unprofitable.The group will also face higher than usual costs because of the inherently limited economies of scale, Conti and Krongold said.

The firm will also face competition from current manufacturers as well as the uncertainty that comes with evolving technology. That is to say, a new therapy could become available that renders one of the group's generics obsolete before their investment would have garnered the appropriate return. Non-oral drugs are even more specialized and expensive, and there is less flexibility with production methods, the report said.

Huge regulatory costs will also be a challenge for the venture as it moves forward. Drug manufacturers must have an abbreviated new drug application approved by the FDA to make and sell a generic drug in the U.S. market. The new group could apply for a new ANDA for each drug they intend to market or use an existing one to produce the drug. Even though using an existing ANDA might seem easier in the surface, since it alleviates the need to go through the regulatory process that comes with applying for a new one, it can actually be more expensive. That's because the manufacturer must use the same exact manufacturing process, facilities and equipment specified in the original filing. Any changes the group would want to make to processes or equipment would need to go through the FDA, which can require a lot of money and the process can take years.

The regulatory costs of getting a new ANDA in place, for an oral generic drug for example, are not small. They range from one to five million. Injectible and infused drugs are more.

Another looming question is whether the group will decide to manufacture the drugs themselves or contract that work out to willing suppliers. It seems almost a foregone conclusion that the Intermountain group would partner with existing manufacturers, considering the enormous cost of building a new manufacturing facility. They would have to find suppliers that are willing and able to ramp up production to meet their demand and enter new markets. At issue here is what the group would offer to persuade these makers to invest their time and resources. 

"It is possible that as a not-for-profit the new venture would be willing to pay a sufficient premium for stable supply to incent manufacturer participation, somewhat like a special case of a GPO, but whether such an equilibrium exists and for which specific drugs is uncertain," Conti and Krongold wrote.

Another scenario actually could carry political intrigue. The group could possible seek out suppliers in the European Union who may have been eyeing an entry into the U.S. market but had thus far viewed the regulatory costs as too high. The FDA has in the past indicated limited interest in relationships with the European Medicines Agency as there are wider implications for drugs beyond those the Intermountain group identifies. 

"The nascent venture, however it solves these challenges and resolves other choices, will have important implications for the prices and availability of generic drugs in the US. Like many things, the devil is in the details."

Twitter: @BethJSanborn
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