The latest pharmaceuticals coming out of labs today are derived from living proteins. They're called biologic drugs, and if you were to look at a few under a microscope, you'd see that they're much more complicated than most prescription medicines on the market. Conventional drugs are made up of chemical compounds that, up close, might resemble the Big Dipper or some other constellation in the night sky. By contrast, the molecular makeup of biologic drugs is much more tangled and dense. Biologics don't appear as a handful of stars. They're the whole Milky Way.

Biologic drugs promise to treat everything from AIDS to cancer, from Alzheimer's to multiple sclerosis. There are currently over 400 biologics in clinical trials targeting more than 200 different diseases. But because these drugs are so complex to produce, they're also extremely expensive compared with traditional chemical drugs. Enbrel, an anti-arthritis biologic, can cost $20,000 per year, versus $300 per year for the most expensive non-biologic treatment of arthritis. More specialized biologics run an even higher tab. Cerezyme is a treatment for a rare genetic disorder that causes fatty deposits to build up in certain organs and bones. A year's prescription costs $200,000. And biologics keep getting pricier. From 1998 to 2006, the costs of these drugs shot up 505 percent, according to Kaiser Permanente, the managed-care organization. Sales of biologics hit $60 billion last year and are expected to reach $100 billion by 2010.

State and local governments, which are eating some of these rising costs through their Medicaid programs and employee benefit plans, are just starting to take notice. Seven years ago, biologics sales accounted for 11 percent of all drug sales in the U.S. By 2005, that figure rose to 18 percent, and by 2010, it is predicted that biologic drugs will comprise 26 percent of spending on pharmaceuticals. Insulin--the first biologic ever approved by the U.S. Food and Drug Administration, in 1982--is now one of the most widely used biologic drugs. The diabetes drug alone costs state Medicaid programs more than $500 million per year. Biologics may be the miracle drugs of our time, but before long they may start bleeding state budgets dry.

The usual way governments try to save money on prescription drugs is to push the use of generic versions--and that's exactly what some states want to do with biologics. Some estimates have predicted that the use of generic versions of biologics could save patients and health providers $50 billion or more. One pharmacy benefit manager, Express Script, earlier this year announced an anticipated $71 billion in savings over 10 years if generics enter the market. An Express Script representative even called that estimate conservative.


When it comes to biologics, however, there are two big problems with the generics strategy. The first is political. The federal government has yet to come up with an approval process for generic versions of biologics similar to the one it has for other drugs. The National Governors Association, among other groups, has asked Congress and the FDA to establish a regulatory framework for generic biologics. Committees in both houses of Congress have approved separate measures that aim to do that, but lawmakers must reconcile some large differences for the plans to move forward. Even if Congress passes a biologics bill, it could take the FDA years to implement it, and drug manufacturers would enjoy a period of protection from generic competitors. In both the House and Senate versions, that "exclusivity" period would last for 12 years.

The other issue goes back to the view under the microscope. Because biologic drugs are so complex and made from living enzymes, there's technically no such thing as a "generic" version of one. While conventional drug making is a form of chemistry, producing biologic drugs is more akin to agriculture. Replications may come close to the original but will never be identical. That's why many prefer to call generic forms of these drugs "follow-on biologics," or "biosimilars."

The complex structures of biologic drugs also raise safety concerns. Because these drugs are so hard to replicate, a biosimilar medication can sometimes behave in radically different ways from the original drug on which it's based. When it comes to traditional chemical drugs, mix all the right ingredients together and you know the drug will act the same way every time. For follow-on biologics, there's no such guarantee.

That fact became abundantly clear in Europe in the late 1990s, when several people taking Eprex, an anti-anemia drug, began suffering from allergic reactions. Their bone marrow stopped producing red blood cells altogether. In some cases, the effects proved fatal. It turned out that in 1998, Johnson & Johnson, the company that marketed the drug, had slightly altered the manufacturing process of Eprex. The minor change caused the drug to interact with the rubber stoppers used in syringes, resulting in the adverse reactions among patients. Johnson & Johnson fixed the manufacturing problem, but the entire episode underscores the volatility of biologics.

Drug companies cite this quality as a reason why Congress should be cautious about pursuing generics. "These products are more delicate and more complex in a whole slew of different ways," says Sara Radcliffe, the vice president for Science and Regulatory Affairs at the Biotechnology Industry Organization. Minor changes in heat or humidity can have drastic effects on a drug's functionality. "It just won't be received by the body the way it should be," Radcliffe says. If Congress and the FDA approve biosimilars, the drugs may have to undergo just as much testing as the original "innovator" drugs do, Radcliffe adds.

States are nevertheless rallying around the push for follow-on biologics. As inspiration, they point to the FDA's efforts, begun back in 1999, to draft plans for approving generic versions of insulin and human growth hormone, a biologic drug used to treat growth defects. The FDA finished its work on those guidances but never released them. Critics accused the agency of caving to pressure from drug makers who stood to lose money; the FDA said it wanted congressional authority for developing a broader approval process applicable to all biologic drugs. Either way, states see the FDA's work on insulin and HGH as proof that developing a framework for approving biosimilars is within reach.

In April, a bipartisan group of 18 governors sent a letter to Congress calling for an FDA approval process. The group cited the FDA's actions regarding insulin and HGH. "Based on that example," they wrote, "we believe there is little hope that Americans will have the benefit of generic versions of other biopharmaceuticals until Congress passes legislation authorizing the FDA to create an efficient and effective abbreviated pathway for approval of generic versions of biopharmaceuticals."

Some state lawmakers have voiced similar support. In June, several members of the Pennsylvania House of Representatives sent letters urging Congress to pass biosimilar legislation. "The FDA has acknowledged that generic biologics are inevitable," read one letter from Pennsylvania representatives Frank Oliver, a Democrat, and George Kenney, a Republican. "Meanwhile, state Medicaid costs for drugs continue to rise."


For states, federal approval of biosimilars would be only the beginning. If follow-on biologics do become legalized, the question then shifts to one of "bioequivalence." How freely can a generic drug be substituted for a brand-name one? That's a question that, at least with conventional drugs, has been left to the states.

For example, in some states the pharmacist at your drugstore can switch out your brand-name meds for cheaper generic ones, if you agree. In other places, that decision is left only to the physician prescribing the drug. Some states' employee benefit plans make it easy to swap out brand-name pharmaceuticals for generic ones; others make it more difficult. Medicaid programs in many states actively push for generics to be prescribed whenever possible. In 2004, generics were dispensed to Medicaid recipients an average of 89 percent of the time that a generic alternative was available. Some states' programs even provide a financial incentive to pharmacists who use generics.

Anthony Barreuta, the vice president of government relations for Kaiser Permanente, says the debate over biosimilars could quickly move from Washington to the states. "If the FDA does implement an approval process for biosimilars, I would not be surprised at all to see a lobbying frenzy at the state level by manufacturers trying to keep these drugs from being considered bioequivalent." On the other hand, generic-drug makers will be working just as hard to see that states consider the follow-on drugs interchangeable. "I would expect there to be a lot of state talk about generic substitution laws," Barreuta says.

How much might state and local governments save by pushing the use of biosimilars in Medicaid and employee benefit plans? That's hard to say. Despite the rosy estimates of Express Script and others, many experts believe the savings will be far more modest. That's mostly because producing and testing biosimilars is so much more complicated than making conventional generic drugs. "We've come to believe that 'generic' means 'cheaper,'" says David Ridley, a Duke University business school professor. Ridley says he believes biosimilars will actually have a cost "relatively close to the branded price."

Some of Ridley's studies of the biologics industry have been funded by the drug manufacturers. But other experts have reached similar conclusions. Avalere Health, an advisory company focused on health care business strategy and public policy, recently estimated that the federal government would see biosimilar savings of only about $3.6 billion over the next decade. Avalere hasn't estimated savings for states, but Dan Mendelson, the firm's president, urges states to think small. "My sense is that this is a long-term proposition with no immediate budget implications in the next five to 10 years," he says. "States need to be thinking now about how they can best move the ball forward. But they need to be very realistic about the fact that these savings are not going to be anywhere near what some advocates wish they were."

Still, supporters of generics are optimistic about the potential for follow-on meds. "The promise of the reduced costs may not be as great as with conventional drugs, although that remains to be seen," says Barreuta. "But Medicaid programs and state employee programs still have a huge incentive to push for this."