In an effort to increase patient access to affordable drugs, California recently created Cal Rx, a state-sponsored generic prescription drug label. Precision’s Jason Shafrin weighs in on the potential impact the law ultimately will have.

Law Will Allow Calif. to Produce, Distribute Biosimilars, Generics

As the focus on drug prices continues, California recently took a step that it hopes will “increase patient access to affordable drugs,” according to a bill recently signed by the governor. But industry experts differ on the potential impact the law ultimately will have.

On Sept. 28, California Gov. Gavin Newsom (D) signed SB-852, which will create Cal Rx, a state-sponsored generic prescription drug label. The law charges the California Health and Human Services Agency (CHHSA) to enter into partnerships to produce or distribute generic prescription drugs — including biosimilars — and at least one form of insulin, “provided that a viable pathway for manufacturing a more affordable form of insulin exists at a price that results in savings.” The drugs will be available for “public and private purchasers, providers and suppliers,” including pharmacies and PBMs, and at “a transparent price and without rebates, other than federally required rebates.” CHHSA will enter only those partnerships that “produce a generic prescription drug at a price that results in savings, targets failures in the market for generic drugs, and improves patient access to affordable medications.” The law also is aimed at dealing with drug shortages.

The law requires that CHHSA “report to the Legislature on or before July 1, 2022, a description of the status of the drugs targeted for manufacture and an analysis of how CHHSA’s activities have impacted competition, access, and costs for those drugs.” In addition, before July 1, 2023, the agency needs to submit a report to the legislature “that, among other things, assesses the feasibility and advantages of directly manufacturing generic prescription drugs and selling generic prescription drugs at a fair price.”

Per the bill, “CHHSA shall prioritize the selection of generic prescription drugs that have the greatest impact on lowering drug costs to patients, increasing competition and addressing shortages in the prescription drug market, improving public health, or reducing the cost of prescription drugs to public and private purchasers.”

“The cost of health care is way too high. Our bill will help inject competition back into the generic drug marketplace — taking pricing power away from big pharmaceutical companies and returning it to consumers,” said Newsom in a press release. “California is using our market power and our moral power to demand fairer prices for prescription drugs.”

“Although state governments frequently pay for health care through programs such as Medicaid, in the past, state governments have not manufactured drugs,” says Jason Shafrin, vice president of health economics at PRECISIONheor. “Thus, this is a significant departure from the status quo. The California state government, however, does not have a robust set of government-owned drug manufacturing facilities to start making its own drug either.”

However, in a press release issued upon Newsom’s signing of the bill, California State Sen. Richard Pan, M.D. (D), the bill’s author, maintained that “state manufacturing of drugs is not a new concept. California, through the Department of Public Health (DPH) Infant Botulism Treatment and Prevention Program (IBTPP), has been manufacturing the only treatment for infant botulism since 2003. Massachusetts and Michigan Departments of Health operated manufacturing facilities for production of certain vaccines and biologic treatments. The Massachusetts laboratory is still in operation, and the Michigan laboratory was sold to a private company in 1998.”

“Will this entity and its manufacturing capability be viable?” asks Elan Rubinstein, Pharm.D., principal at EB Rubinstein Associates. He points out that nonprofit Civica Rx, which was established in 2018 by a group of health systems and philanthropies to address generic drug shortages and high prices, “started with a manufacturing intent, and then backed off. It is now contract manufacturing and acting as a GPO [i.e., group purchasing organization].”

Civica Rx Consulted With Legislators

An article posted on STAT News Sept. 28 says that Civica consulted with California legislators as they wrote the bill. It’s unclear what the organization’s role may be down the road, but Allan Coukell, senior vice president of public policy at the group, told STAT, “I expect Civica will be engaged if we can be helpful as the state moves forward.”

Among the entities required to purchase prescription drugs through CHHSA or entities contracting with it is Covered California, the state health exchange. Rubinstein contends that “this is unworkable, because Covered California is a marketplace on which a host of commercial and government health plans compete for individual enrollees. How will the government force these entities to purchase generics through this new vehicle, given that a substantial fraction of each of these health plan’s business is not Covered California and that the prescriptions are filled by freestanding contracted retail and mail-order pharmacies, administered by commercial PBMs?”

Most generics manufacturers are located outside of the U.S., “where costs are lower,” says Rubinstein. “Manufacturing costs will be higher in the USA relative to many less-advanced nations where generics used here are most often manufactured. How will U.S.-based drug manufacturing compete on a cost basis?”

Companies May Partner for Market Share

Omar Hafez, a managing director at Avalere Health, points out that in generic drug areas with many competitors, savings at times can be more than 90%. “California will likely not find much opportunity for additional savings with this segment of generics, which is already very competitive and commoditized. This is not to say that manufacturers won’t be willing to partner, especially if they are struggling to find market share through their distributors and believe that California can help move their product. However, the price points are already compressed, and the relative incremental savings that California can generate from these drugs are low compared to the total spend of branded and generic drugs.”

According to Phil Ball, Ph.D., head of policy practice at Innopiphany LLC, “the fact that PhRMA [i.e., Pharmaceutical Research and Manufacturers of America] is neutral and hasn’t commented tells us a lot. Even the generics industry didn’t rise up against a bill that has a singular focus to drive down prices in their market. The reality is that we already have one of the most robust, competitive generics markets in the world, which provides huge health care savings. There would be limited benefit in trying to undercut the prices for most drugs in this class, and I don’t see why a company would partner with the state for these products if they could just sell them on the open market. The only reason I can think of is a guaranteed sales volume.”

Shafrin tells AIS Health that there are two key reasons for manufacturers to contract with California. First, the drugs will be available without rebates. For this reason, “manufacturers could lower their list price but not lose much funds by simply cutting out the middleman — the pharmacy benefit managers — and avoiding having to pay rebates.”

Second, he notes that “California is a large market, and it could be the case that these ‘Made in California’ drugs would have preferred status among California payers. The bill notes that the state needs to consult with key state purchasers including Public Employees’ Retirement System, the State Department of Health Care Services, the California Health Benefit Exchange (Covered California), the State Department of Public Health, the Department of General Services, and the Department of Corrections and Rehabilitation. Getting access to all these large California payers could be lucrative if the reimbursement price is reasonable.”

State Is ‘Ideal Candidate’ for Program

“As the most populous state in the union, California is an ideal candidate for this type of program,” asserts Shafrin. “Other large states like New York, Texas or Florida could consider enacting a similar program. Manufacturers would have less incentives to enter into contracts with states with smaller populations.”

“Major manufacturing companies work with California. Right now, they work with end users in California with rebates and bundling to get some good prices,” said Stacie Ropka, Ph.D., an intellectual property law partner with Axinn, Veltrop and Harkrider, in an article posted Sept. 29 on The Center for Biosimilars website. “It could be an opportunity for them as well.”

But unless the state can guarantee volume that a manufacturer could not get on its own, there isn’t much incentive for a drugmaker to drop its prices, says Hafez. “What is less clear is how will California be able to guarantee share to its manufacturer partners. It is also unclear about what keeps a hospital or a pharmacy from buying through their existing procurement channels, especially if they have existing rebates or volume discounts with those partners, or if they would get price concessions that undercut California’s price. It is unclear if California will be competing against these existing channel stakeholders.”

What Might Be Impact on Biosimilars?

In the face of an already-competitive generics market, Ball says that “the bill will target drugs that offer the greatest opportunity for savings — i.e., the expensive ones. These are products with limited or no competition, either because they still have market exclusivity or because they are complex and, therefore, difficult to replicate. And herein lies the challenge. The state will have to either (1) develop and manufacture these complex products themselves, or (2) partner with an entity that is willing to develop these products and then offer them at significantly reduced prices compared to the current market.”

The first option is “probably a nonstarter because building the required capabilities from scratch is time consuming and costly,” he says. The second option “could work but only with a partner with very different ROI drivers. It would probably need to be a nonprofit, like Civica Rx.”

According to Rubinstein, biosimilars are “not appropriate” to include in this effort because they “are far more difficult to manufacture than are small molecule drugs.” In addition, one of the types of partnerships identified in the bill is GPOs, and “as to sourcing biosimilars as a GPO, there is no evidence that this is a cost-effective thing to do — and if it is, there is an existing California entity to do it (i.e., Statewide Pharmaceutical Program).”

In addition, while a pharmacist generally can substitute a small molecule generic for its reference product, it “does not have the authority to substitute a biosimilar, much less a particular manufacturer’s biosimilar when there are multiple biosimilars available.” And, he adds, “payers may not require the physician to prescribe a biosimilar, much less a particular manufacturer’s biosimilar, in place of the reference originator brand.”

However, commented Ropka in the STAT article, “[reference product] companies that also make biosimilars face the same problem that a company that strictly makes biosimilars faces: you have to be able to market [the product], and you have to be able to get end users to accept it. They may try and take advantage of bidding for California and getting themselves a nice contract with a guaranteed purchaser.”

Immunology Biosimilars Could Be Target

Noting that the legislation calls for CHHSA to “prioritize drugs for chronic and high-cost conditions,” Shafrin says immunology biosimilars, such as rheumatoid arthritis drugs, “would be one likely target. Treatments for cardiovascular conditions, such as atrial fibrillation, would be candidates as well, once their patents expire.”

Ball says that “the insulin market is perhaps the only space in which this has even a slim chance of working over the near term — which so happens to be a clear focus of the bill. While still more complex than most small molecule generics,” insulins are not as challenging to develop as monoclonal antibodies and recombinant proteins. That said, “you would still need to find a partner who is willing to offer the products at a significantly lower price than the handful of companies that currently control the market, all of which who operate optimized, large-scale manufacturing plants and have many commercial levers available to respond to new entrants.”

In addition to insulin’s complexity to manufacture, Rubinstein points out that there are several different kinds. “Also, existing manufacturers hold many patents around particular manufacturing methods that CHHSA or its contract manufacturer would have difficulty getting around — both for the insulins and for the proprietary injectors that the insulins are dispensed in.”

Law Will Affect Limited Amount of Drugs

Ultimately, Shafrin says, “it is important to recognize that this bill would only affect a limited number of drugs. Most generics in the U.S. are very low cost, and use of generics among U.S. patients is very common. Further, California could only manufacture drugs that have not reached their patient expiration/loss-of-exclusivity date. Thus, the SB-852 bill is limited to manufacturing drugs that are generic but for whom the market has not yet had sufficient competition to drive down prices. It is unclear whether the greatest impact of the bill would be the actual manufacture of new treatment or simply the threat of doing so, which could lead generic and biosimilar manufacturers of sole-source products to reduce their prices preemptively.”

View SB-852 at Contact Ball at, Hafez at, Rubinstein at and Shafrin via Tess Rollano at

by Angela Maas

AIS Health