On Monday, August 31, the California state legislature passed, SB 852, The California Affordable Drug Manufacturing Act of 2020, which would allow the state to partner with drug manufacturers to produce their own line of pharmaceuticals.  The state would only enter a partnership to “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 legislation would also allow the state to assess “the feasibility and advantages of directly manufacturing generic prescription drugs and selling generic prescription drugs at a fair price.”  Taxpayers will have to fund $1 to $2 million in start-up and staffing costs.  Citizens Against Government Waste (CAGW) believes Californians should prepare for that amount to be a lot more and when all is said and done, drug costs will not be lowered significantly, if at all.

California Governor Gavin Newsom (D) has until September 30 to sign or veto the law.  It is likely he will sign the legislation since he included a similar manufacturing proposal in his budget proposal earlier this year.  But, a September 2 Inside Health Policy article said the arrival of COVID-19 forced him to abandon the proposal in May.

The generic drug industry trade group, the Association for Affordable Medicines, is not objecting to the proposal nor do they feel threatened by it.  According to Fierce Pharma, the association’s reaction was they “are more than open to doing this kind of partnership” and having “a fair and open process to sell drugs and compete for customers is what the generic industry is very used to and comfortable with.”

But, according to The Motley Fool, investors are not so optimistic.  Teva and Mallinckrodt’s stock fell by more than 5 percent on Tuesday in contrast to gains in the broader stock market.

No doubt one concern investors have, as does CAGW, is the legislation will allow the state to manufacturer their own drugs and compete directly with the private sector.  The California Health and Human Services Agency has until July 2023 to submit a report to the legislature to see if it would be feasible for the state to manufacture their own generic drugs.  While this effort would not occur for several years, it would be troublesome.

State governments are notorious for designing systems that are too bureaucratic, expensive, and fail spectacularly but they have endless funds to commit for all sorts of mischief: the taxpayer.  Prime examples are the failed Obamacare exchanges and CO-OPs.

In addition to manufacturing generic drugs, the legislation would allow the state to manufacture and distribute biosimilars, the “generic” version of brand-name biologic drugs.  These types of drugs are manufactured from human, animal, or microorganism sources and provide highly effective and life-saving treatments for many chronic and debilitating illnesses, such as cancer, inflammatory diseases, and diabetes.  Biologics can also be very expensive due to their complexity and development costs. 

The legislation also requires the state to enter a partnership to manufacture at least one form of insulin, “provided a pathway exists.”   This will not be as easy as it may sound as there are many different types of insulin, the therapies are more complex to copy and reproduce than other medications, are delivered in different ways, and patients are on diverse regimens.   

The authors of the legislation recognized there are a host of unanswered questions that will determine viability of the law.  This includes the cost of Food and Drug Administration user fees and drug applications; mandatory rebates; production, research and development costs; maintaining the bureaucracy established to develop and negotiate the partnerships with private manufacturers, and the funds needed to build and operate a state-run drug manufacturing plant.

Call us skeptical that this endeavor will be successful and significantly lower drug costs.