May 27, 2007 — Howard S. Jonas is an unlikely policeman.

His company, $2.2 billion IDT Corp., is fresh off a $20 million class-action settlement for claims of failing to adequately disclose rates and fees on its pre-paid phone cards. The industry IDT dominates is so shady New York State Attorney General Andrew Cuomo’s Web site provides a two-page tip list for avoiding rampant hidden fees and surcharges.

Yet Jonas is casting himself as the industry’s top cop.

In March, Newark-based IDT slapped six rivals with a federal lawsuit in New Jersey alleging widespread, systemic fraud from a failure to deliver the promised number of minutes.

Now he hopes to enlist Cuomo himself to help protect the largely immigrant Latino customer base.

“We don’t expect the attorney general to allow people to keep cheating consumers in New York State,” says Jonas.

A spokeswoman for the attorney general said Jonas has not formally contacted Cuomo, but if his office uncovered any ongoing fraud it would investigate for possible enforcement.

To the average New York cellphone addict, a business based on $2 and $5 prepaid cards may seem like a dinosaur. But the small denominations add up to a $4 billion industry, and a brutal battle for market share underlies Jonas’ campaign. IDT claims a direct link between the alleged fraud and its slumping revenues.

In the first half ended Jan. 31, IDT’s prepaid products revenue plummeted 18 percent to $493 million, and the company lost $4 million on continuing operations. By contrast, privately held CVT Prepaid Solutions Inc., a defendant in the suit, is profitable and growing rapidly, according to board member Robert Book.

Three defendant groups have settled, but CVT is fighting back. Book even aims to one-up Jonas as the industry’s hero with a new charitable foundation - by July 1, CVT calling cards will have a toll-free number to nonprofit organizations that assist with housing or legal problems.

“The industry doesn’t have a great image,” admits Book.

The first round of their legal battle ended in a draw, with the judge allowing IDT’s suit to proceed, but denying the request for a preliminary injunction. IDT has appealed, and the case is pending.

Big pharmaceutical companies with popular brand-name drugs have long faced competition from cheaper generic versions of those medicines. Soon, biotechnology companies — until now exempt from generic competition — could have the same headache.

Congress is close to creating a way to approve discount copies of biotech drugs, a momentous move that would shake the biotechnology business to its roots. The off-price drugs could steal customers and drain revenue from established biotech companies, creating a much more challenging environment.

A major reason for the legislative drive is the industry’s own success. Medicines made by biotech companies, called biological drugs, represent the fastest-growing share of the nation’s pharmaceutical market. That means the potential savings from discount versions of those drugs are rising, advocates of generics say.

Many of the biotech companies that might eventually be affected by off-brand competition are in California, including Amgen and Genentech, the world’s two largest biotech companies. Some of the industry’s top products will run out of patent protection in seven or eight years, analysts note. They include blockbusters such as Amgen’s Epogen, a drug used to avoid anemia in cancer patients, and Genentech’s Rituxan, used to treat a form of thyroid cancer called non-Hodgkin’s lymphoma.

Biotech companies have been shielded from generic competition so far because the Food and Drug Administration has no procedure to approve copies of biotech medicines. These drugs, unlike simple pills such as aspirin, are often complex biological molecules produced by living cells rather than synthesized from chemicals. Ensuring that a knockoff has the same physical properties as the original biological drug can be a significant technical challenge.

The biotech industry warns the FDA could endanger patients if it allows inexact copies of biological drugs to be substituted for brand-name products without thorough testing.

In addition, the industry argues that biotech companies need to be guaranteed periods free of generic competition longer than the five years granted to manufacturers of conventional drugs because biological drugs are riskier to develop. The pace of medical breakthroughs could slow if companies and their financial backers have less time for their investments to be rewarded, the Biotechnology Industry Organization maintains.

Traditional drug manufacturers raised similar arguments in the early 1980s, when Congress created the process for generic versions of conventional medicines. The dire predictions of pharmaceutical companies proved to be unfounded, backers of off-brand biologics say.

The high cost of biotech drugs is adding to the pressure for generic versions. Some biotech medications can top $50,000 per year.

Sales of biologics accounted for $40.3 billion of the total $274.9 billion in U.S. drug expenditures in 2006, according to the data and consulting firm IMS Health. Generic manufacturers that have long lobbied to get into the biologics business are now allied with health plans including Kaiser Permanente; AARP and other consumer groups; big employers such as General Motors and Sony; and legislators looking to reduce health care costs.

Genentech would support FDA procedures if they required sufficient testing by generic manufacturers and adequate incentives for developers of innovative drugs, said Walter Moore, vice president of governmental affairs at the South San Francisco company.

“We would like to get this issue resolved before Congress moves on to the uninsured and other issues” in the presidential campaign, he said. “We’ll get a better result than if it’s merged into four or five other issues.'’

The debate at this point is focused on a Senate bill recently cleared by a key committee. The Biologics Price Competition and Innovation Act of 2007 is a bipartisan compromise crafted by Democrats Edward Kennedy of Massachusetts and Hillary Clinton of New York and Republicans Orrin Hatch of Utah and Michael Enzi of Wyoming. The bill has drawn praise and objections from both sides.

On at least one front, biotech companies would get a better deal under the bill than conventional drugmakers did in 1984 when Congress created the original ground rules for generic approvals through the Hatch-Waxman Act. Brand-name drug developers were given a five-year period of exclusive rights in the marketplace after FDA approval of their products. The protection exists even if a patent expires.

That guaranteed period of freedom from generic competition gives pharmaceutical companies an incentive to innovate. Drug patents have a 20-year life, but most companies spend years after the patent is filed doing research and clinical trials on the product, which is then followed by the demanding FDA approval process.

Biotech companies would get 12 years of market exclusivity after FDA approval under the Kennedy-Clinton-Hatch-Enzi bill. Industry advocates had asked for 14 years.

The Generic Pharmaceuticals Association, a trade group for makers of generic drugs, called the 12-year period of exclusivity an “arbitrary and excessive'’ concession. “It’s just going to unjustifiably delay access to consumers,'’ said Kathleen Jaeger, the group’s chief executive.

At the same time, some advocates of generics acknowledge that biological medicines are harder to develop than traditional drugs.

Dr. Steven Miller, chief medical officer of the pharmacy benefit management company Express Scripts, said a 10-year period of exclusivity would be acceptable. However, every additional year free of generic competition would sacrifice more savings as the biotech drug market grows, he said.

“As you get out 10 to 15 years from now, it will cost $1 billion a year,'’ Miller said.

Miller is the co-author of a February study that concluded health plans could save as much as $71 billion over the next 10 years on just four classes of biotech drugs with short patent terms remaining. That figure is hotly contested by the Biotechnology Industry Organization, which maintains the study made many unfounded assumptions.

Analysts agree that competition is most likely to arise first for smaller and simpler biological drugs such as growth hormone and insulin. They say the FDA is likely to move much more slowly on off-brand versions of complex macromolecules such as antibodies, a class that includes Rituxan and Genentech’s other blockbuster drugs, Herceptin and Avastin.

In addition, off-brand biological drugs aren’t likely to be offered at the steep discounts of conventional generic drugs because biotech manufacturing is more complex. The discount might be as low as 20 to 25 percent, analysts say.

As Congress mulls the Senate bill, the biotech camp is hoping to modify provisions that could treat imitations of biological drugs as interchangeable substitutes for the original product. That’s how generic versions of traditional drugs are used.

Makers of generic drugs aren’t usually required to repeat the clinical trials done by the brand-name manufacturer. It’s assumed that the generic will work the same as the branded conventional drug.

Biotech advocates maintain that copycat biological drugs can never really be identical to the brand-name drug. Biotech drugs are produced by bacterial or mammalian cells that have been genetically engineered to make the needed molecule. Manufacturers of generics don’t have access to those proprietary cell lines or the recipes for the nutrient broths in which they grow, said Rob Garnick, a veteran Genentech executive who oversees manufacturing quality control.

Competitors can engineer their own cell lines, but the genetics would not be identical, Garnick said. The resulting products will vary from the branded drug because of a host of operations inside the cell that fold and modify the protein. Those modifications can affect the protein’s safety and effectiveness as a drug, Garnick said. Significant differences between the original drug and the knockoff could be difficult to detect, he said.

For those reasons, biotech manufacturers use terms such as “biosimilars'’ or “follow-on biologics'’ rather than generics. They maintain that manufacturers of generics should be required to conduct clinical trials to establish the safety and efficacy of their products for each disease in which they want approval. They concede that those trials might not need to include as many patients as the original studies.

The Senate bill includes clinical trials as one possible condition for approval of a copycat biological drug, but it would allow the FDA to waive that requirement.

One former FDA official said the path toward generic biologic drugs will be easier than the biotech industry says. Many manufacturers now have expertise with genetically engineered cell lines, consultant Terry Gerrard said. The FDA has experience comparing different branded versions of biologic drugs. Biotech companies themselves have persuaded the FDA to permit them to alter manufacturing processes on their biologics without requiring a new round of clinical trials, Gerrard said.

The Bush administration, however, warned Congress it should avoid provisions that would allow off-brand biologics to be used interchangeably with brand-name biotech drugs without a doctor’s input. Minor differences between the drugs could cause serious or fatal immune system reactions, Secretary of Health and Human Services Michael Leavitt said in a letter to Kennedy.

Over the coming weeks, members of a congressional conference committee will try to cobble together a follow-on biologics bill that both the Senate and the House can accept.
GENERIC BIOTECHNOLOGY DRUGS: A LOOK AT THE PROS AND CONS Arguments for:

Billions of dollars in medical costs could be saved by using copycat versions of biotechnology drugs.

The potential savings are growing larger every year because biotech drugs are the fastest-growing segment of the national pharmaceutical bill.

Arguments against:

Generic drugmakers can’t assure that copies of biotech drugs are exact because they can’t duplicate proprietary manufacturing methods.

Biotech companies must be shielded from generic competition longer than conventional pharmaceutical companies because creating biotech drugs is costlier and riskier than traditional drug development.

Source: Chronicle research

E-mail Bernadette Tansey at btansey@sfchronicle.com.

In April 2004, as the election season was heating up, President Bush appeared at the annual convention of the American Association of Community Colleges in Minneapolis and declared his goal of bringing high-speed Internet access “to every corner of our country by the year 2007.”

Well, here we are (in 2007). And here we aren’t (fully wired for broadband technology). Not even close.

The Public Policy Institute of California issued a report last week in which it found that 47 percent of all households statewide had broadband Internet access as of 2005. Nationally, the figure is closer to 40 percent.

That’s partly a factor of geography — broadband is available to more urban dwellers than people in rural communities. But it’s also a factor of wealth.

Sixty-eight percent of California households with incomes greater than $100,000 have broadband Internet access, the institute found. That percentage drops to 49 percent for households with incomes between $50,000 and $75,000 and to 24 percent for households earnings less than $25,000.

“It’s been an explicit goal of the Bush administration for broadband access to be universal,” said Jed Kolko, a research fellow at the Public Policy Institute of California and author of the report. “We’re not there yet.”

How big a deal is that? After all, the notion of a digital divide has been around since the earliest days of the Net. Does it really matter that some people are accessing iTunes and porn sites faster than others?

“The benefits of broadband definitely go beyond music and porn,” answered Kolko.

He observed that a variety of medical services are moving online, from interaction with health care practitioners to accessing records. This may be difficult if not impossible for people lacking broadband connections.

The same applies to online classes and other educational opportunities provided by colleges and universities, as well as an increasing number of government services.

“It’s definitely easier to do many of these things online rather than in person,” Kolko said. “It’s also easy to imagine these services one day becoming available only online.”

The problem, he said, is that it’s expensive for broadband providers like AT&T and Comcast to extend high-speed Internet access to all neighborhoods, especially if demand, and an ability to afford the service, is limited in some communities.

As such, broadband is often more common in more densely populated — not to mention wealthier — neighborhoods.

At the same time, Kolko said, the relatively high cost of computers also serves as a barrier to bridging the digital divide. If PCs and laptops aren’t in place, broadband service providers have little incentive to wire an area.

Is Wi-Fi the answer? Many cities, such as Mountain View, have taken steps in partnership with the private sector to bring high-speed wireless Internet access to local residents.

Others, such as San Francisco, are stuck trying to get the best possible deal from companies that would receive a virtual Wi-Fi monopoly within city limits.

“Wi-Fi is not a substitute for fiber,” Kolko said, referring to the fiber-optic cables that serve as the backbone of broadband networks. “It’s a complement. Fiber has much greater capacity.”

He recommends greater collaboration between companies and public agencies to facilitate the laying of broadband lines. If sewer workers are going to be tearing up a street, for example, broadband providers should be given ample notice in case they want to extend service to the area.

For his part, the president called in his 2004 speech for more competition among service providers and, not surprisingly, a tax cut.

“Broadband technology must be affordable,” Bush said. “In order to make sure it gets spread to all corners of the country, it must be affordable. We must not tax broadband access. If you want broadband access throughout the society, Congress must ban taxes on access.”

Three years later, we’re not even halfway toward the president’s goal of universal broadband access. In fact, the United States now ranks 15th worldwide for broadband penetration per 100 inhabitants, according to the Organization for Economic Cooperation and Development, an international organization helping governments tackle the economic, social and governance challenges of a globalized economy.

That places us far behind the likes of Denmark, Iceland, South Korea and Norway.

Earlier this year, a senior executive of Verizon, Thomas Tauke, called for a national broadband policy to promote expansion of the network. “We need action in Congress and at the FCC,” he said.

Specifically, Tauke is seeking government grants and loans to hasten broadband penetration in rural areas.

I don’t know if that’s the right step, but it’s a starting point for a discussion that’s long overdue — at least if the United States sees itself as a player in the Internet fast lane.

The gap between haves and have-nots continues to grow, whether we’re talking health care, education, public safety or broadband access.

“As private-sector and public Web sites are developed, their applications will be designed for the speed of broadband,” Kolko observed. “The more complicated these applications become, the harder it will be for people to use them who don’t have broadband.”

He’s right — this isn’t about music and porn, at least not entirely. The sooner our lawmakers recognize this, the sooner we can tackle the problem.

David Lazarus’ column appears Wednesdays, Fridays and Sundays. He also can be heard Saturdays, 4 to 7 p.m., on KGO Radio. Send tips or feedback to dlazarus@sfchronicle.com.