BioPharm Executive: The Price of Confusion

Published: Sep 01, 2011

The Price of Confusion

It's been a confusing summer. Standard & Poor's now believes U.S. Treasury Bills are riskier than French government debt. British youth violently rioted and looted for days over nothing in particular. The markets have gone through wild gyrations as bulls and bears try to make each other blink. East Coast residents recently even felt the ground lurch under their feet.

The biotech industry has had its own little slice of confusion, too. This should be a great time for the industry. We've seen a rising number of approvals--the most in 20 years--for novel, life-saving products. These are the kinds of drugs that should find demand even if the economy is poised on the brink of a new recession. Yet analysts and investors suddenly find themselves deeply uncertain over what kinds of revenues these new products can fetch.

Blame Dendreon. On August 3, the company withdrew its previously rosy outlook for sales of its prostate cancer drug Provenge. Management had expected 2011 revenue of $350 million to $400 million; now they are unsure. Sales have been picking up only sluggishly, and observers were quick to blame it on the price tag for a course of treatment--about $93,000.

Guilty by association is Seattle Genetics, which just got the green light for its lymphoma drug Adcetris. At about $13,500 a dose, a typical course of treatment could run well over $100,000...and potentially over $200,000 if doctors use the maximum number of doses. Worries also tripped up other companies with recent drug launches. Human Genome Sciences has, by some interpretations, gotten off to a slow start with Benlysta, despite the fact that it is the only new lupus treatment approved in the last 50 years. It has a price tag of around $35,000 a year, and reimbursement met with a couple early snags. The resulting nervousness has pushed the stock below where it traded prior to approval.

It's harder to tell how nervous investors feel about the latest expensive oncology drugs coming from big pharma, at least by a glance at stock price. But Bristol Myers Squibb's Yervoy for melanoma is in the same price ballpark as Adcetris and Provenge, at about $120,000 for a course of treatment. The other recently approved melanoma drug, Roche's Zelboraf, costs over $56,000 per treatment. And Johnson & Johnson's Zytiga, which competes with Provenge, costs about $40,000 for a course of treatment.

The truth is, while these drugs are expensive, they aren't out of line with previous, commercially successful drugs. Each new product constitutes its own special situation, but if you had to make a general observation, it would be that the successful launch of these products correlates to the experience of the companies selling them. Bristol's Yervoy took in $95 million in its first quarter on the market--a very strong start. Newcomer Dendreon has had problems with its first-ever product, dealing first with manufacturing constraints and reimbursement worries, and apparently not recognizing muted prescription growth until July. Nevertheless, management insists that growth will continue, just more slowly than first anticipated. And then there's Allos Therapeutics, which priced its drug Folotyn for peripheral T-cell lymphoma at $30,000 per month. After almost two years on the market, it brought in just $11 million in the second quarter. It seems unlikely that product will ever achieve anything like the peak annual sales of $400 million or more than some analysts once predicted. The "experience" angle doesn't bode well for Seattle Genetics and other biotechs hoping to get their first products on the market. Or for their investors. But that oversimplifies things. There's something to CEO Mitch Gold's assertion that Provenge's woes have to do with "price density." A product like Adcetris is expensive, but a $108,000 course of treatment is spread over about six months. The similar cost of Provenge comes in about one month, and doctors have to "buy and bill," hoping they will get paid back for all the money they've just shelled out. Other issues may simply be specific to the drug itself--not enough patients identified, not enough enthusiasm.

My guess is that the market is now overly fixated on price as a stumbling block for commercial success. As long as companies are doing their homework on cost-benefit, quality-adjusted life years saved, and savings to the healthcare system, they should be able to sell $100K drugs. But given the track record for commercial launches, investors have good reason to be cautious.

-Karl Thiel

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