BioPharm Executive: Why Some Drugmakers May See Their Profits Slashed

Published: Jul 29, 2015

Why Some Drugmakers May See Their Profits Slashed
July 29, 2015
By Karl Thiel for

Recent news out of the Alzheimer’s Association International Conference showed a few glimmers of hope in the fight against Alzheimer’s disease. Two highly anticipated presentations from Eli Lilly and Biogen showed that their respective drugs mediate beta amyloid plaque formation and may play a role in the rate of cognitive decline. The theory that reducing amyloid will improve outcomes for patients, at least if done early enough, got a little more support. But while the results thus far warrant further study, they aren’t wildly exciting.

Wildly exciting to clinicians, that is. Yet if approved, either of these drugs could easily become blockbusters, explaining why investors are hanging on every tick of data. Then there’s Vertex Pharmaceuticals, which just received approval for the cystic fibrosis drug Orkambi. While investors have cheered the prospect of sales expected to top $3 billion annually, some doctors have noted that the absolute improvement in lung function associated with the drug is, well, simply not that great.

In one sense, this is just par for the course in drug development—we make incremental progress and then build on it—extending survival a few months here, improving quality of life a little bit there. Investors are concerned about sales, and if the drugs are good enough to capture prescriptions, then they are good enough.

That thinking has driven record returns for drug and biotech stocks over the last few years as the FDA has kept a steady stream of drugs—some representing important breakthroughs, many representing modest incremental improvements—coming to market. After all, investors know that drug approvals mean big money, and they mean long monopolies.

These twin pillars of time and money have long been reliable tent poles for the industry, but are investors right to keep leaning on them so heavily?

Don't Count On Money Or Time

First, take the assumption that drug pricing will continue to be unfettered. I’ve discussed this before, but it’s worth noting that pressure to do something about drug price inflation is mounting. Just last week, 118 oncologists published a sharp rebuke to drug companies in the Mayo Clinic's medical journal, saying among other things that as many as 20 percent of cancer patients don't take their medication properly because they can't afford it.

Their argument that pricing is unsustainable is probably correct, at least under the current model. Even the companies that try to argue their drugs are reducing overall costs—preventing hospitalizations or other interventions, rather than just kicking the can down the road—can't necessarily say that the money is just going to a different place. Some insurers exclude drug coverage from out-of-pocket maximums, so patients may wind up paying 20 or 30 percent of the cost of exorbitantly priced drugs, while surgery or inpatient care would be covered 100 percent. And while choosing not to take, say, a diabetes drug because of the expense may have long-term consequences, the result of not taking a cancer treatment is likely to become evident with devastating swiftness.

Drug prices aren’t under immediate political threat, making the issue easy to shrug off for now, but the ready visibility of drug price inflation means change will very likely be coming.

So how about the time advantage drugs enjoy? After all, it is built into our patent system, as well as the Orphan Drug Act (which, for example, just guaranteed Vertex seven years of market exclusivity on Orkambi).

The thing is, market dominance isn’t only determined by patents and regulations. Think of Vertex’s Incivek, a radical advance in hepatitis C with a very short lifespan as a product. With unprecedented efficacy and far fewer side effects than conventional therapy, Incivek achieved $1 billion in sales within just over six months of launch, making it the fastest-growing drug of all time. Less than three years later, sales were wiped out by anticipation of better options, and Vertex stopped selling it. Merck's cholesterol drug Zocor, once its top seller, saw sales cut short by Lipitor even before its patent expired. The turnover in these highly competitive markets—hepatitis C, AIDS, hypercholesterolemia, cardiology—explains why so much attention has turned to rare disease and cancer, where markets are more fractured and it’s easier to protect a piece of turf.

Tough Math: When 1 +1 < 2

But investors may not be fully appreciating the changes going on in the cancer space, where the market may be changing as quickly as the science. Newer treatment modalities like cancer immunotherapy represent different kinds of drugs where the rules of exclusivity are still uncertain. Moreover, it’s been clear to drug developers for a long while that future advances are going to rely on combination therapies, often developed and approved in tandem.

Indeed, one driving force behind cancer drug price increases may be companies preparing for combinations that will require them to share profits. The last few years have seen a slew of partnerships around cancer drug combinations, and particularly around cancer immunotherapies—link-ups like Celldex Therapeutics and Bristol-Myers Squibb; Incyte and Genentech; Advaxis and MedImmune; and others. As we've already seen, combinations may not command significantly higher prices than monotherapies (e.g., Gilead Sciences' Harvoni versus Sovaldi) or may even be priced lower (e.g., Vertex's newly approved Orkambi). While Gilead and Vertex own the components of their respective combo products, that won't always be the case. Some companies could see profits actually fall as products improve—or at least that's the fear.

It's hard to fault businesses for grabbing the best profits they can, especially if they smell change in the air. Investors, however, might want to get a sense of that shift, too, and not be surprised if companies start to struggle to achieve the same sort of growth they're seeing now, even with continued clinical success.

-Karl Thiel

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