PharThinking

Drug pricing - greed, necessity and the looming political battle

2008-02-21T13:58:00.000-05:00

What an interesting couple of days. The Democratic race is increasingly leaning towards Senator Obama - a man who has placed big pharma squarely with big oil as a target for future action. We learn that PhRMA (the trade group) spent $22m lobbying last year, although it looks to have been defensively biased, and Mr Obama has made it clear what he thinks of lobbying. We also learn that drug wholesale prices for the top 50 best sellers rose last year by a rate that is almost double the overall inflation rate - and some of those products had price rises that were very substantially higher.

No doubt the industry will say that these are the headline rates and that the true price paid is usually very much lower than the list price. What with all the discounts, off-invoice rebates and so forth. Not to mention (because we're not supposed to know it goes on) the so called "portfolio marketing" that involves bundling prices across a range of products. All this means that the net realized price is much lower than list. The industry knows that there have to be price increases if they are to be able to negotiate deals that create an increase in sales - something for which they are constantly being badgered by senior management and Wall Street. The pharmaceutical industry, you see, is predominantly a fixed cost business. The proportion of total costs that are truly variable are very small; and so profit is directly a function of sales. If you don't increase sales then the only way to increase profit is to reduce fixed costs - and that means jobs, plants, and all those other unpleasant things that take ages to show through as a benefit to the p&l.

Consumer groups and anti-industry observers will, of course, highlight the headline number. An average of nearly 8% when inflation is running at 4% - how is this justified? Isn't it a perfect example of corporate greed at the expense of the sick? Well, yes - to a certain extent, but no, not entirely.

Yes the pharmaceutical companies increase prices so that they can maximize profit and, by definition, it is the sick that foot the bill. But to lay the blame for the ills of the healthcare industry at the door of the pharmaceutical industry alone is to misplace responsibility. The insurance companies are at least as much responsible if not more so - given that drugs still represent less than 15% of the total health cost in this country. Are drug co-pays actually linked to drug prices, or is there an option for the middlemen to squeeze a little more profit by getting supply discounts on the one hand and increased co-pays on the other? Of course there is.

From the political perspective there is little doubt that a future President Obama will seek to lower the prices paid for drugs. Central negotiation of Medicare drug prices seems like an obvious starting point. There is no doubt that this would improve costs to Government but it would also hit the industry very hard. One could imagine broader formularies coming into play as a result, because if prices are going to be negotiated centrally one can easily imagine a global price structure becoming a global formulary structure within Medicare, Medicaid and the VA. That is a truly unpleasant notion when viewed from the pharmaceutical industry perspective. And what (if any) role do the insurance companies play in such a process? Perhaps Senator Obama will also look at switching Part D over to a single payer scheme? It makes sense when viewed from his direction but would have dramatic consequences on the industry.

Such a view of the future suggests that a dramatically different business model will be needed. Perhaps P&G have got it right - no internal R&D, buy everything in from start-ups and discovery boutiques, and run the business accordingly. It is a very interesting and compelling approach that has its finances routed in market performance, does not carry the hugely inefficient internal research cost, and has no qualms about seeking in-licensed projects that compete with internal research silos - because there aren't any. Leave the "not invented here" ego at the door and get on with sourcing and selling good drugs. Interesting thought.

Two things I think we can be sure of; the pharma industry will continue to come under severe criticism for corporate greed so long as prices rise this fast and there continue to be stories in the press covering all manner of shady business practices - some of which may be directly linked to patient deaths. Second, the political wind is in the backs of the Democrats and that means healthcare reform. It is hard to know what this will look like but it will certainly be enough to force the pharma industry to think very seriously about what business it is really in. They should have started looking at this already, the question is whether they have enough time before the crunch hits?

Pfizer license AIDs drug to non-profit

2008-01-30T08:05:00.000-05:00

Pfizer have taken what some may consider to be a bold step in licensing Selzentry to the International Partnership of Microbicides to see if it can be converted into a drug that will prevent transmission of the HIV virus in women ( WSJ, 30th January 2008). What a terrific idea. It is a risky idea from a scientific perspective because the whole area of prevention in HIV/ADIS has been fraught with troubles - who can forget Merck's failed vaccine trial? However, I believe that this shows the way for pharma to effectively manage one of its biggest problems - how to make drugs available to the developing world without getting crucified for the high prices it has to charge.

The non-profit world has enormous potential for assisting healthcare delivery in the developing world. Already, in many parts of the world, the majority of healthcare delivery is managed by non-profits of one kind or another. Whether it is volunteer physicians giving their time to run clinics, or huge organizations running fully developed programs, the non-profit organizations are already playing a huge role.

Why not then take a bigger role in drug development? A number of disease specific groups are already directly owning and funding drug development (the Cystic Fybrosis Foundation is a leader in this field), and people like the Bill & Melinda Gates Foundation are pouring huge amounts into specific disease areas. Why not then take it to the next stage? Directly acquire licensing rights to develop and distribute drugs. With the shortage of funding in early stage research that we see today, the opportunity for non-profit organizations to step up and fund development of new science that one day turns into drugs over which they have some IP control could fundamentally change the way in which developing world diseases are managed.

In addition, pharma can surely find ways to protect their developed world rights whilst also granting free access to drugs for the developing world - just as Pfizer are doing with Selzentry. Isn't this a massive win-win?

There is much more to say on this - but I have to go to a meeting.

Election Year - A Good Time to Get Back in the Saddle

2008-01-29T08:44:00.000-05:00

2007 was a very busy year for me and this blog suffered. No more.

We start 2007 with the potential for more change in the industry than probably any previous year. FDA is massively underfunded and so far behind it is truly worrying The New York Times; most major pharma companies are closing plants and laying off staff; significant issues are being raised regarding drug trials and drug promotion, and the industry is at an all time low in terms of public perception.

At the same time the political trends appear to be shifting towards the Democrats, and all the candidates from that party are lauding their credentials as someone who will end special interest politics in Washington - especially the drug companies. This is a risky time to be in the drug business.

The business shifts occurring in pharma are seismic, and we are only just getting the initial tremors. I am convinced that we are about to see a major transformation in the ways in which pharma does business and the ways the industry is structured. The steady increase in the licensing business is evidence of the shift away from in-house R&D to in-licensed R&D. It can only be a matter of time before one of the big pharma companies off-loads its entire R&D function. Divesting large divisions that were previously thought to be core has been a trend in other industries for some time and I think it is only the higher margins of the pharma industry that have prevented it occurring here too.

I'm off to the BioPartnering North America Conference this weekend (I do business development consultancy for a couple of small biotech companies). There are going to be over 500 companies at the meeting, with around 700 products being represented - and this is one of the smaller partnering meetings. R&D is alive and well - but not in big pharma, where the in-licensing teams are typically talking to over 100 potential partners at any given time. The Hollywood model is coming and soon we shall see at least one top-20 company shift entirely to a D&M model (development and marketing), and a new category of company will have been formed.

sanofi-aventis, BMS and merger speculation

2007-01-29T08:50:00.000-05:00

Here we go again, another day when rumors out of France suggest that s-a and BMS have signed a pre-merger agreement. These two long term partners have had a good deal of success - most especially with Plavix. I don't think there is much doubt that the managements of these two companies would see some significant benefits to a merger.

BMS have been under a cloud for quite a while - probably right back to the massive Imclone deal that looked very expensive and coincided with the appointment of two former BMS senior managers to senior positions at Imclone. The cloud has been lifting slowly but all is not yet clear and a mega merger with s-a would go a long way to clearing the air.

s-a would love to be the largest pharmaceutical company in the world. With market cap of around $170 billion this would be a huge organisation with significant synergies, an existing strong relationship and the all important US market capabilities that s-a have sought for so long.

But I wonder if this rumor is really true? If these two companies are really seeking to merge, why would BMS sell 50% of their very promising DPP-IV anti-diabetic (saxagliptin) to AstraZeneca? Is the s-a diabetes pipeline so strong that they could afford to go without that business? Or are BMS so dysfunctional that the two decisions were being managed separately? Or is saxagliptin not what they thought it would be and selling 50% in exchange for all future development costs plus $100 million was an offer to good to turn down? It goes without saying that I don't know the story behind the story behind the rumor, but something in there doesn't quite pass the sniff test - yet.

Either way, I am sure that this rumor will not be the last relating to a mega-merger in 2007 as all of the majors try to shift their fortunes by acquiring assets that will allow them to maintain (or return to) growth of revenue, earnings, dividends and ultimately shareholder value.

NIH, Ethics and Commercial Funding

2007-01-19T09:52:00.000-05:00

It seems that the NIH conflict of interest issue will be with us for some time. The cancellation of a meeting to discuss guidelines for herpes treatment of pregnant women because most of the panel have received funding from big pharma is just the latest episode in a long running saga. So how do we overcome the problem that most research funding is going to come from industry and a good deal of the best and brightest in health research work for the Government? If the latest ehtics bill to come out of the Senate is anything to go by, the legislative tendency (when they get around to it) will be to ban all forms of commercial funding - and that would be a disaster for all concerned. I have a different idea.

What about taking a leaf out of the book of military research? I'm based in the DC area and so I am geographically very close to NIH, NNMC, WRAMC and USUHS. Now for those of you not familiar, these last three are Navy Medical, Walter Reed and the military medical school - all of which conduct a significant amount of research that is funded by the pharmaceutical and biotech industries - and ethics isn't an issue over there. So how do they do it? The answer is the Henry M. Jackson Foundation - a non-profit that is the source for all funding of medical research in the military and a mechanism that has been used by big pharma for years (decades). You want your research done at a military establishment? You set up the research and channel the money through HMJF. You get access to the researchers you want - but they can't be your spokesman. That job must be done by someone outside the military using the research produced (and published) by your military researcher.

Surely a similar model could be worked into the NIH? Wouldn't it be possible to separate the funder from the researcher so that the research is completed in an environment that is independent and yet scientifically sound and relevant to the needs of the community. The problem at NIH isn't that researchers are biased - they aren't - it is that their results are perceived as biased because these people go on to stay at the NIH and get paid as consultants to industry. With an effective middle-man to manage the funds the issue of NIH funded research being biased could be effectively removed.

I'm not suggesting this would be an easy fix as there are a number of very strong vested interests who rather like the current system. But if meetings are going to be cancelled and research is going to remain unpublished because the funding source attracts accusations of bias, then the system has to change. Perhaps HMJF could simply be expanded to cover all Government institutions - not just the military?

MedImmune v's Genentech - Licensing Revolution?

2007-01-16T17:11:00.000-05:00

Well, here's a conundrum - what to do when the Supreme Court makes a ruling that not only reverses the rulings of lower courts but also contradicts conventional business practices? In allowing a patent validity challenge without insisting on a cessation of royalty payments the Supreme Court has, in effect, removed all the risk from the licensee who wishes to mount a challenge. Many in the industry are suggesting that this will create mayhem, confusion and turmoil - I don't quite see it that way.

I think future licensing agreements will have new clauses inserted that cause the licensee to forgo this new right granted by the Supreme Court. Failure to agree to such terms on the part of the licensee will be a clear signal to the licensor that a challenge is distinctly possible and either the points will tick up to compensate for the increased risk, or the deal will not be done. How else can licensors continue to do business?

The bigger issue I see is with the thousands upon thousands of agreements already in place! This is not to suggest that all of these (or even most of them) will be the subject of patent challenges, but there have to be quite a few situations where companies are currently paying royalties for bits of enabling IP that they would prefer to go away. Now they can mount a challenge with substantially reduced risk - and I think this is bound to occur. Who loses in these circumstances? Well, it is the smaller organisations that do not have the resources to fully defend all their IP - and here I think Universities must be at particular risk.

In the end I am not sure that this ruling will make such a huge difference to licensing, but there will be a number of cases where the nature of an existing agreement shifts dramatically so that challenges will be put in place. The lawyers win (as ever) and I hope that promising products do not suffer as a result, but in the end I think business will do what it always does best and adapt to the new legal framework. Unless of course the ruling prevents adaptation, in which case the pharmaceutical and biotech industries could be in for a VERY interesting 2007!

BMS & AstraZeneca - Merger in the wind?

2007-01-15T08:28:00.000-05:00

It is almost impossible to avoid wondering if the recently announced deal between BMS and AZ will ultimately create the forces necessary for them to merge. AZ need something in primary care to help fill the gap that will be left by Crestor, as well as giving their Crestor reps something else to discuss with physicians. BMS need marketing muscle in the primary care world in order to compete effectively as a late entrant (against Merck and Novartis).

Neither company can describe their R&D productivity in glowing terms - which may ultimately be the weak element in any potential merger. Their product lines have a good fit, but neither has demonstrated the ability to produce a consistent flow of new products. Also they both have numerous oncology agreements that might cause some difficulties for a merger. Does saxagliptin represent so much potential that it could drive a merger? I doubt it; it's probably not quite going to be enough on its own but it would be interesting to see if these two flailing giants of the industry could see this as a starting point towards much closer ties. BMS have some history in this in the USA (both Plavix and Erbitux are in-licensed and over 50% of total comapny sales are from in-licensed compounds or IP) and saxagliptin will add to this (licensed IP coming from OSI). AZ have been more "stand-alone" in their strategy - but that has certainly been driven by the success of Crestor! In addition, if a way could be found to merge these two oncology portfolios ther result would be a real power-house.

In the end I think the saxagliptin deal is good for both companies in their primary care operations, but I don't think it will be enough on its own to drive a full merger. On the other hand, should either of them suffer further late-stage set backs the situation would change again - and it is still fairly clear that the industry is over segmented at the top end.

Marketing trials - should we be surprised?

2006-03-21T11:03:00.000-05:00

So, Novartis is going after AZ by setting up an open label breast cancer trial and the news is all over the WSJ and on-line news sheets. Is this such a surprise, and aren't we always hearing that trials are much better when they are a direct comparison rather than simply placebo-based?

I think that we are going to see many more of this type of trial, both open and closed label, so that a true understanding of the comparison of leading compounds can be assessed. Of course, the real problem is that the company conducting the trial has a very clear interest in the results, and so comparisons will likely only be started when they know the result is going to come out in their favour. This also would explain pre-emptive negative comments (like those already made by AZ in this case).

But do these trials really help the cause of improving medicine delivery? If so, shouldn't the regulatory authorities (or reimbursement bodies) be insisting on more of this kind of thing? If it is just a marketing ploy (not that I'm against that in principle), is there not a danger of yet more misinformation getting into the public domain, further damaging the reputation and standing of our battered industry?

My sense is that brand-on-brand comparisons are here in a small way and will become a bigger and bigger feature of post-marketing activity. The stakes are so high and rewards so great that the company with the better product will move on this as fast as they can and we shall see many more. I just hope they are handled properly, and well communicated when completed - or we could all be in for another wave of bad press and possibly yet more regulation.

Big pharma acquisitions

2006-03-09T12:10:00.000-05:00

If you accept the argument that big pharma needs more R&D productivity (and I'm not aware of an industry watcher that doesn't agree), and we agree that all the big companies are doing all they can to pursue in-licensing and acquisition from smaller companies, then we must accept that further big-scale acquisitions must be around the corner. We hear today that AZ are on the hunt; rumors have always abounded regarding AZ and GSK (although I don't see it happening just yet), SP must be worried now that generic flonase disrupts their respiratory strategy, and I've already talked about Merck - but who is buying?

Pfizer are looking to sell their OTC operations and have to be thinking about further acquisition to keep their needle moving. sanofi-aventis should now be sufficiently stable to be thinking about making a move and BMS does look like an interesting option for them. I think everybody knows that J&J are always looking - but rarely for a big company. So in my mind the real dark horses are the other European stalwarts - Roche and Novartis. Both have very strong portfolios and pipelines - especially so long as "bird flu" keeps adding millions to the Roche sales, and Roche must be thrilled withe their share of Genentech. Merger of the two seems highly unlikely in the near term, but both could benefit greatly from a major US-based acquisition. We have to watch this space, but I wouldn't be surprised to see a major move by either (or both) the Swiss majors before this year is out - unless of course they see pricing and margin pressures in the US market making acquisitions elsewhere more attractive (of which, more later).

IS IT JUST ME, OR IS THE VIOXX SITUATION HELPING MERCK?

2006-02-06T15:29:00.000-05:00

On September 30th 2004, Merck experienced that most hated of experiences for any company – product withdrawal. Whether voluntary (as with Vioxx) or enforced, unexpected product withdrawal is catastrophic. So it proved for Merck. Their stock price fell from over $45 to around $30 and is still struggling to get back to $35. What many of us forget is that the year before the withdrawal of Vioxx was also not one to remember with pleasure in Whitehouse station. The unexpected failure of phase 3 compounds had already meant that the $45 stock price was a plateau at the very low end of their market value for the last 7 years.
So, here is a company with sales in excess of $22 billion, net income over $4.6 billion and a market cap of around $75 billion (3.5 times sales). Compare this to Guidant with sales of under $4 billion who were just bought for around $27 billion (over 6 times sales) and, in this aggressive and hungry industry, Merck looks like a pretty attractive acquisition target (at least a cheap way to gain over $20 billion in sales).
But that is not to be, and the reason is Vioxx. While the Vioxx case is undetermined the degree of liability for which Merck is exposed is also uncertain, and who is going to acquire a company with such a potentially large risk attached? Quite the opposite. I think that the very best Merck strategy right now is to extend the Vioxx case as long as possible so that their licensing and acquisition team can work their socks off trying to refill that pipeline! Just last week this policy was confirmed (the licensing piece) alongside a story saying that the next trials were being postponed.
I’m not suggesting that Merck did this intentionally, but Merck is, in effect, unacquirable whilst the trial continues, and they have that buffer in which to get the stock price back up to a point where they will not look like a pretty cheap way to acquire $20 billion+ in sales and over $4 billion in net income (before acquisition savings)!!

2006-01-25T23:46:00.000-05:00

BIG PHARMA RESPONSE TO THE PIPELINE PROBLEM

So, what are big Pharma doing to try and solve their pipeline problem? Well, they’re certainly spending a lot on R&D – in excess of $40bn in 2005. The real question is better put in terms of where this huge amount of money is going. If we consider projects that are active in R&D as the location for the spend, we find the average is over $20 million per project in 2005. I know this is a relatively meaningless number as the range of spend is enormous, but $20 million on average seems to me to be a huge number given that most biotech wouldn’t dream of needing to spend that much per project (in fact, many biotech companies would love to have half that amount for their entire clinical program).

There is another really interesting trend and it relates to licensing. We all know that big pharma has been increasing their demand for in-licensed products in recent years. What I hadn’t realized was just how substantial this trend really is. In the years from 1984-99 the top 10 companies completed about 50 in-licensing deals of late-stage products (Phase 3 and later), and this was about equal to the number of early stage product specific deals. From 2000-05 they completed about 40 late-stage product deals but over 100 early stage deals. Not only did they do about 150 deals in 6 years (as opposed to 100 deals in 15 years), but the number of early stage deals more than doubled.

But that isn’t all; in addition to the product specific deals, for the same time periods, the number of development collaboration deals went up from about 30 to nearly 400!!

What this says to me is that the top ten companies have accepted that their huge research organizations are not able to improve their efficiency at discovering key new products and that this is best done by small specialist companies with particular expertise and incredible motivation (helped by deals that include full funding of research, milestones and royalties). This is looking more and more to me like the Hollywood model – more and more movies aren’t made by the big studios, they acquire the marketing and distribution rights from production companies.

The real problem that the top 10 still have is that their 30% of the late stage compounds is probably not enough to maintain their growth and profitability while they wait for these development deals to increase their share of the early stage compounds beyond the current 25%. This must mean that they are more vulnerable to patent expiry than in previous years, and that doesn’t bode well for their long term viability as independent entities. Does that mean that another round of big company acquisition activity is on the way? I don’t see how they can all avoid it – but the question is who is buying and who is selling?

2006-01-25T23:32:00.000-05:00

THE EMPTY PIPELINE

So what is the problem? The industry has over 300 products in Phase 3, another 120 or so in pre-registration. I haven’t looked at the historical record, but this many products in the late stages of development cannot be bad news for the industry. I suspect that the problem most people are talking about is, of course, the pipeline of the major companies – the ones with all the current business, the engine that drives the industry (and all the industries that provide support services).

A closer look at the top 10 is a little worrisome; the top 10 represent over 40% of industry sales but they only have an interest in about 30% of the pre-registration products, and only about 30% of the Phase 3 products. Now I’m not about to discuss a complex and detailed analysis of all the forecasts for all of those compounds, but I think it is possible to explore some possible causes and likely effects that come from these top-line numbers.

By definition, if 30% of pre-registration products are with the top 10, then 70% are being developed by companies outside the top 10. Closer examination also shows that only about a third of the pre-registration products involve only one company. This is no surprise – we all know that there has been a huge increase in licensing deals in recent times, but you don’t necessarily expect to see small companies going it alone these days. I think this is actually not a surprise.

All small companies have to make a strategic choice regarding their development strategy, and some are clearly attempting to become the next Amgen (namely, a company that builds itself into a major force by developing its own products, supported by sales and marketing agreements in the early days if necessary). So, for example, we see Sepracor moving out of the licensing deals that were the foundation of company strategy and into the competitive world of COPD, first with short-acting beta agonist Xopenex, and now with long-acting beta-agonist arformoterol. With revenues growing at an incredible rate and further products in the pipeline, Sepracor is a perfect example of the new strength in the pharmaceutical industry – small companies growing on the back of a highly focused and well managed product development and marketing strategy.

Is Sepracor unique? Clearly not. Multiple companies are following growth strategies that do not rely on the big-pharma companies. In fact, I am sure that many of these up-and-coming companies are actively avoiding relationships with big Pharma as the latter are seen as behemoths in which you have to have a $2bn+ product in order to get any attention at all. In some respects the same is true within the big Pharma companies. As a colleague said to me recently “How do you move the needle to achieve double-digit growth when you’re losing 15% of sales to generics next year and sales are already over $25bn?” This is a tough challenge that I do not think big Pharma can meet with the current model (some might say that any model makes this an impossible task).

I don’t subscribe to the “end of the world” model espoused by some, but I certainly think that big Pharma (or most of them) have to rethink their structure and approach before they are going to be able to be able to effectively meet the multi-faceted challenges of the market as it evolves.

2006-01-21T17:06:00.000-05:00

INTRODUCTION TO A BLOG

The pharmaceutical industry has always been an industry experiencing change, but what is unusual about the current environment is that so much change is occurring simultaneously, and all of it appears to threaten the future of the industry. Permitting generic importation in the absence of a compulsory license, outcomes-based drug approval and reimbursement, automatic generic substitution, ten-fold drug safety margins at the start of clinical research, the absence of effective venture funding for early stage companies, and the fact that the top 10 pharmaceutical companies appear to have weak pipelines – all combine to paint a dire view of the next few years in this industry. And I haven’t started to mention managed care and Medicare impact on profitability in the profit power house US market.

In this blog I want to start conversations about these and many other issues facing our industry. Using analysis and interpretation of the news of the day, trends seen over the years and insights drawn from exposure to many of the extraordinary people in our industry, I hope to develop thoughts and ideas that will encourage us to find ways to help meet these multitude challenges.