The pharmaceutical and biotech industries are notoriously tricky for investors. The industry is riskier than many others (such as basic materials or consumer goods), and companies’ successes are largely based on drug approvals, which can be difficult to predict given the complexity of the drugs involved, and the arduous process by which they’re developed. Often, investigational drugs are years in development before they are ever approved, and worse, some drugs, which may have initially seemed promising, are never approved at all, or fail in late-stage trials, dashing researchers’ best hopes for the medicine.
In spite of its downsides and higher risk, the pharmaceutical industry remains attractive to investors because of its potential to be incredibly lucrative, and the science behind investigational drugs seems only to get better and better — meaning that rare or complex diseases are finding effective treatments no one could have imagined even a decade or two ago.
Regardless, the industry, known for its complexity, is about to get even more complex: a lobbyist war is heating up in Washington between the primary lobbyist group for insurers, the American Health Insurance Plans, and the primary pharmaceutical industry lobbyist group, Pharmaceutical Researchers and Manufacturers Association. Last week, the two groups initiated a war of words in a renewed flurry of antagonism, with health insurers arguing that the staggeringly high cost of specialty drugs threatens the very sustainability of the healthcare system in the United States.
Karen Ignagni of the AHIP — a woman known for being one of the most powerful individuals in the healthcare industry — launched a public relations assault on pharmaceutical manufacturers last month, arguing that the cost of specialty drugs in America could cripple government healthcare budgets and bankrupt American families. She argued that pharmaceutical companies didn’t seem to see limits to the high cost of their medicines, claiming that the rising costs of drugs in the U.S. suggests that Big Pharma is utilizing “whatever they can get away with” pricing.
Big Pharma’s Take
Pharmaceutical companies argue that with the already high cost of developing effective medicines ever on the rise, high prices are necessary in order for businesses to remain viable, and to continue ongoing research and development efforts. Big Pharma’s arguments aren’t without clout by any means. The industry is facing a transformative era in which companies are being forced to re-focus research efforts on strongest therapeutic areas, and many companies are reorganizing in an effort to remain profitable and productive, as evidenced by the frenzy of pharmaceutical mergers in recent months.
Big Pharma isn’t necessarily throwing away money on R&D; according to John Castellani, of PhRMA, who spoke during The Atlantic’s panel discussion earlier last month, 70 percent of the drugs currently in Big Pharma’s pipeline (there are approximately 5,400) have the potential to be first in class. “They all won’t make it,” Castellani admits, “but 70 percent have the potential to be first in class. That means there’s nothing like this out there in the health care system now. So they have incredible promise.” Companies also argue that it isn’t necessarily the high cost of the drugs that is at fault, but the way in which our current insurance system works. In a recent statement, Castellani argued that, “The increased attention on the cost of new medicines is being fueled by the fact that we have an outdated insurance model that is forcing patients to pay an ever-growing share of their prescription drug costs.”
MarketWatch and The Hill point to the approval of Gilead Sciences’ (NASDAQ:GILD) Sovaldi as the catalyst of this most recent battle between the two enemy lobbyist groups. Sovaldi, a hepatitis C medicine that boasts a cure rate of more than 90 percent, has been much-criticized for being prohibitively expensive. The drug costs about $168,000 for one full coarse of treatment. In another report, CNN mentioned the cost of former blockbuster Gleevec, developed by Roche Holding Ltd., which, when it was first approved, cost $30,000 — and now costs over $90,000.
In speaking about Sovaldi, Castellani noted that the medicine has the potential to save the healthcare system money down the road, preventing the need for expensive surgeries and transplants. “It is penny wise and pound foolish to focus solely on the price of a new medicine, while completely ignoring the value it provides to patients and the healthcare system broadly. Curing hepatitis C not only dramatically improves patients’ lives, but has the potential to save the U.S. healthcare system as much as $9 billion per year by preventing expensive hospitalizations and avoiding thousands of liver transplants that routinely cost over $500,000 each,” he said in a statement.
AHIP counters Castellani, saying that, “While these drugs offer tremendous promise when medically necessary, their high costs and extended use has put a strain on our healthcare system.” AHIP, in a brief on the issues and challenges of specialty drugs, claims that the biggest obstacle to affordable medicines is the 12-year exclusivity the FDA grants specialty drugs upon approval, which the group refers to as a “government-approved monopoly.”
“Although these exclusivity periods pharmaceutical manufacturers the incentive to take on the risk of developing groundbreaking drugs, they also precipitate a number of negative policy consequences. Granting exclusivity to expensive to specialty drugs removes the economic benefits of price competition, resulting in higher prices relative to what they would be in a perfectly competitive market,” an AHIP statement reads. The AHIP argues for reforms on both the state and federal levels. More specifically, the group suggests limiting the exclusivity period on specialty drugs, removing state barriers which block the use of generics, and prohibiting patent settlements between drug companies.
By now, investors may be wondering what affect this most recent PR battle could have on the market. While it’s obvious that government price controls, or, as AHIP suggests, reduced exclusivity periods, could and would dramatically affect investors, it’s possible that even the threat of such action could also have a tangible effect. Rising drug prices, it seems, aren’t good for anyone.
A number of different studies have established that were government price controls to be initiated in the United States, it would inevitably drive down the number of new medicines approved for the market each year, and would limit the amount of money pharmaceutical companies could spend on research and development, thereby limiting the flow of new medicines. For those who believe the industry already spends too much on R&D, that might not seem like such a bad thing; the change would likely spur a continuation (or possibly an increase) of the current pharma “merger frenzy,” since companies would be under pressure to generate revenue from non-organic sources.
But investors ought to be wary about dismissing R&D’s value despite its expense; experts have also noted that price controls generally mean approval delays, something the FDA is already trying to rectify with new programs like the Breakthrough Therapy designation, initiated in 2012, and the Accelerate Approval program, which began the same year. A study by Steve Hassett at the American Enterprise Institute estimated that the approval delay for specialty medicines could be as long as 23 months under a price control scheme.
To wrap up, there are few takeaway points investors should keep in mind as the lobbyist war continues:
- Pharma’s “merger frenzy” is likely to continue, and companies will likely need to generate more of their revenue through acquisitions than previously (Valeant’s proposed takeover of Allergan is one example of that philosophy in action.)
- The trend towards specialty medicines are likely to continue, and the number of drug approvals each year is likely to fall.
- The cost of specialty medicines are likely to continue rise unless government action is taken, which would, naturally, limit the flow of new medicines.
For the long-term, investors should focus on companies that have demonstrated adaptibility in the face of a rapidly changing pharmaceutical industry and healthcare climate. Companies that seek effective acquisitions, which are focusing businesses on its strongest therapeutic areas, or companies with strong generic businesses (such as Teva) are all worth delving into further.
It’s no secret that the pharmaceutical industry is supported by blockbuster drugs. Attempts to develop these billion-dollar drugs and bring it to market have been major catalysts in both the lobbying war and the frenetic M&A activity recently. But without some context, pursuit of a blockbuster can seem like a nebulous goal — like someone heading to the big city to “strike it rich” without a clear idea of what wealth really looks like.
Last week, we looked at some of the blockbusters that make the pharmaceutical industry go ’round. Specifically, we focused on the top 10 best selling cancer drugs currently on the market. Each drug is an example of the type of drug that a pharmaceutical company would “go to war” to defend.
Zytiga was a big deal for Johnson & Johnson (NYSE:JNJ) when it was first approved in 2011. The drug, which the company developed for the treatment of prostate cancer, was approved by the FDA two months ahead of schedule, suggesting that the FDA saw a profound need for the drug in the market. The drug, which works by interfering with testosterone, has been a huge success ever since. The FDA even approved the drug as a first-line treatment after one study showed that the drug could add as much as 5 months to a patients’ survival period.
Last year, Zytiga brought in $1.7 billion in sales for J&J, and FiercePharma notes that the drug currently dominates about 34 percent of the market. Its sales have totaled $512 million for 2014 thus far, though analysts say competitors are in the process of producing similar medicines, such as Xtandi from Astellas and Medivation, which will no doubt dilute the market.
Though not necessarily a cancer drug so much as a preventative vaccine, Merck & Co. Inc.’s (NYSE:MRK) Gardasil deserves a mention on our list. The drug brought in $383 million during the first-quarter of 2014, and last year’s worldwide sales of the drug totaled $1.8 billion.
Gardasil, which was first approved by the FDA in 2006, has posted more sales growth in the past year than previously, though experts caution that Japan has stopped actively promoting the vaccine, which Merck says will lead to slower sales growth, and the company has posted revised earnings forecasts with this change in mind. The treatment has also come under fire from certain parents who argue that the vaccine encourages pre-teens and teens to have sex by fostering a false sense of safety from infection with HPV, which is responsible for up to 70 percent of cervical cancer cases in the United States.
Gardasil is likely to continue to maintain steady sales, though analysts caution that its days of real sales growth may be over, according to a recent FiercePharma report.
Erbitux, developed as part of a partnership between Merck and Bristol-Myers Squibb Co. (NYSE:BMY), generated $1.87 billion in global sales in 2013, making it number 8 on our list. The drug, used in the treatment of colon, head, and neck cancers is specialized, however, and Merck has done little to expand the drug to new indications, resulting in a steady drop-off in sales.
The drug has also suffered poor results in a recent 2012 phase III clinical trial in patients with stomach cancer, as well as trial that studied the drug’s efficacy in patients who had undergone surgery for the treatment of colon cancer. Analysts predict that sales of Erbitux will slide to $1.1 billion by 2018, according to FiercePharma, so while the drug may be doing well now, it seems as though its decline is imminent — if not already underway.
Acquired by Johnson & Johnson and Takeda Pharmaceuticals as part of a $8.8 billion takeover of rival Millenium Pharmaceuticals, Velcade — a multiple myeloma treatment — Velcade has been pulling its weight. The drug brought in about $2.6 billion in last year worldwide, contributing to Johnson & Johnson’s 10 percent rise in sales last year. The drug was also approved as a first-line treatment for the blood cancer by the UK’s National Institute for Health and Care, a nice bonus for the two companies.
But Velcade, which has finally begun to pick up steam after being on the market for more than a decade — even snapping up FDA approval for subcutaneous injection in 2012 — isn’t likely to be driving sales for Johnson & Johnson for much longer. The drug’s patent is set to expire in 2017, and FiercePharma notes that rival Actavis Plc has already filed an application with the FDA to manufacture a generic version of the drug.
First developed to treat mesothelioma and later also approved for the treatment of lung cancer, Alimta remains one of Eli Lilly’s (NYSE:LLY) best selling drugs behind the popular antidepressant medication Cymbalta.
Both Cymbalta and Alimta are rapidly nearing its patent expiration dates, sparking desperation at the struggling drugmaker. Luckily, however, Eli Lilly won a ruling in which the drugmaker fought for patent protection for Alimta after it was challenged by competitor Teva Pharmaceutical, no stranger to court battles over drugs patents itself. The judge sided with Eli Lilly, claiming that the drugmaker’s patent should be upheld until 2022, though the company continues to fight similar battles in both the UK and Germany. Earlier last month, a UK court ruled against Eli Lilly, giving Actavis the go-ahead to produce a generic version of the drug for the UK.
Further, Lilly’s attempts at expanded the drug’s indications have largely failed, with phase III trials of the drug in patients with head and neck cancer resulting in disappointment. It seems Lilly’s blockbuster won’t save it any time soon.
Like several other drugs on this list, Revlimid is an older medicine, first approved by the FDA in 2006, but continues to boast impressive sales, bringing in a cool $1.09 billion in 2013. Perhaps even more impressive, it was largely due to Revlimid’s sales growth last year that drugmaker Celgene (NASDAQ:CELG) raised its earnings forecast three different times throughout 2013; the drug saw a 13 percent sales growth in the second-quarter, and followed up with a 12 percent sales growth during the third-quarter, according to FiercePharma.
But Revlimid has had more difficulty than certain other cancer medicines in expanding its indications beyond treatment for multiple myeloma and mantle cell lymphoma. Last year, Celgene was forced to cancer trials of the drug in patients with chronic lymphocytic leukemia. The drug, which is costly at $6,195 a month, has also run into trouble with government health organizations such as the UK’s NICE, which refused to carry the drug, saying it couldn’t justify the costs.
Gleevec is another aging, yet blockbuster drug that was a bit of breakthrough on the market when it was first approved in 2001. Often called a “wonder drug” or “miracle drug,” Gleevec is perhaps best known for its astounding success rate; the drug effectively turned some blood cancers into chronic illnesses rather than terminal, life-threatening diseases, and has also nabbed a number of new indications since it was first released onto the market. It is now used as a part of the treatment for myeloid leukemia as well as its original indication for the treatment of blood cancer, and last year gained yet another indication as a treatment for acute lymphocytic leukemia in children. The drug brought in an impressive $4.69 billion in 2013, indicating its run is still far from over even as decades old drug.
But the drug, developed by Novartis AG, has had its share of setbacks as well. Novartis failed to gain patent protection in India for the drug, and the company has had to stave off copycat versions in the U.S. Gleevec’s patent stands until February 2016, but the company is hustling patients to switch over to Tasigna, a follow-up drug. Thus far, Novartis seems to be succeeding: Tasigna brought in $1.3 billion in 2013, a massive, 31 percent increase over 2012.
Herceptin, generically known as trastuzumab and developed by Genentech (Roche), is one of the most widely used breast cancer treatments currently on the market. Prescribed primarily to patients with metastatic breast cancer, the drug is effective against tumors that “overexpress” the HER2 protein, and it’s thought that the drug may also be effective against other cancers that have the HER2 protein, such as ovarian, colon, endometrial, lung, bladder and prostate, and salivary gland tumors.
Global sales of Herceptin in 2013 topped $6.5 billion, and the drug, despite its age, remains a top three best seller after more than 15 years on the market. The drug is perhaps best known for being the first of a new wave of cancer therapies known as “targeted” therapies, which are aimed at cancers that have specific genetic characteristics. Such therapies have exploded in the last decade, with some of the most promising therapies of tomorrow falling under the same category.
While Herceptin may have blazed a trail for the new targeted therapies of the 2010s, the drug is aging rapidly, and its dominance on the market is likely to fade in the next few years, with Mylan, Inc. (NASDAQ:MYL) — a prominent generic drug manufacturer — launching its own versions in India and South Korean generics doing the same. Further, FiercePharma notes that generics of Herceptin could be introduced to the market as early as next year, meaning time is running short for this chemotherapy, which was once ahead of its time.
Another of Roche’s long-standing cancer blockbusters, Avastin, like most of the medicines on our list, has now been on the market for a decade. The drug, which is known generically as bevacizumab, is used primarily to treat colon cancer, has gained several new expansions in the years since its initial approval in 2003, and is now used to treat lung, ovarian, brain, breast, and kidney cancers. The drug is also approved as a second line treatment for metastatic colorectal cancer in the U.S., and as a first line treatment for brain cancer in Japan.
Since the drug gained a new indication for the treatment of ovarian cancers, the drug has experienced a rise in sales growth, with a 13 percent jump in 2013 over the previous year; 2013 sales of the drug, which operates by essentially starving tumors of their blood supply, are impressive, totaling $6.75 billion worldwide.
Our top contender is also made by Roche, and is another former trailblazer in the oncology field. Rituxan, which was approved by the FDA way back in 1998, was the first monoclonal antibody drug, meaning that the drug was the first oncology drug developed to target a specific proteins or cells, which may then stimulate the body’s immune system to attack those cells.
Aside from being the first drug of its kind, Rituxan is also impressive in that it continues to generate sales growth even after 15 years on the market. Last year the drug’s sales rose 6 percent, and Rituxan global sales in 2013 totaled $7.78 billion. It’s not for nothing that this drug is considered the crowning jewel in a trio of cancer treatments developed by Roche, all of which are consistently big earners. The drug is approved to treat numerous cancers, though it is primarily used in the treatment of non-Hodgkin’s lymphoma and chronic lymphocytic leukemia. It has also approved for the treatment of rheumatoid arthritis, an indication which generates sizable sales of more than $1 billion each year, generally.
The trailblazing Rituxan is up for patent expiration in 2018, but luckily for Roche, most generic competitors have abandoned their projects for a copycat version of the drug. Additionally, the company has already gotten the ball rolling on a follow-up drug, which the company says is delivering impressive results in the treatment of CLL.