Wednesday, November 2, 2016

Pricing is only a symptom of drug company woes

Drug companies have been in the news a lot this year. Valeant and Mylan (with the EpiPen) made themselves whipping boys (or girls) through their self-inflicted PR debacles. Next Tuesday, California citizens will vote on an initiative by anti-pharma activists (aided by a failed presidential candidate) who seek price controls for 12% of the drug purchases in the state.

This morning’s WSJ reminds us that none of this controversy changes the stark reality of the drug business: since the Hatch-Waxman Act was passed in 1984, most* drugs have a narrow window to generate profits from their R&D before they lose their pricing power due to a flood of generic competition — and for the largest product categories, they will face competition prior to patent expiration.
Heard on the Street

Big Pharma Sales Need a Booster Shot​


Wall Street Journal, November 2, 2016, C14

The coming election has pharmaceutical investors feeling anxious. But this earnings season has highlighted a more solid reason for worry about the sector: Sales of key blockbuster drugs are slowing down.

This year has been one to forget for the industry. Political risk surrounding the high cost of health care has contributed to the trouble: The Nasdaq Biotechnology Index is down nearly 30% since a furor erupted over high drug prices in September of last year.

Price pressure has been among the reasons sales are weaker.
The article lists a number of examples of such competition:
  • More products (and thus greater price competition) for hepatitis C treatments
  • Disappointing revenue growth for Ibrance (breast cancer) and the Humira and Enbrell anti-inflammatories
  • Slowdown in diabetes sales
  • Price resistance for new cardiovascular drugs
It then concludes:
A basic truth of drug development is the nature and timing of economically significant breakthroughs can be hard to predict. Today’s slow patch doesn’t mean that the industry has become worse at developing blockbuster drugs.

But investors tend to prefer companies with easily predictable growth prospects. And it isn’t clear what new drugs can generate growth in the near future.

Even in areas where there have been discoveries, the outlook may not be great. A number of companies have developed impressive immunotherapy drugs to treat cancer, but that is a crowded field with lots of competition. And since these drugs are new, just how many cancer patients this class of drugs can help isn’t yet known.
In other words, pharma faces the same challenges they have always faced: attractive markets attract competition, buyers exploit competition to reduce pricing power, and then they have to develop new compounds to replace those going off patent. If a firm doesn’t address such problems year in and year out, its revenues, profits and market cap will collapse. We needn’t cry for Big Pharma, but neither should we underestimate the magnitude and complexity of their challenges.

In many ways, the free market works better for expensive drugs than for healthcare services. Payers and providers are organized enough to bargain for better prices from manufacturers, and the overhang of generics (the “Better than the Beatles” syndrome) forces manufacturers to produce markedly better outcomes to justify proprietary prices.

Meanwhile, in the U.S. our third party payer system (a side-effect of WW II wage controls), provider networks and high switching costs mean that patients rarely have pricing information, quality information or purchase alternatives to bargain based on price or quality. In single-payer countries, patients have less choice than public school students (who at least have charter, private or home school alternatives).

*PS: For technical and regulatory reasons, large molecules do not yet face generic competition because biosimilars are not generics. It seems likely that this will eventually change, but for now an expired patent on a biologic is worth a lot more than an expired patent on a small-molecule drug.