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​

By CHARLEY GRANT

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.

UC's biggest drug bonanza - ever?

On Friday, UCLA announced it had sold rights to the prostate drug Xtandi (enzalutamide). The sale could make the drug University of California’s most valuable biomedical patent family — ever.

UCLA, the inventors and its partners will receive $1.14 billion cash (plus future payments) for the drug from Royalty Pharma. This IP investment company owns stakes in various blockbuster drugs, including Humira, Remicade and Lyrica. It is Royalty’s biggest deal since the $3.3 billion it agreed to pay in November 2014 for royalties on Kalydeco.

In August 2005, San Francisco-based Medivation licensed Xtandi from UCLA and received US regulatory approval in September 2012. Medivation relies on Japanese pharmaceutical giant Astellas Pharma to distribute the drug worldwide. Its 2015 10-K states

Under our collaboration agreement with Astellas, we share equally with Astellas all profits (losses) related to U.S. net sales of XTANDI. We also receive royalties ranging from the low teens to the low twenties as a percentage of ex-U.S. XTANDI net sales. 

The drug has generated more than $3.4 billion in sales through December 2015. According to the 10-K statements, the global sales totaled $1.9 billion in 2015 and $1.06 billion in 2014. Its US sales were $392.4 million in 2013, and its US (i.e. only) sales in 2012 were $71.5 million.

Medivation’s 10-K states

We are required to pay UCLA (a) an annual maintenance fee, (b) $2.8 million in aggregate milestone payments upon achievement of certain development and regulatory milestone events with respect to XTANDI (all of which has been paid as of December 31, 2015), (c) ten percent of all Sublicensing Income, as defined in the agreement, which we earn under the Astellas Collaboration Agreement, and (d) a four percent royalty on global net sales of XTANDI, as defined. Under the terms of the Astellas Collaboration Agreement, we share this royalty obligation equally with Astellas with respect to sales in the United States, and Astellas is responsible for this entire royalty obligation with respect to sales outside of the United States.

UCLA and Medivation have had at least two lawsuits over the terms of this agreement. According to the 10-K, UCLA has accused it of not paying the 10% sublicensing royalty. Earlier, Medivation sued (unsuccessfully) to block UCLA’s licensing of a related compound to Aragon Pharmaceuticals.

UCLA received $33 million for multiple prostate cancer patents in FY 2013-2014 — the highest in the University of California that year. But 4% of $3.4 billion thus far should be worth about $136 million beyond the $1.14 billion for a total of $1.275m. This would not include “potential additional payments” from Royal Pharma, or revenues from the Aragon license.

As best I can tell, the most lucrative patent in University of California history. Many of us assumed that the previous winner was the family of three Cohen-Boyer patents, which created the biotechnology revolution through recombinant DNA, and allowed Herb Boyer to co-found Genentech. These patents expired in 1997; the best estimate I’ve seen (Feldman et al 2007) places the total licensing revenues from those patents at $255 million, split between Stanford (Cohen) and UCSF (Boyer). This total does not include the $300 million that Genentech paid (after years of litigation) to City of Hope — a LA-area cancer research hospital — for related discoveries.

Finally, what is often not remarked is that at most US universities, royalties are shared with the inventors. The inventors in this case Michael Jung of UCLA,  Charles Sawyers (then a Howard Hughes Medical Institute researcher at UCLA, now at Sloan Kettering). The USPTO lists 8 granted patents jointly authored by the two men, including two (8,445,507 and 8,802,689) explicitly about prostate cancer therapy.

According to the UCLA patent policies, UCLA keeps 50% of patent royalties, 35% goes to the inventor and 15% goes to the inventor’s lab (which for Jung is the chemistry department). The Royalty Pharma press release says:

By virtue of patent and licensing agreements administered by UCLA, the campus, the researchers and Howard Hughes Medical Institute shared a royalty interest in worldwide net sales of Xtandi. UCLA owns 43.875 percent of the royalty interest.

Using the math, 43.875% of $1.14 billion is $500 million, but UCLA says it will receive $520 million. (I contacted UCLA PR reps to clarify but so far haven't heard back). It may be that the $520 million includes both the $500 million and about $17 million (15% of $1.14 billion) for its chemistry department.

Still, this implies that Howard Hughes will receive about $70 million but the institute has not posted any mention on its media web page. And this leaves over $500 million to be split by the two lead inventors, other named inventors and possibly (as provided by UCLA policies) non-inventors who contributed towards development of the invention.

Preparing the 21st century healthcare industry

Bob Curry, Ph.D.

As KGI prepares the strategic plan that will take it to its 25th anniversary, the members of the KGI community are being challenged to imagine where we need to be 2022 to continue to prepare cutting-edge graduates who will work across the healthcare value chain.

During a post-dinner exercise Wednesday night, we were encouraged to consider a map of imminent changes in healthcare suggested by Bob Curry, who is chairman of our Board of Trustees, a veteran VC, and now CEO of Perceptimed.

Based on this experience, Bob suggested four megatrends that KGI should consider:

1. Growth in the science of diagnostic, prognostic, and monitoring tools will be explosive and be increasing paired with drug and procedure usage.
2. Drugs will become every more customized to treat highly defined cohorts as characterized in the discussion point above. This will change both the nature of drug discovery and of clinical trail design.
3. Healthcare will be delivered by a broader, integrated team of professionals than has been the traditional norm. Pharmacists and clinical diagnosticians will be teamed with physicians and nurses in staffing the healthcare system.
4. Hospital systems and health insurance companies, as we currently recognize them, will disappear and will be replaced by 50-100 integrated care organizations to cover the entire U.S. (e.g. 50-100 Kaiser-like organizations).

The first two points appealed to our scientists in the room, who (since our 1997 founding) have been thinking about genomic and personalized medicine. The third point relates to those interested in clinical care delivery, particularly our pharmacy school which trains its PharmD students to work in teams with MDs and RNs. The final point ties to the business side — our group within KGI — and the changes brought by ACA (Obamacare), both pushed by the strong patient incentives for adverse selection and pulled by incentives for Affordable Care Organizations.

Based on this, the 70+ trustees, faculty, staff and students at nine tables generated a series of ideas. From their ideas — and my own observations — I see four important trends:

• The importance of big data and data analytics. This is not just for analyzing genomic data for personalized medicine, but for patterns of clinical and other bioinformatic data for efficacy, drug-drug interactions, and other healthcare outcomes.
• New types of healthcare providers and business models for funding them. 
• Increasing importance of healthcare economics. Whether it’s HMOs, ACOs, capitation models, bundled pricing, or other approaches, we are moving away from a fee-for-service and dollars-per-pill model toward outcomes-based compensation.
• New regulatory approaches to deal with these changes.

Some of these trends were building and accelerating over the past two decades. (I've been with one HMO for 30 years). Others were accelerated by the ACA. Still others (the destruction of insurance companies) were not among the announced goals of the ACA, but may be its inevitable outcome.