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Today’s Biotechs: Fact and Fiction

Monday, October 12, 2015

by Sheila Jamison & Rich Jamison

Pharmaceuticals – and the volatile biotechs – have been in the headlines since Turing Pharmaceuticals (a startup run by a former hedge fund manager) bought an existing generic drug, Daraprim. Turing then raised the price from $13.50/pill to $750/pill. This 62-year-old drug is the standard of care for treating a life-threatening parasitic infection.1

That created a deluge of headline-filling criticism that came from every direction.2 Biotech companies joined in along with the expected consumer groups. Politicians were front and center too.

Deserved Price Hike?

Turing’s defense was

  1. We need that price to make the transaction profitable and
  2. We need that money to make an improved version of the drug.

A Market Roiling Message

Among the most visible criticism was Hillary Clinton’s announcement that she would:

  • Permit Medicare to directly negotiate drug prices
  • Require pharmaceutical companies to engage in a certain level of research and development, and
  • Place a cap on out-of-pocket costs for prescription drugs.

The biotech stocks showed a quick indiscriminate drop in price that plagued the sector for the rest of that week. Friday’s biotech action was particularly noticeable.

Not a Homogenous Group

Before we conclude that ‘they all deserved it’ (after all, they all price gouge, don’t they?), it’s critical to draw at least two distinctions between Turning’s actions and contemporary biotech companies:

  1. First, today’s biotechs don’t spend gobs of money working on old, effective drugs (i.e., drugs that work very well that have been around for decades). This is a ‘Turing original’ as far as price justification is concerned. (RJ’s comment: if Turing needs to raise prices that drastically to make its purchase deal profitable, it seriously overpaid for the drug!)
  2. Today’s biotechs do spend their research money in promising, new 21st century areas. While early biotech is engaged in ideas, large companies are engaged in products. They’re following paths that have been leading to more and more amazing breakthroughs in treating disease. (see addendum)

Impact Going Forward

The probable outcome of all this is an appreciable short-term increase in volatility in the biotech sector. Let’s face it – they’re volatile in the best of times; have been since the field began. But today’s biotech sector shows important differences from many of the earlier ones. Many of today’s firms are:

  1. Creating working products, and
  2. Profitable

The Ideal Outcomes

We’d like to see the current furor settle down … but not go away completely as so many other drug and drug company uproars have done. With an election coming, this is a great opportunity to get the issues into the spotlight. Perhaps, just perhaps, healthcare costs can be addressed in a meaningful way; one that benefits all consumers. Let’s address all of the problems … from insurance company gouging or restricting what medicines they’ll approve to unrealistic pricing in all areas … including some of the recently announced biotech drugs. Yes, they need to make a profit, but some of the costs included may not be justifiable other than we let them charge those prices.

Regulation Overhaul?

That brings us to the subject of regulations. They need to be revised to be effective simultaneously at protecting us while not preventing new drug development. For example, the time and cost of introducing a new generic provided cover for Turing to make its move. Newer regulations have raised the historical cost of about $1 million for a company to bring an existing generic drug to market. Now it’s about $10 million. Payback is figured as sales of 10-15 times the cost to bring the generic to market are needed before the first dollar of profit rolls in. That’s just too expensive for most companies to come in as competitors. Further, the time required to jump through all the hoops is too long for those who can/will pay the costs for any of those to have impacted Turing’s monopoly for a minimum of a year. Turing could cut its price then to keep the new competitor from making any inroads in selling its competitive pill.

Current regulations are not only costly across the board; they are lengthy. Many drugs are marketed in Europe – with stringent regulations for approval – years before they are permitted in the US market. Finally, some regulations are worse than useless. We call your attention here to the one that says Medicare cannot negotiate pharmaceutical pricing. Wonder why Medicare costs keep rising?

Regulations vs. Alzheimer’s

We’ve segregated this as, for now, it points to a unique problem. Modern research techniques may lead to analogous situations with other diseases as earlier initiation points are identified for those diseases. Research into Alzheimer’s disease indicates that changes begin occurring in our brains as much as 25 years before any symptoms appear. So how does – or will – a drug company develop a drug for this? Here’s what stands in the way.3

Drug Development Process

Suppose a company develops a compound they feel could prevent the changes from progressing to disease. That could turn out to have been the easy part. There are still 2 more major steps to take.

  1. Patent the chemical structure of the molecule they’ve developed with its intended use broadly claimed (e.g., as a brain disease preventive medicine).
  2. Provide clinical trial data to the FDA showing that the drug is both effective for its specific intended use (e.g., prevent the early brain changes and/or stop them from progressing into Alzheimer’s) and safe for use.

Step 1 is an almost routine procedure, albeit not without some potential obstacles. Step 2 is now a major problem. Current estimates suggest it costs up to $2.6 billion to complete that data collection. It is also estimated that from patenting the molecule through FDA approval takes from 6-8 years unless the drug classifies for a fast track status.

What makes an Alzheimer’s drug different from all the rest? It’s hampered by the patent duration.

Drug Patents

Drug patents are usually issued for 20 years. For today’s typical drugs, that means 12-14 years of patent protected sales once the drug is approved for use. The company has that long to make back its investment and grab profits before the generic version can be introduced. Generic versions can come from several companies; hence the price is kept low by completion. But the original company won’t sell much at say $50, $100 or $1,000/pill once generics hit the market at $0.70, $3.25 or something similar.

Now look at the Alzheimer’s situation. Patent your compound. Spend 25 years in clinical trials to prove that it works. Even if 100% successful, it’s not a ‘blockbuster’ item for you because generics can be made immediately. Your patent expired while you were still collecting the data. And given clinical trials taking 3-4 times as long as with other drugs, imagine how much more than $2.6 billion it will cost. Put yourself in the business manager’s position. Would you go down this path? 4,5

The Ruckus Is Warranted We cannot (nor do we want to) live without successful biotechs. Yesterday’s biotechs had lots of good ideas. Today’s biotechs have lots of good products. There are many examples here. For the first time, immunotherapy has moved beyond theoretical to actuality. Melanoma is one of the easiest to appreciate. New discoveries are just short of science fiction. Click here for more on this issue.

Market Implications

But where does all this leave us now? Similar to the way you watch market pullbacks for the good companies that see their stock prices fall into attractive buying levels, this will happen (is happening) right now to biotechs. In any general article, we cannot make any specific recommendations for you. We can say that we’re watching for the times and prices to buy new and/or add further to our current biotech holdings.

1. Daraprim fights toxoplasmosis, which infects people whose immune systems have been weakened by AIDS, chemotherapy and pregnancy. It's also used to treat malaria.

2. The outcry was so vicious that Turing announced that it will reduce the price but it will take 1-2 weeks to figure out the new price. Could it be that they are giving us the famous “look over there” line?

3. We need a test for these early changes also. That’s a different but related challenge.

4. You can see more on the Alzheimer’s situation by clicking here for the CNBC interview with Ken Davis, president and CEO of Mt Sanai Health Systems. http://goo.gl/fWI7zC

5. This is only part of the healthcare-should-not-be-a-for-profit-business argument.

References:

Clinton takes on 'profiteering' drug companies. Dan Merica, CNN.com. September 22, 2015.

Drug CEO Will Lower Price of Daraprim After Hike Sparked Outrage. Andrea Mitchell and Phil Helsel. Nbcnews.com. September 23, 2015.

Drug costs need to be a US priority. Ken Davis Interview. CNBC Closing Bell. October 8, 2015.

Drug Goes From $13.50 a Tablet to $750, Overnight. Andrew Pollack. Nytimes.com. September 20, 2015

Here's What Wall Street Thinks of Hillary Clinton's Plan to Crack Down on Pharmaceutical Companies. Biotechs, beware. Luke Kawa. Bloomberg.com. September 23, 2015.

New Poll Finds Many Blame Pharmaceutical Companies for High Drug Prices. Dan Mangan. Nbcnews.com. June 16, 2015.

Addendum (RJ’s biotechnology travels)

Biotechnology began with the creation of monoclonal antibodies in 1975, the same year I received my doctorate. The experience I had from growing up in clinical laboratories made it easy for me to fit right in. I was in biotech from its inception on into the 90s. I worked in every aspect of it … research, instruments and scientific equipment, senior management and consulting. I even prepared one biotech for its IPO. I saw biotech grow, develop and mature.

What do I mean by mature? I ran a company that introduced the first commercially available DNA sequencer (an instrument for analyzing a gene’s DNA using high voltage electricity). Two different young biotech companies saw an early model of our analyzer burst into flames in their labs. And if memory serves correctly, one of these was at a very young Amgen. But this was accepted as ‘par for the course’ then … by both manufacturers and the biotechs. I doubt Amgen would stand for this today. The good news is sequencers don’t do that anymore.

And back then, the Human Genome Project (HGP) would have taken an army of researchers over 60 years to complete using those sequencers. A decade later, when planning began on starting the HGP, improved sequencers cut projections to only 10 years. By the time the project actually began several years after that, further improvements let researchers finish the project in 3 years total.

Similarly, we only recently can prove or deny criminal innocence or guilt via DNA. It’s in today’s headlines commonly. What was once impossible, became possible but still took weeks - now takes hours.

This doesn’t imply biotechnology company infallibility. New biotech companies, founded on good ideas, still fail when their ideas don’t prove out. Existing companies expand into new areas and try things that don’t work. More new good ideas don’t work than do, at least early on. That’s why clinical trial announcements are often disappointing. But trying, testing and refining those ideas are what leads to exciting breakthroughs.

We now have a catalog of ideas have been proven to work. As happened with DNA sequencers, the time to the endpoints keeps getting shorter. That’s what’s been happening throughout biotech. Things keep accelerating at an ever faster pace. And new successes keep piling up. Biotech was once a world built only on science with dreams and ideas on how to use it. It’s become a world of successes, triumphs over dread diseases, great hope for more of the same … and, importantly, profits for many biotech companies.