Can We Really Trust "Greedy" Drug Development Companies To Find Cures?

By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL

At this year’s FDA/CMS Summit in Washington, D.C., members of government and industry came together to deliberate two of the biggest challenges plaguing biopharma — regulation and reimbursement. Kicked off by Janet Woodcock, M.D., CDER’s director shared a lengthy list of priorities, including the need to fill more than 600 staff vacancies. Some of the industry’s misdeeds discussed at this year’s FDA/CMS Summit include “price gouging” of approved breakthroughs drugs, using approved Risk Evaluation and Mitigation Strategies (REMS) to prevent generic competition, and arguing that distribution of peer-reviewed journal articles and medical textbooks to practicing clinicians should be protected by the first amendment of the constitution. Despite the U.S. Supreme Court ruling that for some purposes, companies are people, we seem content to apply separate but unequal standards when it comes to the rights of drug development companies. In our societal lust for life, liberty, and the pursuit of health, the court of public opinion is being rallied around the notion that healthcare as a human right trumps a biotech’s right to free speech or even profitability. For those who wonder if we can trust greedy biotechs to develop cures, perhaps a better question to ponder is how penalizing companies publically for their success will impact the future of biomedical innovation.

Breakthrough Cures Fuel Desire To Burn Biotechs At The Stake

In March 2014, Congressman Henry Waxman (D-CA) ignited a fiery debate about the pricing of drugs. Taking aim at Gilead’s breakthrough hepatitis C treatment, Sovaldi, he, along with two of his colleagues, wrote a letter demanding company leadership reveal how it arrived at the compound’s $84,000 price tag. Just one day before the start of this year’s FDA/CMS Summit, the Southeastern Pennsylvania Transportation Authority (SEPTA) announced it was suing Gilead Sciences, accusing the company of price-gouging on the sale of its $1,000-per-pill product. In an article written by the Wall Street Journal’s Peter Loftus (12/10/14), the author notes the suit seeks class-action status, subject to judge certification, on behalf of any person or entity in the U.S. who has paid “excessive” prices for Sovaldi or was unable to obtain the drug. I imagine I was not the only one pleased this announcement didn’t prevent John McHutchison, M.D. from taking part in the panel — “Drug Pricing: An Honest Conversation About Innovation.” When the EVP of clinical research at Gilead was asked if he was surprised by the public outcry on the price of Sovaldi, McHutchison responded that Gilead leaders were more disappointed than surprised. He went on to cite the significant advantages of the drug compared to currently available treatments that cause flu-like symptoms and that have cure rates of a little over 50 percent. Sovaldi, on the other hand, has a 94 percent cure rate. According to McHutchison, in the long run, the cost of Sovaldi will far outweigh the costs associated with treating people contracting hepatitis C, especially if the drug were not available. As for how the drug was priced, McHutchison stated it was not based on the cost of its R&D, but determined by adding up the costs of currently available treatments and then not charging a premium.

Unfortunately, for those begging to burn biotech at the stake for developing breakthrough cures which aren’t cheap, this answer simply isn’t good enough. One tweet by @MHPA (Medicaid Health Plans of America, a leading national trade association) illustrates this point, “Gilead didn’t develop #Sovaldi, they just figured out how to price the bejesus out of it #PiracyOnTheHepCs #FDACMS14.” This is one of the problems highlighted by McHutchison’s fellow panel member, Chris Garabedian, president and CEO of Sarepta Therapeutics — one company’s success (Gilead) is being used to paint the public perception of biopharma as a greedy bunch of profiteers.

How Many Biotechs Are REALLY Profitable?

During the drug-pricing debate, Garabedian noted that Vertex and BioMarin were two companies often listed by the media as being very successful — neither of which  aren’t even profitable. According Garabedian, when it comes to publically traded biotechs, only about 12 percent are generating a profit. Further, he noted only two of every 10 drugs on the market ever earn back enough money to cover the cost of R&D and FDA approval prior to patent expiration. His comments prompted me to do a little research of publically traded biotechs. Here is the reality of the situation. Currently, there are 69 publically traded companies classified by NASDAQ as “Biotechnology: Biological Products (No Diagnostic Substances)” with a market capitalization of > $0. Of these, a large majority have negative earnings. For example, nine of the top 20 biotechs (ranked according to market cap) have positive earnings. Adding together or averaging earnings per share for this group provides a much more realistic, and quite frankly, dire picture of this industry performance relative to profits (see table 1).

Table 1

Biotechnology Sector Basks In The Red When It Comes To EPS

Rank	Biotechnology: Biological Products Only	Symbol	Market Cap	EPS
1	Gilead Sciences, Inc.	GILD	$151.5B	$5.65
2	Amgen Inc.	AMGN	$121.2B	$6.35
3	Biogen Idec Inc.	BIIB	$76.8B	$10.57
4	Qiagen N.V.	QGEN	$5.2B	$0.65
5	Seattle Genetics, Inc.	SGEN	$3.9B	($0.53)
6	Bio-Techne Corp	TECH	$3.3B	$2.89
7	NPS Pharmaceuticals, Inc.	NPSP	$3.3B	$0.01
8	Synageva BioPharma Corp.	GEVA	$2.9B	($5.14)
9	bluebird bio, Inc.	BLUE	$2.4B	($1.45)
10	Kite Pharma, Inc.	KITE	$2.0B	($2.89)
11	Acorda Therapeutics, Inc.	ACOR	$1.6B	$0.56
12	Neurocrine Biosciences, Inc.	NBIX	$1.6B	($0.71)
13	China Biologic Products, Inc.	CBPO	$1.5B	$2.54
14	Novavax, Inc.	NVAX	$1.3B	($0.30)
15	Acceleron Pharma Inc.	XLRN	$1.2B	($1.71)
16	PDL BioPharma, Inc.	PDLI	$1.2B	$1.90
17	Avalanche Biotechnologies, Inc.	AAVL	$1.1B	($1.02)
18	ARIAD Pharmaceuticals, Inc.	ARIA	#1.1B	($1.24)
19	Sangamo BioSciences, Inc.	SGMO	$980.2M	($0.46)
20	Halozyme Therapeutics, Inc.	HALO	$957.9M	($0.71)
	Average EPS	($0.03)	Total EPS	($0.61)

These numbers make you wonder why any entrepreneur would want to enter the biotech market in the first place. There are those who argue that the lure of high rewards will continue to attract the willing. But given the comments made by members of the reimbursement community, one wonders for how much longer this will continue. “A big part of our concern is not just Sovaldi, but all the other specialty drugs," said Mario Molina, the CEO of Molina Healthcare, a company which runs Medicaid and ObamaCare plans in nine states. During a July 2014 earnings call Molina said, "I think that the government needs to step in here and make sure that the market is rational. If we as a health plan want a rate increase, we have to go to our regulators and get it approved. There's no such thing going on in the pharmaceutical market. Right now, pharmaceutical companies can charge whatever they want, and I think there needs to be a rational basis for all of this." Molina may claim his publically traded company (NYSE: MOH) with a 2.4B market cap is focused on patient outcomes, but as a publically traded company, he too is beholden to shareholders seeking a positive return. In fact, as table 2 illustrates, all of the top-10 publically traded health insurance companies have positive earnings.

Table 2

Most Publically Traded Health Insurance Companies EPS Outperform Biotechs

Rank	Public Health Insurance Companies	Symbol	Market Cap	EPS
1	UnitedHealth Group Incorporated	UNH	$91.9B	$5.60
2	Anthem Inc	ANTM	$32.7B	$8.16
3	Aetna Inc.	AET	$30.1B	$6.01
4	Cigna Corporation	CI	$26.1B	$7.32
5	Humana Inc.	HUM	$21.6B	$6.21
6	Centene Corporation	CNC	$5.9B	$3.56
7	Health Net Inc.	HNT	$3.9B	$1.98
8	WellCare Health Plans, Inc.	WCG	$3.2B	$2.24
9	Molina Healthcare Inc	MOH	$2.4B	$0.40
10	Magellan Health	MGLN	$1.6B	$2.75
	Average EPS	$4.42	Total EPS	$44.23

 

Even more striking is that not only are these health insurance companies markedly outperforming their greedy biotech counterparts, but their top-10 major pharmaceutical colleagues as well (see table 3). It makes you wonder if health insurance companies are intent on the biopharmaceutical industry further subsidizing its patient outcome profits.

Table 3

Top-10 Publically Traded Pharma EPS 

Rank	Major Pharmaceuticals	Symbol	Market Cap	EPS
1	Johnson & Johnson	JNJ	$287.6B	$6.04
2	Novartis AG	NVS	$221.7B	$4.15
3	Pfizer, Inc.	PFE	$193.2B	$1.58
4	Merck & Company, Inc.	MRK	$161.9B	$1.82
5	Sanofi	SNY	$119.6B	$1.93
6	Novo Nordisk A/S	NVO	$119.0B	$1.64
7	AbbVie Inc.	ABBV	$103.9B	$2.31
8	GlaxoSmithKline PLC	GSK	$100.7B	$2.70
9	Bristol-Myers Squibb Company	BMY	$95.7B	$1.63
10	Celgene Corporation	CELG	$87.9B	$1.91
	Average EPS	$0.19	Total EPS	$25.71

 

During this year’s FDA/CMS Summit, the consensus among FDA employees seemed to be that the agency should not take an active role in determining drug prices. The question then becomes, should other forms of government? I guess it depends on how quickly you want to kill the innovation biopharma golden goose.

REMS, Biosimilars, Free Speech Fuel Debate

There were other interesting discussions at this year’s FDA/CMS Summit. For example, John Jenkins, M.D., director of the office of new drugs, CDER, FDA, pointed out how drug innovators have been “creatively” using the FDA-approved REMS program to “evergreen” products. According to Jenkins, companies have been “abusing the REMS system” and have become very aggressive in preventing generic companies from being able to access these innovations for things like bioequivalency studies. Further, he feels this is not a responsible practice by innovator companies and an unexpected consequence of the program Congress should investigate. While you might not advocate such behavior, given the industry’s previously highlighted financial woes, it is not hard to see why biotechs might try a number of legal tactics to protect their intellectual property (IP). But is this the right approach? 

Today, 86 percent of drugs presently prescribed in the U.S. are generics, the result of previous innovation. If we continue to spur an industry for innovations we aren’t willing to pay for, there will be consequences — intended or not. If you back publically traded companies into a corner, they often will have to make certain decisions in the best interest of their shareholders. For example, although Burger King denies the recent merger with Tim Horton’s to have been motivated by U.S. tax policy,  the end result remains — the loss of an American company now headquartered in Canada. While the U.S. government might not intend current corporate tax rates of 35 percent to prompt companies to leave, Canada’s more favorable rate of 15 percent, lowered from 28 percent in 2012, was most certainly created as a means of enticing corporations to locate within its borders. Likewise, if we want biopharmas to continue to develop innovative cures from which we will all benefit, perhaps it is time we reevaluate some of the counterintuitive policies created which make it difficult to do so, including freedom of speech.

During the panel discussion, “FDA And The First Amendment,” the FDA/CMS conversation was so lively  that participants had to resort to raising their hands and imploring the moderator for the opportunity to get a word in edgewise.  Here’s why. In the past, if a doctor questioned a pharmaceutical sales representative about a medication’s off-label use, the representative was required to inform the clinician they were not legally allowed to discuss off-label use. The rep then had to have the clinician fill out and sign a card or electronic document requesting to be contacted by someone within the biopharmaceutical company’s medical affairs department. If the rep didn’t follow this protocol or even broached the subject by using textbooks or peer-reviewed journal articles,  they could be subject to significant fines and incarceration. But not allowing these kinds of conversations to take place has resulted in the epic demise of a drug rep’s value to educate harried clinicians.

Although the FDA/CMS Summit concluded with a panel looking ahead to FDA reform in the form of PDUFA VI, you, too, should look ahead and plan to attend this conference next year. Perhaps by then the tone on greed will have begun to shift, because the reality for patients is — Greed is Good.