Potential Trouble Ahead For Big Biotechs
by Richard Daverman, PhD
Centient Biotech Investor
The nation's biggest biotechs could soon be feeling more heat. Their products are now under increased scrutiny because of more widespread use, giving rise to more concerns regarding toxicity and safety (see Amgen and Genentech Hit by Blockbuster Effect). But that is not the only thing that could spell trouble for big biotech and its current business model.
Two other problems are also well known but often ignored. We have previously done stories on both issues as well. The first issue is biogenerics, or biosimilar products (see Will Generics End the Biotech Boom? and Biogenerics May Be Coming Sooner than you Think). Here is an issue that frightens companies so much that they engage in word games not unlike the ones used by the administration in describing its current conflict in the Middle East. These companies are as eager to deny legitimacy to the word "biogeneric" as the administration is to the words "civil war."
And when governments and companies resort to these word games, you know they are in trouble. Amgen's (AMGN) entire $14B/year portfolio could soon be free game if biogenerics are approved. That is because most Amgen drugs are at or very close to patent expiry, and the most important thing that keeps Amgen from competition is the lack of a regulatory path for generics approval. But that could change rather quickly. The Europeans have already cleared the path, and with the new Congress, the US is sure to follow suit shortly. That has people in Thousand Oaks seriously worried.
Senators Clinton and Schumer of New York, and Representative Henry Waxman have proposed bills that have the biotech industry up in arms. The Waxman bill is especially worrisome. Genzyme's (GENZ) CEO was quoted in the Wall Street Journal yesterday as saying it would have a "devastating effect" on the industry. No doubt we are seeing a repeat here of what happened to pharma in the mid-1980s.
The 1984 Hatch-Waxman Act enabled small molecule generics by requiring makers to show only that their products are equivalent to the branded versions to gain FDA approval. That allows companies to skip the extensive and expensive clinical trials that the originals went through to get approval. But small molecules are mixtures of chemicals and making identical copies is easy. Not so for biologics.
Since biologics are made in living cells, and incubated in mixtures of growth media, antibiotics, trace elements, etc., making an exact copy is not really possible. And although most scientists would agree that one can readily make a copy that is as near perfect as needed, company executives are now going to great lengths to milk this difference for all it's worth. But in doing so, some have made arguments that seem to undermine their position.
Johnson & Johnson (JNJ) executives were quoted as saying a problem with Eprex, a brand name version for one of JNJ's erythropoietins, a few years ago, was due to manufacturing issues, forcing the company to tweak its process. JNJ gave this as an example to show that even its internal versions are not identical - JNJ sells both Procrit and Eprex brands of erythropoietin. But this argument is quite easy to counter. First, JNJ did not have to repeat Amgen's clinical trials to get approval for either Procrit or Eprex, in effect showing that biosimilar copies are easy to make. Second, the problem with Eprex was a "batch" problem, showing that batches of product, made by the same manufacturers are in fact slightly different from one another to begin with.
An Amgen executive apparently compared its drugs to a fine chocolate cake made with a secret recipe. This argument was again made to underline the "uniqueness" of the drug. He said another chef could make a copycat version, but it would taste different. What he failed to point out is that the same bakery essentially repeats its finicky process day in and day out to produce its signature cake. And no doubt these cakes too have slight variations, but these do not seem to affect business in any way.
So, the "internal noise" is at least as great as the variation that would result from having another company make a copycat version of the product. It seems that the exclusivity argument, put forth by all players, from Genentech (DNA) to Amgen, to Genzyme, is not really founded in science.
The second issue, highlighted in today's WSJ is one that we also covered extensively. It has to do with pricing (see Drugs and Politics: It’s Election Time, and Brits Reject Genentech, ImClone Drugs as Too Expensive). To generate pharma-like profits, biotechs rely on another blockbuster type model, one that is the different from the tried-and-true big pharma blockbuster.
Whereas big pharma tries to sell drugs relatively inexpensively to as many people as possible; often - as critics claim - trading increased efficacy for lower toxicity to enable more widespread use, biotechs sell expensive drugs to a few. Biotech blockbusters such as ImClone's (IMCL) Erbitux, Genentech's Avastin and Lucentis, Amgen's Vectibix, and Celgene's (CELG) Revlimid sell for around $36,000 to $67,000 per case on average. Those are whopping numbers. Especially given that many patients need to co-pay around 10-20%, putting the drugs effectively out of reach for them.
But it is not just patients complaining or refusing drugs. Government payers do too, and in some European countries, health services have limited or even abolished access to some of these drugs. And in the normally tolerant US, there have been widespread cries of foul-play that will ultimately lead to Congress taking steps and possibly introducing price caps. We predicted as much when we reviewed some of these drugs. Now it seems, even some at Wall Street are agreeing with us.
Even the tried and true "innovation" arguments are wearing thin in the face of such blatant profit taking. While nobody discloses margins it is probably safe to assume that margins run in the 90-99% range for these compounds. And while these drugs offer significant advantages, they are not the wonder-drugs that they are priced to be. They do not "cure" cancers - nearly all are cancer drugs - but just extend lives by six months to a year or two. Nor do they totally eliminate the need for other conventional chemotherapies. All that adds up to a troublesome package for many.
We believe that biotech companies are trading long-term prospects for short-term profits. These prices are so high and the step-up from previous treatments is so enormous that an untenable situation is created. And sooner or later, a backlash will follow. And now it appears that it may be sooner instead of later.
All in all, it seems the biotech industry is faced with some major growing pains. These issues are not going away anytime soon. Rather they will hit in full force sometime in the next 2-3 years and some as early as next year. Investors beware.
Disclosure: Centient management holds a position in Genentech shares and does consulting work for Genentech.
Source: CentientInvestor.com
RELATED READING:
- The Biotech Industry: 30 Years of Failure
- Biotechs Ahead of Pharmas after All?
- Senate Committee on Health to Hold Hearing on Follow-on Biologics
____________________
Centient Biotech Investor
The nation's biggest biotechs could soon be feeling more heat. Their products are now under increased scrutiny because of more widespread use, giving rise to more concerns regarding toxicity and safety (see Amgen and Genentech Hit by Blockbuster Effect). But that is not the only thing that could spell trouble for big biotech and its current business model.
Two other problems are also well known but often ignored. We have previously done stories on both issues as well. The first issue is biogenerics, or biosimilar products (see Will Generics End the Biotech Boom? and Biogenerics May Be Coming Sooner than you Think). Here is an issue that frightens companies so much that they engage in word games not unlike the ones used by the administration in describing its current conflict in the Middle East. These companies are as eager to deny legitimacy to the word "biogeneric" as the administration is to the words "civil war."
And when governments and companies resort to these word games, you know they are in trouble. Amgen's (AMGN) entire $14B/year portfolio could soon be free game if biogenerics are approved. That is because most Amgen drugs are at or very close to patent expiry, and the most important thing that keeps Amgen from competition is the lack of a regulatory path for generics approval. But that could change rather quickly. The Europeans have already cleared the path, and with the new Congress, the US is sure to follow suit shortly. That has people in Thousand Oaks seriously worried.
Senators Clinton and Schumer of New York, and Representative Henry Waxman have proposed bills that have the biotech industry up in arms. The Waxman bill is especially worrisome. Genzyme's (GENZ) CEO was quoted in the Wall Street Journal yesterday as saying it would have a "devastating effect" on the industry. No doubt we are seeing a repeat here of what happened to pharma in the mid-1980s.
The 1984 Hatch-Waxman Act enabled small molecule generics by requiring makers to show only that their products are equivalent to the branded versions to gain FDA approval. That allows companies to skip the extensive and expensive clinical trials that the originals went through to get approval. But small molecules are mixtures of chemicals and making identical copies is easy. Not so for biologics.
Since biologics are made in living cells, and incubated in mixtures of growth media, antibiotics, trace elements, etc., making an exact copy is not really possible. And although most scientists would agree that one can readily make a copy that is as near perfect as needed, company executives are now going to great lengths to milk this difference for all it's worth. But in doing so, some have made arguments that seem to undermine their position.
Johnson & Johnson (JNJ) executives were quoted as saying a problem with Eprex, a brand name version for one of JNJ's erythropoietins, a few years ago, was due to manufacturing issues, forcing the company to tweak its process. JNJ gave this as an example to show that even its internal versions are not identical - JNJ sells both Procrit and Eprex brands of erythropoietin. But this argument is quite easy to counter. First, JNJ did not have to repeat Amgen's clinical trials to get approval for either Procrit or Eprex, in effect showing that biosimilar copies are easy to make. Second, the problem with Eprex was a "batch" problem, showing that batches of product, made by the same manufacturers are in fact slightly different from one another to begin with.
An Amgen executive apparently compared its drugs to a fine chocolate cake made with a secret recipe. This argument was again made to underline the "uniqueness" of the drug. He said another chef could make a copycat version, but it would taste different. What he failed to point out is that the same bakery essentially repeats its finicky process day in and day out to produce its signature cake. And no doubt these cakes too have slight variations, but these do not seem to affect business in any way.
So, the "internal noise" is at least as great as the variation that would result from having another company make a copycat version of the product. It seems that the exclusivity argument, put forth by all players, from Genentech (DNA) to Amgen, to Genzyme, is not really founded in science.
The second issue, highlighted in today's WSJ is one that we also covered extensively. It has to do with pricing (see Drugs and Politics: It’s Election Time, and Brits Reject Genentech, ImClone Drugs as Too Expensive). To generate pharma-like profits, biotechs rely on another blockbuster type model, one that is the different from the tried-and-true big pharma blockbuster.
Whereas big pharma tries to sell drugs relatively inexpensively to as many people as possible; often - as critics claim - trading increased efficacy for lower toxicity to enable more widespread use, biotechs sell expensive drugs to a few. Biotech blockbusters such as ImClone's (IMCL) Erbitux, Genentech's Avastin and Lucentis, Amgen's Vectibix, and Celgene's (CELG) Revlimid sell for around $36,000 to $67,000 per case on average. Those are whopping numbers. Especially given that many patients need to co-pay around 10-20%, putting the drugs effectively out of reach for them.
But it is not just patients complaining or refusing drugs. Government payers do too, and in some European countries, health services have limited or even abolished access to some of these drugs. And in the normally tolerant US, there have been widespread cries of foul-play that will ultimately lead to Congress taking steps and possibly introducing price caps. We predicted as much when we reviewed some of these drugs. Now it seems, even some at Wall Street are agreeing with us.
Even the tried and true "innovation" arguments are wearing thin in the face of such blatant profit taking. While nobody discloses margins it is probably safe to assume that margins run in the 90-99% range for these compounds. And while these drugs offer significant advantages, they are not the wonder-drugs that they are priced to be. They do not "cure" cancers - nearly all are cancer drugs - but just extend lives by six months to a year or two. Nor do they totally eliminate the need for other conventional chemotherapies. All that adds up to a troublesome package for many.
We believe that biotech companies are trading long-term prospects for short-term profits. These prices are so high and the step-up from previous treatments is so enormous that an untenable situation is created. And sooner or later, a backlash will follow. And now it appears that it may be sooner instead of later.
All in all, it seems the biotech industry is faced with some major growing pains. These issues are not going away anytime soon. Rather they will hit in full force sometime in the next 2-3 years and some as early as next year. Investors beware.
Disclosure: Centient management holds a position in Genentech shares and does consulting work for Genentech.
Source: CentientInvestor.com
RELATED READING:
- The Biotech Industry: 30 Years of Failure
- Biotechs Ahead of Pharmas after All?
- Senate Committee on Health to Hold Hearing on Follow-on Biologics
____________________
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