Pharma’s Cutting Edge

See the thoughtful editorial by James Love of the Consumer Project on technology. You’ll need a subscription to read the entire thing, but this is the gist of Love’s argument: The need for emergency stockpiles can be anticipated. Limited resources of governments precludes full stockpiling for relatively low-risk events. Therefore, permit governments to to acquire medicines freely from generic suppliers (By freely, he means pay for the drug only not royalties to the patent holder) for the purpose of stockpiling. If the drugs are later used, then pay the patent holders a generous royalty. This approach increases the value of patents on the stockpiled drugs, which otherwise might not be realized due to limited stockpiling.

There are two major limitations to this approach. The first is that it won’t work when the drug has only the emergency use. Love recognizes this limitation and mentions the need for parallel approaches to create incentives for these drugs to be developed. The second, related limitation is a killer. It’s the lack of incentive to innovators to develop drugs they know might later be stockpiled via the “patent-borrowing” procedures. If the drugs aren’t developed, the idea can’t be implemented. A company is not going to spend hundreds of millions to develop a drug if governments can later allow a generic manufacturer to sell it to government(s) at a profit for stockpiling, while they get nothing unless the stockpiles are used. But there is perhaps a way around this limitation too. Instead of allowing patents to be “broken” and giving the rights of manufacture and sale to generic makers, a rule would require the innovator to sell stockpiles to governments at a fixed margin above cost of manufacture and distribution to governments only. These costs would have to be subject to government audit and kept highly guarded. In addition, governments involved would have to provide the additional manufacturing capacity (above the capacity required for a drug’s other commercial uses) needed to meet stockpiling demand. This would require that stockpiling agreements be reached well before a drug is approved for marketing by FDA, with the risk that excess capacity created would be wasted. Easy to implement? No, it would be very difficult and there would be strong resistance from industry, but it would overcome some of the objections to Love’s approach, which I think wouldn’t fly in the U.S. or Europe.

For non-subscriber’s, here is the first paragraph of this story: “When the Food and Drug Administration surprised the company last week by withholding approval for the drug, Pargluva, saying it needed more information, many analysts assumed the delay would likely be no more than a year. But late yesterday, after the close of stock-market trading, Bristol-Myers said that the information that the FDA is seeking could take five years to obtain. As a result, the company said it will “consider a range of options including conducting additional studies or terminating further development” of Pargluva.”

Here is what I said about Pargluva on Pharma’s Cutting Edge October 19th: “…a Deutsche Bank analyst said he doesn’t think this approvable decision reflects on FDA’s current state of mind as regards risk mitigation. I disagree. I think that two years ago this drug would have met with approval accompanied by a rigorous postmarketing committment and surveillance program. Today it received an approvable with a likely approval hinging on further clinical trials before launch. I noted with skepticism commentary that approval could be delayed up to a year. In fact, approval could be delayed for much longer than a year depending on what is asked of BMS. If an outcomes study is required, forget it. That’s several years in the making at a minimum. However, if a surrogate study will suffice (and I can’t imagine which surrogate would be acceptable) a year is possible but unlikely.”

Okay, my point is not to toot my own horn. But, once again, you should view all public pronouncements of Wall Street analysts with skepticism. For the most part, they are spoon fed information from management, and beyond that, they have little knowledge of the industry and its inner workings and therefore little to say that is worth hearing. Also, what they say in public and what they tell their institutional clients are often two different things. Enough said on that topic. Please send all hate mail directly to the offices of PhRMA.

Another, even more important point, is the future of drug approval and of this class in particular. What happens to PPAR alpha/gamma dual agonists if BMS and Merck decide not to do the additional CV safety studies apparently required for approval? Are there any companies that will be willing to spend the additional money needed (I estimate the cost of an outcomes study as around $150 million out of pocket) to demonstrate CV safety pre-launch if BMS/Merck don’t pave the way first? You know what, I don’t think there are. Which companies will be affected if the entire class of dual PPAR agonists is forsaken? Here’s a list of some: Astrazeneca (tesaglitazar, Phase 3), Aventis (AVE-0847, Phase 1), Dr. Reddy’s (DRF-4382, Phase 1), Eisai (E-3030, Phase 1), Lilly/Ligand (naveglitazar, Phase 2), Novartis (LBM-642, Phase 1), Ono (ONO-5129, Phase 2), Plexxikon/Wyeth (PLX-204, Phase 1). Many others have not yet reached the clinical stage of development.

On 10/7 I asked whether AMLN was setting up for a near-term fall based on faulty analyst estimates of first-quarter exenatide sales and the associated run-up in its price above its historical BTK tracking level. Well…it was and it did. It’s now trading at around its BTK tracking level again. If you got in for a short-term trade, now would be a good time to get out.

(Disclosure: I currently hold a small position in Eyetech.) My displeasure with OSI’s takeover of Eyetech really boils down to one thing: It is a slap in the face to stockholder’s who invested in Eyetech at the IPO, believing that Eyetech was in business to “win” in the AMD and DME marketplaces. Eyetech certainly showed all the signs of being a winner back then. They were set to occupy the first market position with Macugen in what will eventually become a crowded anti-angiogenic marketplace for eye disease. They were able to sign a favorable co-marketing agreement with Pfizer. And guess what…investors bet correctly. Eyetech was/is a winner. So, why are investors taking a bath on this merger?

It’s no wonder that a fledgling biotech like OSI, which is largely a one-trick pony with Tarceva, would be interested in an acquisition of Eyetech. But why is Eyetech willing to sell out at a price substantially below the IPO? It’s clear to me that the reason is a combination of fear and greed on the part of Eyetech’s senior management: Fear that they will not be able to maintain and grow market share in AMD after Lucentis is approved and greed reflected by employment agreements giving Eyetech senior management guaranteed jobs with golden parachutes attached if things don’t work out. These are common employment agreements in the workd of M&A, but just because they are common doesn’t mean investors have to support them.

Consider what I view as the single most important paragraph to be found in the proxy statement for the merger (Granted, I haven’t read the whole thing. More power to you if you have.): “Merrill Lynch noted that the discounted cash flow valuation of Eyetech is highly sensitive to changes in Macugen’s assumed share of the estimated future U.S. market for the treatment of neovascular AMD. Merrill Lynch noted that a five percentage point increase in Macugen’s assumed long-term U.S. market share relative to the approximate 20% long-term U.S. market share reflected in the Eyetech management forecasts utilized by Merrill Lynch would add approximately $4 to $6 per share to its discounted cash flow valuation of Eyetech, while a five percentage point decline in Macugen’s assumed long-term U.S. market share relative to the approximate 20% long-term U.S. market share reflected in the Eyetech management forecasts utilized by Merrill Lynch would reduce its discounted cash flow valuation of Eyetech by approximately $1.75 to $2.50 per share.” Read the rest of this entry »

Pharma’s Cutting Edge
Vol. 3 Number 10 - October 2005

Disappointing Biotech (response)

The following is a letter I wrote to the Editors of the British Medical Jorunal in response to the recent article by Joppi et al entitled: “Disappointing Biotech.” This is a slightly modified version of the original, full-length letter. A much condensed version, which is also toned down in its criticism, will be published next week in the journal. I give the BMJ credit for at least trying to inject some balance into their almost constant criticism of the industry. In the current issue a couple of academics argue that the pharma industry invents false arguments to justify higher prices for medicine in the US. I’ll read and critique that one some other time.

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The BMJ continues its apparent new-found tradition of pharma/biotech industry bashing with the publication of Joppi et al’s disappointing biotech critique (”Disappointing Biotech” BMJ 2005; 331: 895-897). Readers should be disappointed by the article’s lack of balance and by BMJ’s decision to publish it without an accompanying counterpoint.

The paper begins with the misleading premise that biotechnology promised “cheaper” medicines: “[T]hey are…cheaper to make thanks to potential large scale production.” Putting aside the lack of a definition by the authors for a biotech product, “they are cheaper to make” than what? Small molecules? Surely the authors recognize that the production and distribution of large molecules, particularly monoclonal antibodies, can be extraordinarily expensive, much more so than “traditional” medicines. The authors have set their story on a faulty foundation, hoping to convince readers that they should be disappointed in their expensive new medicines. Instead, I am already disappointed by the critique and I’ve not yet read past the second sentence.

The authors identified 61 active substances approved in Europe from 1995 to 2003 and categorized them according to their own innovation classification (disappointment #2). The largest category of drugs (24) were classified as “copycat or me too products”–pejorative terms that effectively cast prejudicial doubt upon a drug’s value. I am familiar with one of the drugs on the “copycat” list, teriparatide (rhPTH1 -34, Forteo, Eli Lilly and Company), a treatment for osteoporosis. I assisted with its development while employed at Lilly. Teriparatide was the first and remains the only drug in its class to be approved for osteoporosis. It was also the first bone-anabolic agent ever widely approved in Europe. Many experts have characterized the drug as an extremely important addition to the treatment options for osteoporosis, especially for those with advanced disease who are mostly likely to suffer debilitating consequences. Yet the authors denigrate the drug by classifying it as a “copycat.” If such an obviously pioneering innovation as teriparatide may be classified by Joppi et al as a copycat, I have to suspect that other drugs on this list are also misclassified. Read the rest of this entry »