On Predictions and Probabilities: The Year Past
Pharma’s Cutting Edge Vol. 4 Number 1 - January 2006
On Predictions and Probabilities: The Year Past
Wow. This issue marks the beginning of the fourth volume of Pharma’s Cutting Edge. I started the publication (originally as a quarterly PDF distributed by email and the web) in the fall of 2003, so it’s not the fourth year quite yet, but we have some gray in our hair. We also have quite a few readers, as you will see by clicking on the geographic tracking image at the bottom of the page. If you don’t already subscribe, why not sign up with an RSS aggregator (click your preferred chicklet above) or via email. I don’t receive your email address; it goes directly to Feedburner, so you can keep your identity secret, if that is a concern.
For the fourth volume, I’m going to try out some revisions to the look and feel of the main page newsletter (PCE proper). My goal has always been to educate and to learn, to alert people to the sometimes obscure but relevant issues facing the pharmaceutical and biotech industries. My goal hasn’t changed, but my audience has. At first, I geared PCE’s coverage towards the professional investor community. As my business focus changed, I began covering stories that would be of more interest to industry insiders. I want to extend that trend in 2006, but I’d like your help. Please send me emails with issues you’d like to see covered this year. I’m open to most ideas, but I’m particularly interested in discussing management and technology trends that affect pharmaceutical innovation and R&D productivity. These are the topics of greatest personal interest and should be of interest to anyone who cares about the industry and allopathic medicine. If you would like to be an author on this page, I’m open to that as well.
Last January I published some predictions for 2005. Before I repeated the effort for 2006, I figured I’d better re-visit my 2005 predictions. Then you can know whether to take my 2006 predictions with a grain of salt, a shot of bourbon, a sip of champagne or a roll of toilet paper. Later this month, I’ll post some additional 2006 predictions on the PCE page. So here they are, my 2005 predictions re-printed exactly as they appeared a year ago, with my comments added beneath each.
From January 2005 of Pharma’s Cutting Edge:
1. CMS and FDA band together to create a program for new drug and device evaluations that employs cost and relative value considerations for the first time in U.S. regulatory history. I doubt cost and value will ever be important deciding factors for marketing approval, but they will be scrutinized as never before. Any government scheme will have a bearing not only on the many government-run and -coordinated health plans but also on the entire private sector as well. My only reluctance in making this call is the timing; I have no doubt about the inevitability of a new drug evaluation system that includes features similar to those of UK’s NICE and Australia’s PBAC. But will it come in 2005? I think it will be gradually phased in beginning late this year.
I’ll stand by this call, even though I didn’t nail the timing. CMS took some baby steps in the direction of evidence-based coverage with publication of its draft evidence development guidance in June 2005. As I indicated in June, the draft guidance is a precursor to a future formal CMS guidance that will describe ways in which CMS will make “reasonable and necessary” determinations for Medicare coverage decisions. CMS proposes to promote collection of evidence in a variety of ways that will support clinical decision-making (and Medicare coverage) for individual patients. The timing of a federal NICE-like body formation is now becoming more clear. However, my prediction of a joint CMS/FDA-governed body might have to be revised. Recently, Senate and House bills proposed by Hillary Clinton and others provided for the AHRQ and NIH to review the comparative efficacy and cost-effectiveness of therapies. Interesting. Similar legislation will probably be introduced in 2006, but I now suspect that the U.S. won’t see a NICE-like body until 2008 at the earliest, perhaps bundled with legislation that creates a federal negotiating authority for the bulk purchase of drugs and devices for Medicare and/or Medicaid.
2. FDA reconfigures its organization to provide more autonomy for the drug safety division. The newly autonomous division, in conjunction with CMS, proposes a standing post-marketing surveillance system that relies on prospective surveillance of Medicare drug beneficiaries to—again for the first time in U.S. history—track incidence rates and case mortality rates for all adverse events reported by seniors enrolled in Medicare Part D. Similar surveillance programs, coordinated by FDA will be initiated within the private sector, creating the world’s most sophisticated post-marketing surveillance system by 2007.
I’ll consider this one nailed to the wall. The new office is called the Office of Drug Safety, and it is indeed autonomous relative to the review divisions. CMS and FDA have discussed how to share Medicare Part D adverse event data, and FDA has contracted for propsective adverse event monitoring within the private sector to supplement its MedWatch spontaneous-reporting surveillance system. Boom!
3. Industry-wide liability protection for drug and device makers will not be enacted into law in the U.S. this year. However, lawmakers are likely to expand current incentives for industry to develop ways of countering biological and chemical threats and improving the supply of prophylactic vaccines. Particularly for the latter, these incentives will include some liability shields.
Doh!! I came so close on this one. Senate legislation describing public-private partnerships and limited liability (Bioshield II) protection for vaccine manufacturers was proposed and debated in Congress, but weren’t brought to a vote during the 2005 sessions. Look for a revised Bioshield II that includes some liability protections to pass in 2006. Depending on the level of support, similar legislation that widens the protection to some non-biowarfare therapeutics (e.g. for ultra-orphan diseases) could also make it to a vote this year.
4. Follow-on protein therapeutics. I think this will be the compromised name for what the generics industry would prefer to be called “biogenerics” and what innovators would like to call “not in my lifetime.” The first U.S. approval will happen in 2005, although it will be for a follow-protein whose innovator cousin was approved by CDER under regulation 505(b) governing approval of drugs via the NDA route. This is because the 505(b)(2) regulation in existence allows for such approval. The only thing holding back the first 505(b)(2) follow-on protein approval—likely to be Sandoz’ growth hormone—is FDA publication of scientific guidance specific for proteins and evidence that the legal challenges to 505(b)(2) by Pfizer et al will be futile. I anticipate both of these hurdles to be cleared by year’s end. But approval does not equal launch, and I anticipate the first launch to be delayed—because of litigation—until late 2006 or 2007. Conversely, approval of the first follow-on protein outside of 505(b)(2) won’t happen until late 2006 at the earliest.
The compromised name does seem to be “follow-on protein therapeutics” as predicted (Bam!). As for the rest of it, I overestimated Sandoz/Novartis’ lobbying power with FDA and its overseers in Congress. While progress was made towards publication of an FDA draft guidance on a mechanism for follow-on protein accelerated development, Sandoz, frustrated with the slow pace of FDA action on its NDA (under 505(b)(2)) for its follow-on growth hormone Omnitrope, sued the Agency in September. The suit is pending and will be tried in 2006. I think Sandoz will win the suit. In the meantime, FDA should issue its draft guidance early in 2006.
5. Investing in the healthcare sector will again be a mixed bag for most of 2005, with most drug makers and emerging drug companies underperforming their reference market-cap indices. However, device makers and diversified manufacturers, like J&J, should continue to out-perform as investors take note of the increasing willingness of U.S. private and public sector third-party payers to cover an increasing variety of “quality-of-life” products. The situation for non-diversified companies will improve towards year-end, however, as the environment for drug reimbursement in 2006 clarifies, and lowered expectations for sector growth become widely adopted. This turnaround should mark the beginning of a fairly robust period of market value appreciation for much of the drug sector, as it climbs closer towards its long-term valuation averages. Emerging companies should also pick up towards year-end.
Have to give myself a B- on this one. Big Pharma did indeed underperform most industry sectors in 2005, ending the year up under 2%. I was wrong about the end-of-year rally, though. It’s true that pharma finally rallied in December to avoid a losing year, but it peaked in May and suffered losses in October. I do see major pharma outperforming most industry sectors next year, as it once again becomes viewed as a safe haven during a turbulent year for the broad developed-country markets. Biotech and emerging companies outperformed major pharma in 2006. The Amex biotech index was up 24% for the year, besting all but gold & silver, oil and brokers in this collection of 9 sectors. Much of the index success can be traced back to an outstanding year for the biotech majors, Amgen (up 23%), Genentech (up 69%), Genzyme (up 22%), and Medimmune (up 28%). Big biotech losers were Biogen-Idec (down 33%) and Millennium (down 21%). Unlike pharma, biotech did well all year until the fall, when it quieted down a bit. Next year, look for the reverse, with biotech suffering as speculators withdraw. Remember that stock-picking is much more important in a bear market than in a bull, when long indices outperform nearly all pickers. Pick carefully.
6. There will continue to be a reasonably healthy market for healthcare IPOs in 2005, although it is likely to cool off a bit from 2004. As in 2004, companies will find themselves relying on “fast follow-on” secondary equity and debt offerings to fully fund their clinical programs and launches, creating turbulence for investors with short-term horizons. On the bright side, 2004’s IPO class had an overall positive return (albeit with very high volatility), and I anticipate the same in 2005. The most successful IPO for 2005? I’ll go out on a limb and guess that Synta will get the $115 M they’re looking for to be the year’s most successful offering.
Sixteen biotech/pharma IPOs closed in the U.S. for 2005, all but two on the NASDAQ. Compare this number with the 29 IPOs priced last year. On the hopeful side for startups looking to float in 2006, there were as many IPOs priced in the second half as the first half of 2005. Repricings to the downside were very common, and all that weren’t re-priced opened at the bottom of their pre-trading pricing range, with one exception: Coley Pharma opened at $16, raising $96M, after being initially priced at $14-$16; it was the most successful IPO of the year. As for Synta? Never made it to the market. Overall, I’d say that 2005 was just a fair year for IPOs. Look for further weakening of biotech and pharma IPOs in 2006, as the market largely shuns the sector and VCs liquidate preferentially via acquisitions and partnerships with larger brethren.
7. Industry consolidation will continue. We will see more diversification of businesses within major pharma, as some of the less successful non-diversified players seek to emulate J&J’s long-term success. This diversification will include pharma acquisitions of device and diagnostics manufacturers in particular. I also anticipate that at least one major pharma will swallow a big-name biotech; likely candidates to be consumed include Chiron and Millennium.
Speaking of partnerships, the urge to merge continued in 2005, with some big stories like Sankyo-Daiichi, Shire-Transkaryotic, Pfizer-Vicuron, Pfizer-Idun, OSI-Eyetech, GSK-ID Biomedical, and Amgen-Abgenix. You have to give me props for my big call that either Chiron or Millennium were likeliest of the big biotechs to be swallowed. Slam! Chiron will be acquired by Novartis; the announcement came in September, well in time for my 2005 prediction to count as nailed. As for Millennium; it’s still looking like takeover bait to me, with J&J a likely suitor. As for diversification of large pharma, I can’t say that it began to happen in 2006. There have been some hints that non-diversified companies are looking at device and diagnostics partners seriously now, but I have to admit defeat on this call.
