Biopharma in 2013: A Rising Tide

Biopharmaceutical Report I


Issue1_March 2014





Big launches, clinical success in key therapeutic areas like cancer immunotherapy, and renewed interest in biotech from a broad investor base fl oated the biopharma world through 2013’s average year for FDA approvals, the rocky rollout of the Aff ordable Care Act, and increasing concern about drug prices.

BY IN VIVO's PHARMA TEAM


In 2013, the broader biopharmaceutical world built on the valuation gains afforded by a buoyant stock market and enthusiasm – unmatched in the history of the industry – for biotech IPOs. But this boom comes amid a reversion to the regulatory mean, as FDA approved a dozen fewer drugs in 2013 than in the standout year of 2012; the cooling of growth in emerging markets like China; and the not-so-distant drumbeat of pay or demands for health care value.


Deal trends largely stayed on track from previous years, with peer dealmaking among large companies gaining steam and “innovation center fever” – Johnson & Johnson’s was contagious – reflecting pharma’s continued push into earlier-stage, less-expensive asset and technology acquisitions. Pharma-VC collaboration also continued apace, with GlaxoSmithKline PLC leading the way through its Avalon Ventures tie-up. (See “Venture Firm Avalon Turns To GSK To Share Biotech Risk” — START-UP, May 2013.) There were few enormous deals, and where multibillion dollar dealmaking was concerned, Big Pharma seemed to take a backseat to increasingly aggressive specialty pharma and Big Biotech acquirers.


Although rollout of the Affordable Care Act has been anything but smooth, pharmaceutical companies will still very likely enjoy the growth in drug spending that is at least in part a result of its implementation. Nearly all drug companies are pursuing some variety of medication adherence strategy. (See “Medication Adherence: A Positive Story You Are Not Hearing” — IN VIVO, November 2013.) Some, such as Merck & Co. Inc. with its HMR Weight Management Services Corp. and post-hospital-discharge services company Vree Health, are very much playing the ACA angles in so-called beyond-the-pill adjacencies. (See “Merck’s “Beyond The Pill” Bet, Vree Health, Goes Commercial” — IN VIVO, October 2013.)


ALLIANCES: NEW NORMAL?


Alliances in 2013 did not pick up after a weak 2012. Exhibit 2 shows the decline in total up-front cash fl owing from large to small partners in biopharma deals is continuing. The number of deals potentially worth at least $10 million in combined up-front and downstream payments has seemingly bottomed out around 90 deals. This new normal is abetted by biotech corporate structures that incentivize M&A (including full acquisition of individual assets), fewer large pharmaceutical buyers, R&D restructuring at several large pharmaceutical companies, and shifting commercial priorities.


But fewer deals is not necessarily a sign of reduced interest on the sell-side, which given the year’s free-fl owing capital has surprised even seasoned dealmakers. Roche’s Genentech Inc. partnering chief James Sabry was expecting a dropoff in partnering interest to accompany the biotech boom last year. That hasn’t happened.


“What we’ve noticed is, remarkably, no diminution in interest in partnering,” he said in an interview during the 2014 JP Morgan Health Care Conference. “Ten years ago, when I was running a company, if there was a ready-made way to access capital, we would put off partnering discussions and create more value and take more risk. What I thought we’d see, but we don’t see, is people saying, ‘We’ll talk to you in a few years when we have Phase II data.’”


And there certainly are investors eager to pour in capital by floating biotech companies on the public markets. Newly public companies – and the horde amassing in the IPO queue behind them – have the cash that might suggest they should be dealing from a position of strength, or not wanting to deal at all. (See “On The Road And Through The Window: Inside Three Biotech IPOs” — STARTUP, November 2013.)


That said, although the frequency of partnership interactions hasn’t changed, potential partners have predictably become more aggressive – another data point for the “this time it’s different” crowd. That suggests to Sabry that smaller or newly public biotechs are perhaps justifiably concerned that the boom won’t last or recognize that development is increasingly difficult. Attrition rates in the clinic are as bad, or worse, than ever, finds a study by analysts at BioMedTracker and the Biotech Industry Organization published online in January in Nature Biotechnology. Some of that attrition boils down to companies facing up to the fact that some drug candidates may be safe and effective – but may struggle to compete regardless. So interest remains high, discussions are ongoing, but fewer deals are getting done. (See ”2013’s Top Biopharma Dealmakers,” this issue. Roche cracks the top five.) That overall trend is reflected by Genentech’s own experience. “We’re passing on deals that other people are doing at crazy valuations,” says Sabry. “Some of the deals you don’t know about because we didn’t do them because they priced themselves out of our sweet spot.”


BREAKTHROUGH DRUGS:

FDA HITTING STRIDE


Genentech Inc.’s Gazyva (obinutuzumab) represents a lot of “firsts.” Formerly GA101, the chronic lymphocytic leukemia drug is Genentech’s first application to go through the Food and Drug Administration’s new review process under the Prescription Drug User Fee Act V. It was also the company’s first “Breakthrough” designation from FDA – and the first “Breakthrough” application accepted for filing. And on November 1 it became the first “Breakthrough” product approved by the agency. (See “FDA’s First “Breakthrough” Approval Coming; Won’t Break Speed Records” — The RPM Report, October 2013.)


“The approval reflects the promise of the breakthrough therapy designation program, allowing us to work collaboratively with companies to expedite the development, review and availability of important new drugs,” FDA Office of Hematology and Oncology Products director Richard Pazdur said in the agency’s announcement of the approval. (See ”Roche’s Gazyva Clears FDA, But First Breakthrough Approval Breaks No Speed Barriers” — “The Pink Sheet,” November 4, 2013.)


Gazyva, however, is not a true test of the program’s impact. Because the designation wasn’t available during GA101 development –Genentech requested it at the time of the BLA submission – the company missed out on the program’s opportunities for accelerating drug development. But it’s unlikely industry will have to wait too long to witness the full potential of the program to accelerate development of industry’s most impressive product opportunities. (See Exhibit 3.)

Among the first wave of breakthrough therapies – the second to get FDA’s nod – is Johnson & Johnson and Pharmacyclics Inc.’s expected oncology blockbuster Imbruvica (ibrutinib). (See “Pharmacyclics/Janssen Off er Suite Of Patient Support Programs For Imbruvica” — “The Pink Sheet,” November 18, 2013.)


SPECIALTY PHARMA TOP BUYERS IN 2013

Although 2012 and to a lesser extent 2013 gave large pharmaceutical companies new product approvals to drive future growth, current trends in R&D productivity make it unlikely that organic growth alone will be sufficient to boost Big Pharma revenue to the extent that the group can keep up with faster growing specialty pharma and biotech companies. M&A is essential, analysts at Ernst & Young pointed out this year.


Unfortunately, just when Big Pharma most needs growth through acquisitions, its resources to conduct such transactions have become more constrained. To quantify this phenomenon, E&Y developed a measure of “firepower” – the financial resources a company has available to execute M&A or alliances. Firepower is directly correlated with market value, cash, and equivalents, and is inversely correlated with debt. E&Y’s analysis, published in IN VIVO in June 2013, looked primarily at acquisitions, for the simple reason that most alliances cannot be expected to provide a meaningful boost to revenues in the near term. (See “Biopharma M&A In An Era Of Elusive Growth, Capital Triage, and New Competitors” — IN VIVO, June 2013.)

To the extent Big Pharma was a major player on the business development scene in 2013, it was largely through early-stage dealmaking and outreach to scientific hotspots like Boston or San Francisco. The wheelers and dealers writing big checks tended to be from specialty pharma companies such as Valeant Pharmaceuticals International Inc. (See Exhibit 4.)


Valeant has been telling investors (most recently during the January 2014 JP Morgan gathering) that it plans to be a “top five” pharma business by 2016 – which would essentially mean adding more than $100 billion in market cap over the next few years. Meanwhile, what excites analysts most about the Pfizers and Mercks of the world is whether they’ll get smaller – through divestments or spin-offs of businesses like consumer or animal health. Big Biotechs such as Biogen Idec Inc., Celgene Corp., and Gilead Sciences Inc. are growing much faster than traditional large pharmaceutical players and have enjoyed the year’s most explosive launches. As such, it’s easy to wonder whether the current crop of Big Pharma players will be eclipsed by these upstarts sooner rather than later.


TECFIDERA:

2013’S BREAK-OUT STAR


Biogen Idec’s Tecfidera (dimethyl fumarate) stands as proof that the blockbuster drug is alive, if perhaps not exactly kicking, in 2013. The drug was the break-out star among the new drugs that launched during the year and the only one to stand out from the group on sales metrics.


Tecfidera, an oral pill for multiple sclerosis, appears to have generated sales approaching $1 billion in 2013 after just nine months on the market (official annual sales tallies aren’t yet available).

The drug brought in $478.5 million for Biogen Idec from its launch in April through September, surpassing analyst expectations and Biogen’s own internal forecasts. It’s likely to outpace first-year sales of Regeneron Pharmaceuticals Inc.’s Eylea (aflibercept) for age-related macular degeneration, regarded as one of the most successful recent drug launches. Eylea debuted in late 2011 and generated sales of $838 million in 2012. Tecfidera appears on track to surpass $1 billion in sales in its first 12 months on the market. It was the exception in 2013, not the rule. No other new drugs flew out of the gates with as much speed, and only one other generated more than $100 million in sales in the first months of launch.


The early success of Tecfidera harkens back to Vertex Pharmaceuticals Inc.’s hepatitis C drug Incivek (telaprevir), which generated $950.9 million in sales in 2011 following its mid-year launch. Vertex hasn’t been able to sustain the sales momentum for Incivek, however, as “warehoused” patients were treated and as other patients await the first all-oral regimens, the first of which – Gilead’s Sovaldi (sofosbuvir) – was approved in December 2013. Incivek generated only $447 million in the first nine months of 2013, less than half what it generated in the first nine months of 2012. Sovaldi is very likely to be 2014’s launch of the year – and with analysts talking about a potential billion-dollar quarter for the drug in its first full quarter on the market, perhaps the launch of the decade or longer.


REIMBURSEMENT:

PBMS PLAYING HARDBALL


The coming year could see increased intensity in drug pricing negotiations between some brand drug manufacturers and the largest pharmacy benefit managers, as Express Scripts Inc. and CVS Caremark Corp. weigh adding more drugs to their “not covered” lists.


The formulary exclusion lists, especially Express Scripts’, were a particularly important development in the reimbursement world in 2013. (See “Express Scripts Tightens Commercial Formulary Control With “Not Covered” List” — “The Pink Sheet,” October 7, 2013.) The lists were developed as part of the PBMs’ 2014 recommended national formularies for commercial insurance plans and are noteworthy because they are expected to solidify the presence of more restrictive formularies in employer-sponsored insurance.


Express Scripts and CVS Caremark are expected to announce the next iteration of their national formularies for the 2015 plan year, including lists of “not covered” drugs, around late summer/early fall. Both firms have said they see room to expand their “not covered” lists, particularly in the area of specialty drugs.


Express Scripts’ “not covered” list includes 48 branded products – 44 drugs and four diabetes test kits – and was launched for the first time in 2014. CVS Caremark’s list includes even more products, a total of 76, including a number of diabetes test strips and kits. (See “CVS Caremark Formulary Exclusion Program Expected To Save $1 Bil. In 2014” — “The Pink Sheet” DAILY, December 20, 2013.) CVS Caremark first introduced a “not covered” list in 2012; the current version includes 25 new products and the rest are carryovers from the previous year.


The concept of a “not covered” drug list was not new in commercial insurance when Express Scripts introduced its 2014 list during the latter half of 2013. Nevertheless, the move sent shockwaves through the biopharma industry.

What was striking about the Express Scripts “not covered” list is that it demonstrated a more aggressive approach than had been taken by CVS Caremark. For one thing, it targets more high-profile drugs, such as GSK’s Advair Diskus (fluticasone/salmeterol) and Novo Nordisk AS’s Victoza (liraglutide), on the basis that the dosing advantages offered by the products are not enough to ensure a place on formulary.


Express Scripts also includes more specialty drugs on its list, such as treatments for hepatitis C, multiple sclerosis, and inflammatory disease, and growth hormone products. CVS Caremark’s list covers just one specialty class – growth hormones.


The Express Scripts list also illustrates a different approach to exclusion and one that is potentially more worrisome for drug firms. It targets brands with branded drug alternatives in the same class and not just brands that have generic competition in the same class, like CVS Caremark has done. Express Scripts’ approach thus drives branded manufacturers to compete with each other for a spot on the formulary through bigger price concessions and rebates.


The moves underscore the importance of incorporating payor perspectives into drug development plans as early as is practical. Doing so should also increase potential deal values for biotech firms shopping their wares to commercial partners. (See “Surpassing Expectations: Increasing Deal Value Through Better Drug Value Propositions” — IN VIVO, November 2013.)


TACKLING CANCER DRUG PRICING?


The time has come for Roche to revise its approach to oncology drug pricing, Pharmaceuticals Division chief operating officer Daniel O’Day stated at an analyst briefing held at the American Society for Clinical Oncology Annual Meeting June 2. Payment will need to move away from volume, especially as expensive combinations become more widespread in treating cancer, O’Day suggested. “The days of looking at per-milligram price, I think for us in many countries, and certainly when we look at the next three years, it’s unsustainable,” he acknowledged. “It’s unsustainable to suggest that we’re just going to simply add another therapy at $8,000 to $10,000 a month on top of [existing costly therapy] and expect constrained health care systems to be able to pay for that. So we have to be a bit more creative about it,” he said. (See “Roche Experimenting With New Pricing Models In Oncology” — IN VIVO, June 2013.)


The company’s new pricing focus will include indication-based pricing, pricing for combination therapy, and eventually, in some countries, outcome-based models, O’Day indicated. Roche has started this shift, “but it will advance,” he said. In Germany, where novel medicines must show an added benefit as they go through a two-tier system of health technology assessment, Roche uses a capitation program where everything over 10 grams in an annual period is covered by the company. A similar program is used in Italy, and the idea is similar to the price cap in the US (for labeled indications only). However, “there is no one size fits all here,” O’Day cautioned. “Every health care system has different dynamics; they have different needs.” Risk-sharing arrangements that make payment contingent on pre-specified outcomes are also part of the Avastin (bevacizumab) policy in Italy for the first dosing schedule. Indication-based pricing is facilitated by stronger data sources at the country level, and the approach allows Roche to monitor patients by indication.


GSK PROBE SLOWS

CHINA JUGGERNAUT


It is not surprising that Big Pharma sales hit the wall in the third quarter of 2013 in China as widespread compliance probes cooled down marketing activities during the period. Overall, the top 10 Big Pharma in China reported an average 1% sales growth in Q3; in contrast, these companies grew 18% in Q2, 24% in Q3 last year, and 23% for the full year in 2012.


GSK, which is in the eye of China’s compliance storm, reported a 61% sales decrease in the country for the quarter. (See “Public Security Ministry Claims Evidence Of GSK Bribery In China; Several Execs Arrested” — PharmAsia News, July 11, 2013.) Excluding GSK, average growth of the other nine companies was still only 8% (or 9% if excluding Pfizer Inc.’s transfer of products to its joint venture with Zhejiang Hisun Pharmaceutical Co. Ltd.), poor growth for an emerging powerhouse like China.

Most companies’ revenue growth was down 6% to 10% compared with Q2 numbers. Roche dropped 18% from the previous quarter but still kept a relatively high year-on-year growth of 16%. Merck was the largest victim after GSK with a 21% drop from the previous quarter and a year-on-year sales decrease of 8%. (See “Behind The Ugly Numbers From The Compliance Crisis Fallout: China Big Pharma Roundup” — PharmAsia News, November 7, 2013.)


RELATED READING


“New Drugs In 2013 Show A Virtuous Cycle: FirstCycle Approvals Up, Review Times Down” — “The Pink Sheet,” Jan. 6, 2014 [A#00140106010]


“Venture Firm Avalon Turns To GSK To Share Biotech Risk” — START-UP, May 2013 [A#2013900093]


“Biopharma M&A In An Era Of Elusive Growth, Capital Triage, and New Competitors” — IN VIVO, June 2013 [A#2013800114]


“Medication Adherence: A Positive Story You Are Not Hearing” — IN VIVO, November 2013 [A#2013800176]


“Merck’s “Beyond The Pill” Bet, Vree Health, Goes Commercial” — IN VIVO, October 2013 [A#2013800182]


“On The Road And Through The Window: Inside Three Biotech IPOs” — START-UP, November 2013 [A#2013900217]


“2013’s Top Biopharma Dealmakers” — IN VIVO, January 2014 [A#2014800001]


“FDA’s First “Breakthrough” Approval Coming; Won’t Break Speed Records” — The RPM Report, October 2013 [A#2013500123]


“Roche’s Gazyva Clears FDA, But First Breakthrough Approval Breaks No Speed Barriers” — “The Pink Sheet,” November 4, 2013 [A#00131104018]


“Pharmacyclics/Janssen Offer Suite Of Patient Support Programs For Imbruvica” — “The Pink Sheet,” November 18, 2013 [A#00131118014]


“Drug Spending Expected To Rise By $200 Bil. In 2022 Compared To Pre-ACA Levels” — The RPM Report, September 2013 [A#2013500113]


“Express Scripts Tightens Commercial Formulary Control With “Not Covered” List” — “The Pink Sheet,” October 7, 2013 [A#00131007006]


“CVS Caremark Formulary Exclusion Program Expected To Save $1 Bil. In 2014” — “The Pink Sheet” DAILY, December 20, 2013 [A#14131220002]


“Surpassing Expectations: Increasing Deal Value Through Better Drug Value Propositions” — IN VIVO, November 2013 [A#2013800199]


“Roche Experimenting With New Pricing Models In Oncology” — IN VIVO, June 2013 [A#2013800116]


“Public Security Ministry Claims Evidence Of GSK Bribery In China; Several Execs Arrested” — Pharm Asia News, July 11, 2013 [A#28130710009]


“Behind The Ugly Numbers From The Compliance Crisis Fallout: China Big Pharma Roundup” — PharmAsia News, November 7, 2013 [A#28131106015]


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