According to a new report, “Resurgence,” Ernst & Young’s 2004 review of the U.S. biotechnology industry, the biotechnology sector is poised to become profitable by 2008. By then, revenues will top $91 billion and, for the first time, will realize a net income — approximately $400 million. Sales in 2003 were $35.9 million, resulting in a net loss of $3.2 billion.
“The pace of product approvals, as well as the robustness of the pipeline right now, will drive future growth,” says Michael Hildreth, Americas life science director for Ernst & Young. The number of biotech products on the market has increased dramatically in just the past decade, growing from only 22 in 1993 to 190, marketed by 66 companies, today. “What is really encouraging to me is that now there are 297 products in phase 3 trials and 50 products that have completed their trials in the United States and are awaiting approval from the U.S. Food and Drug Administration.”
The biotech industry has turned 30 and is, in a sense, growing up in that many biotechs are less likely to take the risks they have in the past. “For many companies the NRND (no research, no development) model is becoming more in vogue,” says Hildreth. “Even for companies that embark on robust basic research programs, you will see them focused on areas that have a clear path toward regulatory approval. They will not place as many bets — not a shotgun approach but more of a rifle approach in basic research.”
SOURCE: RESURGENCE/THE AMERICAS PERSPECTIVE. ERNST & YOUNG GLOBAL BIOTECHNOLOGY REPORT, 2004
Two out of every five biotech companies have embarked on cost-restructuring plans during the past 18 months. Hildreth believes that this trend will not continue at the same rate, the benefits of these cost-cutting plans will start to pan out, and costs will grow at a much slower rate than topline revenues. To make it through another four years of net losses between now and 2008, more companies will pursue interbiotech mergers such as the Biogen-Idec merger, Hildreth believes. He predicts that there will be some consolidation and that some will just go out of business, with around 200 fewer biotech companies in existence by 2008.
Of course, many unknowns will continue to frustrate bottom-line watchers — one being whether product approvals will slow down now that, once again, the FDA is without a leader. But the move by Mark McClellan, MD, PhD, to the Centers for Medicare and Medicaid Services could be a positive, Hildreth indicates, because there will be someone who will support and talk about the value of biotech products — an area in which the industry has shown little strength. Other potential pitfalls rest generally at the macro level and out of the industry’s hands — reimportation of pharmaceuticals and a presidential election, to name two — concurrent with changes in an industry that Hildreth characterizes as “growing up and joining the real world.”
Personalized Medicine May Yet Reap Profits
Some biotechs are betting on a “personalized medicine” approach to research. Though some investors are wary of this approach — pharmacogenomics, or molecular diagnostics — the thinking is that, ultimately, personalized medicine will yield substantial profits for manufacturers and reduce payer expenses because dollars will not be spent on patients who are unresponsive to a given drug. Genentech is actively pursing diagnostic markers for its drugs (it markets a diagnostic with trastuzumab [Herceptin]), in an attempt to reduce costs related to drug development and health insurance.
One top geneticist at a major drug company has gone so far as to say that 90 percent of prescription drugs will work on only 30 to 50 percent of patients. Molecular diagnostics can help to close this gap by determining which patients will benefit from a drug; thus, the patient benefits from personalized medicine and payers could benefit from lower overall costs. With elimination of the fallacy that one drug works for every patient, payers may become willing to pay more for a drug that comes with reasonable assurance that it will actually work for a particular patient. Companies such as Genentech also benefit from the sale of two products — the diagnostic and the drug itself.
With No Cookie Cutter Approach to Managing Biotech Costs, PBMs Expanding Services.
Medco Health Solutions, the pharmacy benefit manager, reports in its 2003 Drug Trend Report that spending for specialty drugs increased 26.6 percent in 2003, representing double the increase in the overall drug spend. Much of this increase is due to the sheer number of new biotech drugs entering the market. According to the report, the average annual cost per treatment is $18,000, with total spending possibly reaching $25 million this year.
While insurers and employers have a handle on managing non-biotech drug costs, there seems to be no clear consensus on what to do about the cost of biotech drugs. The disparity arises from the fact that most biotech drugs are administered in physicians’ offices and then billed through the medical, not pharmaceutical, benefit, making it difficult to track how dollars are spent on biotech therapies. Several PBMs are trying to help payers solve this problem.
With more and more therapies being administered in the healthcare setting, payers are asking what can be done to get a handle on these costs. Medco has developed one approach, with its integrated healthcare data warehouse. The system is designed to process information from both medical providers and pharmacies, to help the PBM analyze biotech drug charges for its clients, apply case utilization and case management techniques, and determine if a particular drug is covered. AdvancePCS, one of Medco’s competitors, offers its clients its Specialty Benefit Management system to help manage biotech drug costs. The service includes drug-pipeline forecasts and drug-spending reporting to help clients forecast future costs specifically related to new biotech drugs that are entering the market.
Chit-Chat
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