That’s the advice from Wall Street, as giant biotech companies and the incumbents of Big Pharma are bracing to get crushed by more innovative — and cheaper — new drugs.
What started in 2017 will continue in 2018, analysts say. Generic drug approvals are rising and interesting new medicines are starting to take market share from the legacy makers of medications that consumers use frequently, including both Big Pharma and biotech companies.Blockbuster drugs representing an estimated $17 billion in annual sales are set to lose patent protection over the next decade, analysts say. Disruption will come as generic drugs and innovative new biologic alternatives come on the market.
“It will be brutal,” JMP Securities analyst Mike King told Investor’s Business Daily. “It will be a knife fight.”
In the market for cholesterol-lowering drugs, King expects Amgen (AMGN), Regeneron Pharmaceuticals (REGN) and Sanofi (SNY) to feel the heat from the likes of Esperion Therapeutics (ESPR), The Medicines Co. (MDCO) and Alnylam Pharmaceuticals (ALNY).
Meanwhile, in anti-inflammatory treatments, Celgene‘s (CELG) Otezla, which gained blockbuster status in 2016, missed sales forecasts by a wide cut in the third quarter. Analysts say newly approved drugs to treat the same conditions from Eli Lilly (LLY) and Novartis (NVS) are taking market share.
Gilead Sciences (GILD) is still feeling the pain from the maturing of its hepatitis C drug unit in the U.S. and Europe. The rapid pace of Gilead’s hepatitis C sales decline is expected to slow down somewhat, but newer medicines like AbbVie‘s (ABBV) Mavyret are likely to swipe some of its sales.
Big Pharma isn’t getting any help from regulators either. Food and Drug Administration head Scott Gottlieb will continue to increase approvals for copycat drugs, stoking competition for both branded and generic drugs facing new rivals as firms try to undercut one another in price.
Big Pharma Feels The Sting
Among the Big Pharma companies, Pfizer (PFE) will be at the forefront feeling the sting of generics taking sales. Earlier this month, Teva Pharmaceutical (TEVA) was allowed to launch a generic copy of the blockbuster erectile dysfunction drug Viagra.
Generic drugs tend to be cheaper than their branded counterparts and Viagra is a pricey drug at about $70 per tablet, according to AccessRX. In 2013, after Pfizer lost exclusivity for Viagra in Canada and Europe, worldwide sales fell 8% to $1.88 billion.
Today, generics in Europe have slashed the price of drugs containing the same active ingredient as Viagra by about 90%. Generic versions of Viagra cost about a third of the price in Canada. U.S. Viagra prices could also fall if the trend repeats itself with a generic on the market.
Teva, meanwhile, is struggling with $34.7 billion in debt as of the end of the third quarter. On Thursday, Teva announced a plan to cut its workforce by more than a quarter, close several manufacturing facilities and suspend its dividend on ordinary shares.
The firm is also planning to review its generic drug portfolio, most specifically in the U.S., to change prices or discontinue products.
IBD’S TAKE: See how giant biotechs fared vs. smaller players in the third quarter by visiting the Industry Snapshot. Hint: The quarter was classified as “alarming” for one large-cap biotech which could be in trouble as they see more competition for their traditional moneymakers.
Across the board, spending on prescription drugs in 2016 increased by just 3.8% per person, according to a report from Express Scripts (ESRX). That’s down from a 5.2% rise in 2015, representing a 27% drop in the growth rate.
That trend is likely to continue in 2018, FBB Capital Partners analyst Mike Bailey told IBD. He credits Gottlieb for the decline in generic prices. Gottlieb is running the FDA like a business, which allows for a cycle of more approvals, more competition and lower prices.
Although the Centers for Medicare and Medicaid Services could use their tools to influence pricing, it’s unlikely President Trump will use his executive powers to enact sweeping drug-pricing reform such as allowing Medicare to negotiate prices or enacting outright pricing controls, Bailey says.
“I wouldn’t expect any major changes out of the Trump administration in pricing,” he said. “I think mechanically and politically it’s difficult to get pricing law through the system. It’s politically more acceptable to just get more generic drug approvals. It’s a win-win.”
Competition Stokes Drug Price Declines
JMP’s King counts drugs that treat rheumatoid arthritis and psoriatic arthritis as among those in the “crowded areas.” In 2016, drugs in this class cost an average $3,588 per prescription and benefited from increases in utilization and unit cost, according to Express Scripts.
But in the third quarter of 2017, things began to look dour for the likes of Celgene, which missed expectations for its inflammation drug Otezla by 26%. In the U.S., the lag was even sharper at 28%. One analyst suggested Celgene was forced to take a price concession.
Celgene also cut its guidance for 2020 after terminating trials of a drug to treat Crohn’s disease, a condition that results from chronic inflammation in the digestive tract. It now sees inflammation and immunology drugs bringing in a combined $2.6 billion to $2.8 billion in 2020, down from the $4 billion outlook it issued in 2015.
Biotech companies and Big Pharma will need to “get realistic” on their pricing in these competitive arenas, King says. The same could be said for companies making treatments for hepatitis C, multiple sclerosis and high cholesterol. All are highly saturated markets.
To the latter point, he expects prices for drugs known as PCSK9 inhibitors like Repatha from Amgen and Praluent from Regeneron and Sanofi to be under the microscope. These drugs lower bad LDL cholesterol in the blood. Evidence shows they also have a benefit on some cardiovascular outcomes.
Repatha is listed at $14,100 per year, while Praluent costs $14,600. But rivals are closing in. Medicines Co. and Alnylam are working on another cholesterol drug, known as inclisiran. Meanwhile, analysts expect bempedoic acid from Esperion to be cheaper.
Some of these Big Pharma and biotech companies “are probably going to get their arms twisted a lot,” King said. “The pricing umbrella has created opportunities for new companies to come in and scale market share. Be careful if you own incumbents. Invest in the disruptors.”
Some Drugs Buck Price Wars
Other areas are seemingly immune to pricing pressure, analysts say.
In 2016, the price of multiple sclerosis drugs rose an average 7.4%. That’s a continuing trend, FBB’s Bailey said. The price increases have been so egregious that House Democrats launched an investigation in August, noting that many of these drugs carry price tags north of $85,000 per year.
Among those pharmaceutical and biotech companies, Teva’s 20-milligram dose of Copaxone has increased the most, rising 1,002% since its approval in 1996 to an annual price of $91,401 today, according to the National Multiple Sclerosis Society. Novartis’ Gilenya, approved in 2010, is the highest priced at $91,836.
The investigation is “10 years too late,” he said. “It’s more difficult to push price control for specialty markets. Multiple sclerosis is a massive market now, but stakeholders view it as a specialty market.”
Prices Of Rare Disease And Cancer Therapies
Rare disease and innovative cancer therapies also seem immune to pricing controls, analysts say. For example, earlier this year Novartis and Gilead — via its acquisition of Kite Pharma — gained approval for CAR-T drugs known as Kymriah and Yescarta, respectively.
CAR-T drugs are developed using a patient’s own immune system cells. They are trained to seek out and destroy cancer cells. Kymriah goes for $475,000 per year and Yescarta is listed at $373,000, ARK Invest analyst Manisha Samy wrote in a recent post.
“While gene therapies are beginning to cure cancer, they come at a price that can cause sticker stock,” she said. “That said, compared to traditional therapies that suppress, but do not cure cancer, the cost benefit analysis of gene therapy is compelling.”
Pricing shock tends to tamp down on excitement for really compelling drugs, Bailey says. The prime example is Biogen and Ionis Pharmaceuticals‘ (IONS) Spinraza, the first spinal muscular atrophy drug approved. It costs $750,000 in its first year and $375,000 in subsequent years.
But sentiment for the biotech companies’ shares is already down, he said. So drug pricing concerns shouldn’t be a big stock killer in 2018.
“In the past when biotech stocks go up quickly, they get new drugs and people are excited, a lot of times someone will throw in a grenade: ‘What about drug pricing?'” Bailey said. “But sentiment is already down. Even if there’s a concern about drug pricing, I see a little less downside.”
Big Pharma And Biotech Companies’ Stocks
IBD’s 462-company Biotech industry group is now ranked No. 34 out of 197 groups tracked, and has fallen from first just two months ago. Shares collectively neared a two-year high in October, but have since shucked almost 7% from that point.
Over that same time, Amgen and Celgene — among the biggest biotechs — have seen their share prices dive 9% and 26%, respectively. Regeneron has taken a 19% hit and Gilead has tumbled 14%.
Meanwhile, Alnylam and Esperion, which look likely to rival PSCK9 inhibitor drugmakers like Amgen and Regeneron, have lifted 7% and 5%, respectively. AbbVie, which recently launched a rival to Gilead’s hepatitis C franchise, is up 5%.
But Novartis and Lilly, which are competing against Celgene to treat inflammatory conditions, have seen their shares retreat, though to a smaller degree. Respectively, their share prices are down 1% and 2%, matching a 1% dip in IBD’s 42-company Ethical Drugs industry group.
Generic drug stocks, ranked No. 105 out of 197 groups, have actually broadly risen 2% since mid-October. But that’s against respective 8% and 5% dips for Teva and Mylan (MYL), its two biggest names.