A useful insight into pharma’s current status emerged this week when Goldman Sachs lowered its rating on Eli Lilly & Co. from Neutral to Sell. Quite apart from Eli Lilly, that downgrade was interesting, if only for the fact that sell-side analysts rarely rate a Big Cap pharma as a Sell. But it was analyst Jami Rubin’s explanation for the reason behind their Lilly cut that clearly shows pharma, like Dorothy and Toto, aren’t in Kansas anymore.
In Rubin’s opinion Lilly’s “most important pipeline assets (diabetes and oncology) are undifferentiated or me-too.” In particular, the company’s diabetes products are “likely to face further pricing pressure” because products in the various subclasses there, especially the DPP-IV’s, GLP-1’s, and SGLT-2’s constitute commodity categories.
Now while it is highly unusual for new classes these days to contain drugs with any clinically meaningful differences, the fact remains that pharma marketers have tried to retain oral antidiabetic brands as a throwback to previous decades when a company could come out with a fourth or fifth me-too and still make a boat load of money.
In most categories, especially specialty therapies, pharmas are learning the facts of competitive life. Specifically, if they’re not first and then best in their particular class, they will have to compete on price and, even then, they may only capture a marginal share.
Oncology provides some prime examples. In metastatic melanoma, Roche launched the first BRAF inhibitor, Zelboraf, in the second half of 2011. The brand generated strong sales right away. This year GSK launched its own BRAF inhibitor, dabrafenib, as well as a MEK inhibitor, trametinib. Very quickly, Zelboraf’s sales began falling like a stone.
Hepatitis C offers another example. A few years ago when Merck and Vertex launched their protease inhibitors, Bristol-Myers Squibb’s NS5A inhibitor, daclatasvir, was regarded as the most likely compound to change the standard of care into an all-oral, non-interferon, non-ribavirin regimen. Then Gilead paid $11 to buy Pharmasset and acquire an NS5A to pair with its NS5B. As outstanding study data gradually emerged on this combination, US gastroenterologists decided to “warehouse” one-third of all their Hepatitis C patients to await launch of the Gilead combination. AbbVie also has an auspicious combination, as does J&J/Tibotec. So in a period of months, Bristol-Myers Squibb went from the Hep C penthouse to street level. To their credit, the company’s management decided they would no longer research new compounds for Hepatitis C and just quietly finish developing the daclatasvir.
Increasingly pharmas can no longer rely on overindulgent payers to insulate themselves from a competitive market. If a category consists of undifferentiated me-too’s, payers/providers will treat it as a commodity and force lowest-price competition. Pharma’s R&D strategists knew this by the mid-‘90s, but the industry’s ten-year lead time for product development obliged them to continue with the compounds they had in pipeline. The process resembled the movie studios that had silent films in production during 1928.
The Jazz Singer premiered the previous fall and it soon became apparent that all movies would have to be “talkies.” The studios were able to rejigger or dispose of several months worth of pipeline inventory, but pharma’s long lead time obliged them to continue developing their anachronistic me-too’s for another decade. No longer will pharma be able to ghoulishly drag these dead soldiers onto the battlefield and earn billions by marketing them as conquering heroes.
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