Biopharma Facing Two Major Crises

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The recent productivity of the biopharmaceutical industry has been truly remarkable. From 2017 – 2022, 287 new medicines were approved including drugs to treat a variety of cancers, rare diseases, diabetes, obesity and even Alzheimer’s disease. And, if that wasn’t enough, this industry gave us Covid-19 vaccines and therapeutants that enabled us to get past the worst pandemic in 100 years. All of these achievements have benefitted billions of people around the world.

Theoretically, biopharma should be in the midst of major growth to position itself for even greater things. Instead, it is facing two major threats that will likely limit its future potential. The first is a looming patent cliff which is the biggest in its history. As described by Meagan Parrish in PharmaVoice, 190 drugs accounting for $236 billion in sales will lose patent exclusivity by 2030. Included in this list are some of the biggest selling drugs of all time like AbbVie’s Humira, Merck’s Keytruda and Lilly’s Trulicity.

In truth, while the size of this cliff is unprecedented, patent expirations are a fact of life for biopharma. This industry must reinvent its product portfolios continuously replenishing older products with new ones that hopefully not just maintain a company’s sales but also grow them. This is a pretty daunting challenge, one that causes sleepless nights for R&D heads who are responsible for driving a company’s pipeline. Yet, the public has little appreciation of the finite nature of a company’s product portfolio. Ironically, at a time when people cry out for price controls, few realize that we already have price controls in place – patent expirations – which author Peter Kolchinsky calls “The Great American Drug Deal” in his book of this same name. Proprietary drugs are the only part of the healthcare system where prices drop precipitously after about a dozen years. Compare this to hospital procedures such as hip or knee replacements. These cost $40,000 per year and will continue to increase 5% or more annually ad infinitum. Hip and knee replacements don’t “go generic”.

Then there is the second major crisis facing biopharma – price controls. Thanks to the Inflation Reduction Act (IRA), the government will soon set prices for specific medicines covered by Medicare. Vital Transformation (VT), an independent healthcare think tank, has been studying the impact of the IRA on biopharma with respect to both revenues and output of new drugs. The results are stunning. VT modeled the impact of the IRA on the top 200 biologic (Part B) and small molecule (Part D) medicines and found that 92 drugs (produced by 41 biopharma companies) will be impacted over the next 10 years. VT estimates that the average reduction in revenue per therapy will by $4.9 billion for biologics and $4 billion for small molecules – a cumulative impact of over $400 billion.

Industry critics will counter that this isn’t such a big deal as biopharma is overly profitable. VT counters this by quoting data from NYU Stern showing that the pharma sector ranks 92nd overall with a net profit margin of 18% well below that of banks (30%), railroads (28%), oil/gas (26%), tobacco (23%) and semiconductors (23%). Pharma’s profit margin is closer to that of soft drinks (15%), which is sobering as sodas don’t protect against Covid-19.

The combined effect of the patent cliff ($236 billion) and IRA price controls (>$400 billion) will drastically impact biopharma revenues. For an industry that invests a whopping 25% of its revenues directly into R&D, this is devastating. These projections indicate that there will be almost $160 billion less to invest in R&D at a time when the opportunities for breakthroughs have never been better.

Out of necessity, the industry will have to make significant cuts to its R&D operations. Research sites will be cut back or eliminated, therapeutic areas will be dropped and jobs will be lost. This is not an exaggeration. When Pfizer’s blockbuster, Lipitor (peak sales of $12.9 billion), lost its patent in 2007, this is exactly what happened as Lipitor sales dropped by >90% in 12 months. Research sites in Ann Arbor, France and Japan were closed, therapeutic areas like neurosciences, antiinfectives and cardiovascular were discontinued and hundreds of R&D jobs were eliminated. Imagine such things happening across the biopharma industry.

The drug industry continues to be unfairly attacked despite the fact that new medicines SAVE us far more in hospital costs than we spend on drugs. Price controls will erode the industry’s ability to bring forward the new breakthroughs that will save lives AND reduce overall healthcare costs – and that’s a shame.

(John L. LaMattina is the former president of Pfizer Global R&D and the author of “Pharma and Profits – Balancing Innovation, Medicine and Drug Prices”.)

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