More Bad News Coming on Avandia

By now everyone has seen the two newest studies on GlaxoSmithKline's diabetes drug (rosiglitazone) Avandia and Takeda Pharmaceutical's (pioglitazone) Actos in the Journal of the American Medical Association.

A study by Wake Forest researchers found that Avandia increased the risks of heart attack by 42% compared to control therapy, while another study by researchers at The Cleveland Clinic found that Actos lowered the risks of cardiovascular events, including heart attacks, strokes and death. You can read about it here.

Word on the street is there are more manuscripts to come. For example, results from a large (millions of patients), independent observational study comparing rosiglitazone to pioglitazone will be published soon, according to a source familiar with the manuscript, and the results won't be favorable for Avandia.

As you may recall, GlaxoSmithKline presented observational study data to support the case for Avandia during an FDA advisory committee meeting on July 30. GSK VP for Clinical Development Murray Stewart presented two large observational studies, one by Ingenix (2,095 heart attack events in over 400,000 patients) and one by PharMetrics Inc. (323 heart attack events in over 30,000 patients). The studies found no difference between Avandia and other antidiabetic agents for heart attacks, and there was no difference between Actos and Avandia, specifically.

It's unclear where and when the soon-to-be published observational study will show up, or even what study it is. But I'll go out on a limb here.

The most likely candidate is a California Medicaid study. At the end of his presentation at the Avandia advisory committee meeting, FDA Office of Surveillance & Epidemiology director for science and medicine David Graham cited a study he was co-authoring that looked at Type 2 diabetic Calfornia Medicaid patients. The study was not presented formally because it was incomplete.

Graham said at the meeting that out of roughly 2 million diabetic patients, there were a total of 6,000 hospitalized heart attacks. Avandia increased the relative risk of heart attack by 30% compared to control (statistically significant), while Actos did not increase the risk of heart attack (statistically significant).

“We found that rosiglitazone increased the risk the most. Sulfonylurea increased the risk next. Pioglitazone did not increase risk and metformin decreased risk,” he said.

So it doesn't look like things are going to get any easier for GlaxoSmithKline going forward. And that goes for FDA as well as the agency decides whether to withdraw Avandia from the market or leave it on pharmacy shelves with stronger warnings and possibly a risk management plan.

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Who's Sorry Now? Big Pharma Edition

Sparked by today's apology by Bayer at its Trasylol FDA committee meeting, we thought it would be fun to round up a few recent mea culpae out there in pharmaland. I'm sure we've missed some, so let us know in the comments.

• Bayer to FDA Panel: Sorry we didn't let you in on the bad news in that big Trasylol study last year, but what's a little death, kidney damage, congestive heart failure, and stroke among friends? We hope you'll leave Trasylol on the market.


• Novartis to Shareholders: Sorry we haven't been buying back a ton of shares like every other Big Pharma company. We promise to do better in the future!


• Lilly Leaker to Lilly: Sorry I sent the New York Times all those juicy Zyprexa documents last year. I hope $100k covers the damage? PS I'm not really sorry.


• JAMA to GSK: Sorry we're piling on.
  

[Ed. note: As any of you out there who are sports and pharma blog readers may already know, we freely admit to stealing this gimmick from the sports blog par excellence Deadspin. Sorry.]

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Big Pharma: Beware the Coupon Clippers

A few days ago, we were talking with a small group of senior executives from one of the Big Pharmas. We were making the point that Big Pharma’s investors now need cash reasons to stay in the stocks—big dividends and share repurchases, specifically. The only kind of investor that such a strategy attracted, we elaborated, was the coupon-clipper – not the growth investor. And Big Pharma, I off-handedly assumed, certainly wasn’t interested in that kind of investor.

Why not? asked one of our interlocutors.

Because the coupon-clipper—the C-C--wants maximum coupon, thus maximum cash flow, minimum risk. He wants an earnings flow he can count on – a stock that behaves like a bond. But given the risks of R&D investment (and perhaps of primary-care marketing investment, too), the C-C will always vote “no” on spending that won’t bring in the near-time dime. Already, shareholders in Big Pharma are unwilling to pay for Big Pharma R&D. The share prices, by various analyses, including one we wrote about here, reflect largely the value of marketed products, not the pipeline.

Maybe that’s ok – since the drug industry is, at least right now, very much not a growth industry. A little spreadsheet work with Microsoft’s Moneycentral tells us that the top eight biotechs by market cap have, on average, grown their top lines by 28% since the previous fiscal year; the top thirteen Big Pharmas by 5%.

And yet we think that the drug industry can, through various strategies, once again become a growth business--we describe some of them here and here--but all of those strategies will require it to take risks C-Cs don't like, risks that could interrupt the steady flow in dividends.

That wouldn’t be so serious if Big Pharma was willing to ignore its shareholders. But that’s dangerous to do.

We are increasingly interested in the lessons Big Pharma can take from biotech’s struggles with its business models. Most importantly, we think that biotech’s willingness to disaggregate the value chain – focusing, for example, on unlocking corporate value by doing a few particular things very, very well (e.g., taking a compound from preclinical testing through clinical proof-of-concept, then selling off rights) is one model with tremendous applicability to Big Pharma. Bristol’s biotech-ization, which we’ve touched on here and here, makes our point nicely.

But there is another lesson, too—the trouble companies run into when they take strategies counter to the investment philosophies of their shareholder bases. Take, for example, the brick wall of shareholder intransigence that Enzon and NPS ran into when they tried to merge. Enzon’s shareholders were the biotech equivalent of C-Cs, expecting nothing to threaten the cash flow generated by royalties of PEG-Intron, the hepatitis drug marketed by Schering-Plough. NPS was a swing-for-the-fences investment: get blockbuster value from selling a blockbuster deal for their late-stage program, the recombinant human parathyroid hormone for osteoporosis, Preos.

Strategically, the deal made a lot of sense: combine Enzon’s pipeline, niche products and commercial organization with NPS’ breakthrough-possibility pipeline. But shareholders killed the deal—NPS’ shareholders hated the idea of sharing Preos’ returns with Enzon’s shareholders – and Enzon’s shareholders hated the idea of spending any more money on research that would have the effect of diluting their earnings from PEG-Intron.

If Big Pharma likewise wants to do something dramatic to turn around its fortunes – and we believe they need to do just that – they’ll need shareholder support. Our advice is: make sure you’ve got the right growth-oriented shareholders when time comes to lay out the growth strategy.

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While You Were Finally Watching Some Football

Autumn's here, and the NFL is back. IN VIVO Blog's contingent of Philadelphia Eagles fans is predictably feeling a little uneasy about the season ahead. Meanwhile, here are a few odds and ends from the weekend.

• More GSK hand-wringing in the UK papers, this time it's the Financial Times. (Hat Tip: Pharmagossip.)
  
• Hey look, free access to medical journals. (via the NYT)
• The SF Chronicle looks at personalized medicine, and how the FDA is encouraging drug developers to find genetic patterns in responses to treatment.

(Photo by Jonathan Daniel/Getty Images)

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Buyer’s Remorse: No Love for Medicare Part D on the Campaign Trail

So Many Happy Faces! None are Running for President in 2008

The Medicare prescription drug benefit known as Part D has been an unmitigated blessing for Big Pharma at a time when good news has been hard to find. It has greatly expanded drug coverage for senior citizens, providing a boost in prescription volumes. And it has shifted a large chunk of the market out of the price controlled Medicaid program, giving a healthy margin bump for many blockbuster brands.

It is also a political orphan, one that will face an especially harsh winter as the primary phase of the Presidential campaign moves towards its climax.

The Democrats make no secret of how they feel about Part D. Remember price negotiation? The idea may have died in the Senate, but it will be reborn this fall once Congress finishes its serious legislative work. Expect hearings and reports criticizing Part D prices—with the themes trumpeted by the Democratic candidates on the campaign trail.

None of the front runners in the Democratic party supported Part D, though the thinking here is that they secretly love it. After all, the program pumps hundreds of billions of taxpayer dollars into federal health benefits while allowing the candidates to bash Republicans for catering to the profiteers in Big Pharma and the insurance industry.

The problem is, as Jeffrey Young writes in The Hill, even the Republican contenders have nothing nice to say about Part D. Its not that they are turning on the pharmaceutical industry per se, its just that they don’t see anything to gain from talking to conservative voters about a massive expansion to federal health care entitlements.

Its no different than the 2006 Congressional campaign, which featured Democrats around the country attacking Part D—and Republicans changing the subject. Supporters of Part D, like former CMS Administrator Tom Scully, claim that the Republican Party should have embraced the program during last year’s campaign, instead of running away from it. It certainly is hard to believe the GOP would have fared any worse in the elections if they had.

Still, if the Republican legislators who enacted Part D refused to brag about it in 2006, you can expect the Republican Presidential contenders to stay even farther away from it. As The Hill’s Young points out, one of the top tier GOP candidates—John McCain—actually voted against the law creating the program. Another, Fred Thompson, voted against earlier plans to create a drug benefit, but left the Senate before the Part D law passed in 2003. The rest of the leading Republican contenders were not in Congress when Part D passed and hence have no stake in defending the program.

So expect a winter of Democratic attacks on Part D, with little or no response from the Republican campaigns.

Once the Presidential campaign shifts gears to focus on the general election in November 2008—the party nominations could be locked up as early as the first week of February—the dynamics may change.

The Democratic nominee is sure to keep attacking Part D. But the Republican nominee may be more eager to counterpunch. With the nomination locked up, fear of alienating small-government conservatives may be less important than the opportunity to cast Part D as model for public/private partnerships in expanding health coverage across the US.

Until then, don’t expect too many kind words about Part D on the campaign trail.

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Why Financiers Like Virtual Companies

Capital hates a vacuum.

In this case, the vacuum is Big Pharma’s late-stage pipeline. As deal prices rise for post-proof-of-concept products, investors and clever packagers of financing are stepping into the financing void which, at least relatively speaking, opens up pre-POC. For more on this, see our analysis here and here.

Take Drug Royalty. It’s made a good business monetizing royalty streams from approved products but now is moving upstream, looking to package still unapproved products on which they’d take a percentage of future revenues.

Or Morgan Stanley. Its PhaRMAs (Pharmaceutical Royalty Monetization Assets) likewise package a set of development-stage products into a debt security. The earlier-stage the assets, or the smaller the portfolio, the higher the interest rate. But for the issuer—the biotech with the products--the return is capped: once it’s paid off the investors, the biotech gets all the upside.

It isn’t just biotechs, like NPS and Alkermes, which are exploiting Morgan’s PharMAs. Morgan also used its security idea to place $150 million in mezzanine debt for private-equity firm Celtic Pharma – essentially an investment management team, funded by a set of limited partners, which has acquired a set of eight projects from various biotechs.

Despite its financial structure, Celtic looks a lot like a virtual biotech, exploiting a network of consultants and CROs to get its products developed. And like other virtual biotechs, it has no intention of creating any sort of sales force. The point is to serve the needs of investors, the supreme anti-infrastructuralists.

Most of these investors, usually hedge funds and insurance companies, want “alpha” from these kinds of investments – in this case, a return uncorrelated with major public markets like equity, debt or real estate. Since Big Pharma buys rights to these products regardless of what the markets are doing, they theoretically should provide plenty of uncorrelated return. But once a product is wrapped in infrastructure—into a real company, with an HR department, office politics and an investor-relations group—then its returns begin to correlate with the equity markets.

And the reality is, says Celtic’s founder Stephen Evans-Freke, products are worth more “without the companies wrapped around them.” Big Pharma, he says, needs “more fixed costs like a hold in the head.” And once there’s infrastructure, companies have social and economic incentives to keep working on programs which should be killed. For investors, the faster a developer kills a drug that’s already fated to die, the better – money, being fungible, can be applied elsewhere. Less easy to do with employees.

“The only reason to wrap all that corporate infrastructure around these projects it to take them public,” says Evans-Freke – who, in his days at PaineWebber or in founding companies like Sugen, found plenty to like about IPOs.

And there are indeed other virtues to owning infrastructure. Discovery doesn’t get done without it, for one thing. Happy accidents—like discovering an alternative use for a drug, for example—would be less frequent. It’s hard to think Genentech could have happened without enough R&D infrastructure to figure out which biologies made a difference.

But the virtual is also now real—and investors like it. The development is another unintended consequence of Big Pharma’s earning-driven appetite for variabilizing its costs, creating a vast and technically expert world of CROs and consultants available for anyone to hire. Whether that’s a good thing or not for Big Pharma (and we think in general it’s a good thing—another way to get products), it certainly has opened up a new way for disenchanted pharmaceutical investors to stick with the industry.

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The Cost of FDA's Credibility Gap

In previous posts, I have talked about the rising challenges facing the pharmaceutical and biotech industries stemming from FDA's credibility gap. In fact, I think FDA's credibility gap is one of the most pressing business problems for biopharma companies right now and for the foreseeable future.

I want to point you to a story I just wrote, hot off the Internet's virtual presses. The story, "Avandia and the Commercial Impact of FDA's Credibility Gap" can be found on our new website http://rpmreport.com/. Just register for the free trial, and you can read that, and many other stories we've written for our September issue.

Some of the takeaways from the story are:

1) FDA's credibility is one of the top commercial challenges facing biopharma decision makers.

2) Business leaders are re-thinking their drug development programs as a result of the current environment.

3) The FDA advisory committee on Avandia did more to hurt than help FDA's credibility crisis.

4) FDA is grappling with how to manage incoming information faster and more effectively.

Registration is easy, so go take a look. I'd love to hear thoughts from the investment community about this issue. Also, tell us what you think of the http://rpmreport.com website.

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