Biosimilars that are as safe and effective as expensive brand-name biologics could significantly reduce drug prices and healthcare spending, but only if they win support from insurers. Unfortunately, drugmakers like Johnson & Johnson (NYSE: JNJ) may be employing tactics to keep that from happening.
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In this episode of the Motley Fool's Industry Focus: Healthcare podcast, analyst Michael Douglass is joined by contributor Todd Campbell to dig into the details of a lawsuit recently filed against Johnson & Johnson by Pfizer (NYSE: PFE). In its claim, Pfizer accuses J&J of negotiating contracts with insurers that prevent coverage of Pfizer's biosimilar to Remicade, a top-selling autoimmune disease drug. Listen in to find out how this scheme could be increasing drug prices.
Also, the two weigh in on Axovant Sciences' (NASDAQ: AXON) disappointing setback in Alzheimer's disease and how its recent high-profile trial failure impacts patients and shareholders.
A full transcript follows the video.
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This video was recorded on Sept. 27, 2017.
Michael Douglass: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Wednesday, September 27th, and we're talking about two stories: Axovant's massive Alzheimer's flop, and the biologics controversy swirling around Johnson & Johnson and Pfizer. I'm your host, Michael Douglass, filling in for Kristine Harjes this week, who is about halfway through her big Greek vacation. I'm joined in the studio, as always, by Todd Campbell. Todd, great to be talking to you today!
Todd Campbell: Hi, Michael! Thanks for having me today!
Douglass: Absolutely. Really more, it's me thanking you for having me, since you're on the show a lot more often than I am. [laughs] But, I'm glad to be here, and I'm glad we get to talk through two very interesting and very different stories. Let's dive right in. Axovant ...
Douglass: Yeah. Let's not bury the lead, there was definitely a big flop. But let's start by talking about everything that seemed to be going right for them beforehand. I think that's really the key part of this story. Things, in a lot of ways, looked -- as much as they can be whenever someone is studying Alzheimer's -- pretty good for Axovant.
Campbell: Michael, as investors, you and I probably agree, ideally we would love to catch stocks and pick winners early on. But, in biotech, oftentimes, it seems like it's akin to buying a scratch off ticket.
Campbell: There's just so many things that are out of our control in whether or not we're going to win or lose. Maybe win a dollar, most of the time we're probably going to come up empty. And sure enough, in the case of this Alzheimer's disease drug for Axovant, we did come up dry, we did come up empty with a losing ticket. And I think, there's some good lessons here, listeners, that we can take away from this. I think one of the things you're alluding to in saying, let's talk about what was going right. I think oftentimes, it's very easy for us to look at all of the things that are lining up as evidence. Because obviously, we don't have insight into what's going on in a clinical trial. We don't know if the drug is panning out or not while the study is going on, so we have to build up this body of evidence and come to whatever guesswork we can based on that evidence. And in the case of Axovant, there were a lot of signs, that made it encouraging to take a risk and a gamble, even though we're talking about Alzheimer's disease, which is undeniably the most difficult disease to try to develop new drugs for.
Douglass: Right. And not least of those, frankly, when Axovant went public, it was a massive IPO. $360 million. That unheard of in American biotech.
Campbell: Yeah, it was the biggest at the time in biotech, may still be the biggest IPO. I think the reason for that enthusiasm or optimism was because again, you're targeting this massive, large population that's growing, and currently has totally inadequate treatment options associated with it. But it wasn't just the fact that they were targeting Alzheimer's disease that made this company intriguing to investors. You have to go back and say, what were they trying to do? What was the drug, walk me through what made this company interesting. And I think, you have to start with the founder, Vivek Ramaswamy. Vivek is a former hedge fund manager, he's done a lot of things. And at the ripe age of 29, he created a company called Roivant. And Roivant had one mission: to go and hunt through all of the drugs that had been discarded by big pharma, because for one reason or another, big pharma didn't want to spend all that money that's associated with late-stage trials because they just have so many different drugs in development that they have to pick and choose. Find those gems that have been accidentally discarded, buy them for pennies on the dollar, and then using all of the intelligence tools available to you, design a study with the greatest likelihood of producing a positive result. And that's what Vivek's mission was at Axovant. It was to buy a drug on the cheap -- in this case, Intepirdine, which is a drug that he picked up from GlaxoSmithKline for $5 million, which now looks like he overpaid, [laughs] but at the time was a bargain basement price -- and then look at the Phase II studies that were successful and design a Phase III study that mimicked that Phase III success as closely as possible to try and encourage the likelihood of a win.
Douglass: And I think this is one of the really important points to draw out here. You're taking this value investor mindset to what's really a growth industry. The idea of having a cigar butt that somebody else has discarded, it has a couple more puffs in it, is key to this value investing. And basically finding something that has more value than other people really give it to you for, that's the essence of making money. I think that's very attractive. It's a very attractive story. And let's face it -- healthcare, because so much depends on these clinical trials that you can't predict, and so much depends on whether management knows what they're doing, a lot of your small-cap biotech stocks are story stocks. So, they have this story. And frankly, this was a pretty compelling story.
Campbell: Yeah. Michael, he put together an all-star cast, an all-star team on the bench to try to navigate this drug to market. One of the people that he hired early on is Dr. Lawrence Friedhoff. And Dr. Lawrence Friedhoff is the person who is responsible for developing the top selling Alzheimer's disease drug of all time, which is Aricept. So, you had this great team in place that, theoretically, you had all of the things lined up that, if you were going to be able to get a few extra puffs out of that cigarette butt that you picked up, they were going to be able to be the ones who would allow you to do it. Unfortunately, obviously, we now know that despite all the king's horses and all of the king's men, all of the efforts that were put forth to try to get this drug across the finish line, it was a failure. They missed on the two primary endpoint of the study, same primary endpoints that they had had in the successful Phase II study. They used the best dose, gave them the best likelihood of success based on that mid-stage study, they enrolled the same population of patients that had been successful in that prior study. I mean, they basically did everything that they were supposed to do. But when push comes to shove, they basically bought a pretty looking car that doesn't have an engine.
Douglass: Right. I think this really highlights the fact that Alzheimer's is an incredibly difficult disease to invest in. Let's face it: you have an over 99% failure rate for drugs that go to the clinic. Almost all the big pharmas at this point have taken a shot at Alzheimer's and failed. It's very clear -- listen, this is an enormous disease population with tremendous need for new development.
Campbell: 5.5 million Americans, Michael, with Alzheimer's disease. And more than expected to double over the course of the next few decades.
Douglass: Yeah, it's enormous, and frankly, it's a frightening diagnosis and there's a lot of clinical need here.
Campbell: And the current treatment options --
Douglass: They're not great.
Campbell: -- like I said earlier, they don't work well.
Douglass: Yeah. Unfortunately, on the flip side, you have all these people going after this Holy Grail and it's just not happening, at least thus far. I'll say, for me personally, I was invested in Biogen in part because of their Alzheimer's treatment that they were putting in the clinic, which is still on going through clinical trials. And that was actually one of the reasons I ended up selling my shares. I looked at Biogen and said, "The risk-reward just isn't great across the board. I'm putting way too many of my hopes for this company on and Alzheimer's drug where frankly you have a very tiny chance of success." Now, I could end up regretting that, because Biogen's could be the one that ends up working.
Campbell: But, 1 out of 100, Michael.
Douglass: Yeah, those are not good odds.
Campbell: No, they're really not. Maybe it's not a scratch off ticket you're buying, it's actually the Mega Millions or something, I don't know. In fairness to Biogen, they're researching different targets. Intepirdine was targeting 5-HT6, and the idea was, if we can boost acetylcholine in the brain, we might be able to improve cognition. And there was some reason for thinking that could be true. If you look at Aricept, which is the drug that was studied alongside Intepirdine in this study, what it does is prevent acetylcholine from being broken down. The idea was, let's deliver a one-two punch where we boost it by using Intepirdine, and we prevent it from getting broken down by Aricept, and maybe that gives us a better outcome. The problem is, we just don't fully understand these targets. So, there's a lot of hypothesis that goes into this, thinking, "If I do this, maybe this happens." Maybe not. We just don't fully understand how the brain works, and how do these synapses communicate. And that's why we've had problems, we look at plaque buildup, we look at tangles and how they're strangling off the nerve endings, all of these different things that we think may be the cause of Alzheimer's disease, but we really just don't know yet.
Douglass: Yeah. And that's going to be a continuing problem for drug development in this area. As for Axovant, they have about $298 million in cash as of the end of June, but frankly, the pipeline outside of Intepirdine is pretty early stage and I think we'll probably not be talking too much about Axovant in the near future.
Campbell: It really depends. If you happen to own it, and hopefully you're diversified, so, if you have 5% in it, you suffered a hit, no question, but it's not a deal-breaker. So now you look at it and say, "As an investor, what's next for me?" They do have another study going on right now for Intepirdine that should read out before the end of the year, and that's a Phase II B study in dementia patients with Lewy bodies, that's a million-plus population, second most common form of dementia in the elderly. Obviously, not a lot of confidence right now that that's going to pan out based on what we just saw.
Douglass: But it's possible.
Campbell: But the wild card is, there's a bigger dose of the drug being used in this trial. So, who knows.
Douglass: Absolutely. Here's hoping for good results, because frankly, again, these are a rough series of diagnoses, and it would be very nice to have some positive outcomes. But I think neither of us is terribly confident. By the way, listeners, I should apologize. My voice is a little raspy because I'm getting over a cold. When you hear that, know it's not you, it's not your headphones, it's me. Let's go ahead and turn over to Johnson & Johnson and Pfizer. Basically, there's a lot going on, a lot to unpack. There's a lawsuit, and a lot going on with biologics here. But let's start with some background. Pfizer got into biologics, which are these complex medicines created in living organisms, they got into biosimilars specifically. That's this idea of getting something that's similar to the original biologic but not precisely the same because these are living organisms, they can't be precisely the same. They got into this in a really big way with the purchase of Hospira in 2015.
Campbell: Yeah. I think, we have some definitions, we'll try to make sure that, if you're a new listener, we try to keep you up to speed on it. Michael already mentioned the fact that you've got biologics, they're complex medicines that are created in living organisms, they're not easily copied. They're also some of the most expensive, top-selling medicines in the world, on the planet. Biotech companies invest a lot of money in developing biologics. One of the reasons was, because of their complexity, they couldn't be easily replicated. So, their thinking was, if they can't replicate it exactly, maybe I have more protection on my sales that stretches beyond the expiration of the patents. Well, maybe not. Once Obamacare passed, it included provisions that allowed for an FDA pathway to approval for biologics that were similar to but not exact replicas of these reference drugs. So, essentially creating a marketplace for biosimilars, drugs that can produce the same outcomes with the same safety, but they're not exact replicas. Pfizer became at the forefront of the research into biosimilars with its $17 billion acquisition of Hospira back in 2015, once it knew it had that pathway available to it to be able to get biosimilars to the markets, compete against these biologics for all that money that was at stake.
Douglass: Right. And a little bit more background on biologics and biosimilars -- as Todd mentioned, there really hasn't been a regulatory pathway for biosimilars until very recently in the United States. However, there has been one in Europe for longer. So, essentially what happens is, when small molecule drugs, when non-biologic drugs go generic, usually generic drug companies will come in, they'll hack 80-90% off the price and they will sell the generics, and then the main company will either have to figure out whether they're going to exit the market or try to compete based on branding or lower prices, all of that. With biologics and biosimilars, because it's so much more difficult to create a biosimilar for that reference drug that's similar, although not precisely the same, usually the markdown is something more like 10-30%, is what we've seen in Europe. So, the expectation is that comes to the United States.
Campbell: Let me jump in for a second and provide listeners with two quick numbers. I've read studies that say that to develop a typical traditional small molecule generic drug, it may cost someone $10 million to do the research and get that to the market. On biosimilars, it could be $100-200 million.
Douglass: Right. So, that's why that markdown is a lot less. Although, it's still a markdown. It's still savings for the health system.
Campbell: Absolutely. And the idea was, just like with traditional generics, if we can undercut on pricing, once those patents expire on the brand-name biologic, then free market takes over, and demand will flow to the provider of the good with the lowest price.
Douglass: Right, basic economics.
Campbell: However, maybe that's not happening.
Douglass: Yeah, and that's what's interesting, and that's what's at the core of Pfizer's lawsuit against Johnson & Johnson, which they filed on September 20th, so a week before we filmed today. Essentially, there have been seven biosimilars approved in the United States. The second one approved was for Pfizer's Inflectra, which is a biosimilar to J&J's Remicade. Now, Remicade is an autoimmune disease drug, it's for rheumatoid arthritis, Crohn's disease, plaque psoriasis, a lot of those autoimmune diseases. In 2016, it had $4.8 billion in U.S. sales. That's a lot.
Campbell: Yeah. And it's not just a lot in absolute terms. It's a lot in terms of Johnson & Johnson's total sales, too.
Douglass: Right, 19% of pharma revenue, 9% of revenue companywide. So, it's a big drug for J&J.
Campbell: Unquestionably, the stakes were high, right?
Douglass: Right. So, what's happened is, Inflectra launched last November after the patents expired and J&J's legal strategy to delay things ran out of options. And yet, even though it's priced about 10% below Remicade, it hasn't made that much headway, it's only accounting for 4% of Remicade scripts.
Campbell: Yeah, and sales last quarter were only about $23 million in the United States. To put that into perspective, Remicade sales last quarter in the U.S. were over $1 billion.
Campbell: So, is the free market at work? And if it isn't, why?
Douglass: Right. So, the interesting thing is, Pfizer is going after J&J's biosimilar readiness plan strategy, which basically involves cutting deals with insurers and Remicade prescribers to exclude Inflectra and other Remicade biosimilars from their formularies and reimbursement.
Campbell: I tell you, Michael, last week's show, Kristine and I talked about patents, and the way that drug makers can use patents to insulate themselves against the threat of generic upstarts. At the time, it didn't even dawn on me to think about the fact that these companies could do something ... nefarious? I don't know, but, redo their contracts in such a way that it would force an insurer's hands to say, "We're not going to even cover this drug because we don't want to jeopardize our relationship with J&J."
Douglass: Right. So, what's interesting about J&J's strategy is, what they basically said is, J&J offers insurers rebates on Remicade. A lot of folks don't pay full retail price on drugs. And they've tied that to, "Only if you exclude Inflectra." Now, with most patients, about 70% of Remicade users being satisfied with the drug, doctors probably don't want to switch them off anyway unless the insurer forces them to. So, what they've essentially done is say, "Yeah, sure, you can have Inflectra on your formulary, but if you do, Remicade is going to cost you, the insurer, a ton more money. It's going to more than balance off the cost savings, having Inflectra on your formulary, and doctors won't want to switch it anyway, so you're just going to take everybody off and probably lose money in the process."
Campbell: And it's obviously been very successful. Over two-thirds of the covered lives that are covered by insurance plans, commercial insurance plans, so private citizens, have embraced these contracts with J&J. And it wasn't even that they said, "We're going to tie the rebates only on Remicade to you excluding it." They tied it to other drugs in their pipeline, too. J&J is a Goliath. You're talking about tens of billions of dollars in pharmaceutical sales over any given six month period of time. And those rebates can total in the tens of millions of dollars to some of these insurers. So, you look at it and say, "Yeah, Inflectra is 10% cheaper. But how long would it take me to get to scale in the Inflectra patient population to offset this lost revenue from the rebates?"
Douglass: Right. It's interesting, because we're talking about the U.S. specifically. When you go abroad, Merck sells Remicade for J&J. And Remicade sales are down 40% year over year because of the increase in all these biosimilars. So, this isn't an issue internationally, it's specifically in the United States where this pricing and exclusionary formulary tactic is being used, and to great effect for J&J.
Campbell: What's interesting, too, about that -- you just made me think of something here. I think investors have to recognize that there are very, very different markets for biosimilars between the rest of the developed world and the United States. And I think one of the things that you have to recognize is, in other countries, biosimilars can be substituted much more easily for the brand-name drug than they can be in the United States. In the United States, because they consider the differences of biosimilars to be more significant than these other nations, the doctor has to specifically write the script for that. It's not like you're going to go to the pharmacy with a Lipitor script and they're going to automatically fill it with the cheap, $4 generic. This is something that the doctors have to prescribe. And what makes it even more complex is, these drugs in the U.S. are infusion based drugs, which means that they are dosed to patients in the provider's facility. That means the providers have to pre-buy these drugs, and then file a claim with the insurer afterwards for reimbursement. Now, I don't know about you, Michael, but if I'm running a company, I have to put out a ton of money for these very expensive drugs, and I'm not sure I can get a reimbursement on Inflectra, but I absolutely know I can get reimbursed on Remicade. Which drug am I going to stock in my facility?
Douglass: Particularly, if I also have patients who are generally saying that they're very pleased with the Remicade drug, and, frankly, there's a lot of confusion about biosimilars still. It's still a very new development here in the United States. It's pretty darn clear what you're going to do there.
Campbell: Pfizer went back -- listeners, if you get a chance, go out and get a hand on the complaint so you can read it, and then go out and search for Johnson & Johnson's response to it. Two very different stories being told there, I'll let you come to the conclusion on which one you believe to be correct.
Douglass: Even one better: email us at firstname.lastname@example.org, we'll send them to you. Again, that's email@example.com. We've got them, if you don't want to spend time Googling around, I get that, just to drop us a note and we'll send them along.
Campbell: Awesome. They're extremely interesting reads. And this has major implications on biotech and healthcare spending overall, and on total drug spending and the path and trajectory of prices over time. The other thing that Pfizer says in their complaint is, not only have they denied us access to compete fairly in the market through these tactics, but at the same time, they're raising their price on Remicade. So, the price of Remicade has climbed, despite a lower-cost provider entering the market.
Campbell: So, there's definitely a lot at stake for biosimilars. I think investors shouldn't assume this tactic is going to successfully keep all biosimilars from gaining traction. I think, you go back and look at what happened with small molecule generics, it took a while for them to reach the tipping point of widespread use. I think, about 10 or 12 years ago, they represented about 50% of prescription volume. Today, they represent closer to 90% of prescription volume. There's going to be some bumps along the way here as these market players figure out how to navigate the rules here in the United States. I still think this is a very big market opportunity. I think investors need to be paying particular attention to it, because there's a lot of money that can be made for investors by owning biosimilar companies like Pfizer. But you're going to want to watch this and see what happens with the court system if they weigh in, how they weigh in.
Douglass: Yes. We cannot make predictions about this particular case. We have no clue. But, I can predict, this is not the end of litigation around biosimilars. And I can also predict that there will be changes in how things are done today, five years from now, 10 years from now, maybe two years from now. And I think we'll learn a lot about that as the time comes. And you can bet we'll be reporting on that here at Industry Focus. That's it for this week's Healthcare show. Questions, comments, you can always reach us at firstname.lastname@example.org. Again, if you want a copy of the complaint letter and response, email us, email@example.com. Or, on Twitter, @MFIndustryFocus.
As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Todd Campbell, I'm Michael Douglass. Thanks for listening and Fool on!
Michael Douglass owns shares of Johnson & Johnson. Todd Campbell owns shares of Pfizer and Twitter. The Motley Fool owns shares of and recommends Biogen, Johnson & Johnson, and Twitter. The Motley Fool has a disclosure policy.