Biotech Resolutions: More Innovation, Better Execution, and Fewer Price Hikes

Pushback on pricing and high-profile pipeline disappointments last year means that battered biopharma companies have a lot of work to do to restore investors' confidence in 2017.

In 2016, the Nasdaq Biotechnology ETF tumbled 21% following revelations of sky-high drug price increases that could lead to regulatory price controls. Some industry executives are lobbying for self-regulation on pricing to avoid that risk; however, a better idea may be to focus less on price, and more on drug innovation and operational execution.

In this clip from The Motley Fool's Industry Focus: Healthcarepodcast, analyst Kristine Harjes and contributor Todd Campbell discuss the challenges facing the industry, and how biopharma can reset public perception and win back investor confidence in 2017.

A full transcript follows the video.

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Kristine Harjes: Let's get rolling with another company that we think should have a pretty firm resolution.

Todd Campbell:You know what?I'm going to throw the entire biotech industryinto this one. I think biotech needs to take a really hard look -- biopharma, we'll say -- at the way they're pricing their drugs. They need to focus on innovation, and stop focusing on growth through price increases. Setting arbitrary, "We're not going to increase our prices more than 10%," and going right up to 9.9% --

Harjes:You're calling out Brent Saunders, aren't you?

Campbell:A little bit.Allergan(NYSE: AGN) was at the forefront of saying, "We need to self-regulate on pricing, and we're going to commit to our consumers that we're not going to raise our prices more than double-digit rates." Sure enough, the reports fromdifferent Wall Street analysts who tracked the pricingshow that he did, indeed, comeunderneath that double-digit rate, but 9.5%? Consider the optics here, people. If inflation is 3%, and you're going at about 9% to come underneath 10%, I feel like thatdoesn't do a whole heck of a lot to encourage the average person who's reading this news flow and saying, "Great, I guess it's less than 50%, and it's less than 20%, but come on."

Harjes:To be fair, if you look at the industry as a whole -- and I don't think this is an excuse for Allergan -- relative to the broader industry, a 9.5% increase is actually not that much. The average price of a brand-name drug increased 16.2% in 2015. Those are the latest numbers we have from theExpress Scripts Drug Trend Report. Theseprices have also increasedalmost 100% since 2011. One-third of branded drugs increased their price by more than 20% in 2015. Which is just crazy. And it's veryindicative of this industry, where prices are inelastic. Can youimagine the price of aChipotlebowlgoing up 10% every single year? It wouldn't happen.

Campbell:Yeah, it wouldn't. You make a fair point. It's the right direction, and it shows that there's asocial consciousness, a social contract out there, to try and contain these increases. I thinka lot of people are looking at it and saying, "Butwhat's behind those increases? Did the cost to produce these drugs really increase 10%, and you're passing that cost on? Or did the cost toproduce those drugs increase 4% and you're padding profit by an extra 5%?"I think it's a fair question to ask. I think we have to move beyond this. We have to focus on innovation. We have to focus on how these drug companies are improving the lives of consumers and patients. AndI don't know whether or not we're going to be able to do that in 2017.

Harjes:But at its heart, that is what this sector is about. That's why I love it.I'm sure you're the same way.

Campbell:Oh, absolutely. It's fascinating. We see thephenomenal work that's getting done by companies, which actually is a nice segueinto another one that I have. Let's resolve to stop hyping early stage phase 1 results.

Harjes:Ooh, this is a good one.

Campbell:Right? Let'sstop going out there and saying, "Hey, we have this great phase 1 success story!" In a bid to beingable to do an equity offering, getting peopleconvinced that this is going to be the next drug that'sgoing to revolutionize Alzheimer's or whatever. Let's focus more on phase 3 drug successes and growth for drugs that arealready on the market, tied to unit volume, not pricing.

Harjes:Yeah. Theresponsibility for this one has got to fall both on the companies themselves for producing the hype, but also on investors. You can't blame people for being excited about new,innovative drugs. But onceyou actually translate that into the financial markets, and you get these bloated valuations for very, very early stage companies, you get the volatility and the heartbreak that we've seen in a company like, say,Anavex. You mentionedAlzheimer's. This is a company that wastaking a completely different approach to Alzheimer's. They had great phase 1 data, and thenall of the sudden, phase 2A, nope, there was a slight deterioration, actually, in the patients' mental abilities, and the stock plunged 50%.

Campbell:Yeah. As investors,we need to hold these companies accountable by not buying shares based on phase 1 data. Kristine,you and I have talked about it before --90% of drugs fail in clinical trials. 90%! So,the likelihood of a phase 1 success translating into an FDA-approved drug that's going to be a billion-dollar blockbuster? Small. Very small.

Harjes:Yeah. And maybe,if there wasn't so much hype about early stage candidates, you would find thelarger companies like Gilead better able to make early stageacquisitions, because the prices wouldn't be as bloated. It's all related.

Campbell:And,theoretically, they might havea greater level of experience that allows them to recognize failures earlier on. So, yeah. I think,we can hold them accountable,but they should also be holding themselves accountable, and they should resolve to do that this year.

Harjes:Right. Speaking ofexperience, I think we have time for one more resolution. This one I'm going to give to manufacturing issues. Across the entire industry, we need to stop having drugsrejected by the FDA because of manufacturing issues. If you have a drug that works and is safe,it needs to be able to get the patients without being blocked by your facility not being up to par.

Campbell:Yeah. There were a host of them last year, Kristine, that we talked about, where the FDA said, "No, we're going to push back on this because we have some questions about how these drugs are going to be manufactured." I don't want to say it's ridiculous, but come on. We've been making biologics for a long time. A lot of these monoclonal antibodies, etc., they've been produced for a long time. For me, I struggle to understand how it is that large companies -- I'm going to call out Sanofi (NYSE: SNY) andRegeneron(NASDAQ: REGN) on this one -- how they're having some problems with their manufacturing that's causing delays in approval.

Harjes:Right. The Sanofi-Regeneron story, that one was a heartbreaker. Back in October of 2016, theyreceived a complete response letter, a CRL,which is basically a thumbs down from the FDA, for arheumatoid arthritis drug,because of manufacturing issues in one of the Sanofifacilities in France. This was where the drug wasfilled and finished --the very last step of the process. Interestingly, the active ingredient isn't even made there. It'smanufactured by Regeneronall the way over in New York. But just because of this one last step in the process that the FDA had some sort of issues with the facility, all of the sudden, they need to refile and fix these problemsbefore it can actually get to patients.

Campbell:Right. This was a drug that could have gotten approval in lateSeptember or early October. It could potentially be a $1 billion drug forrheumatoid arthritis. It showed really goodresponses versus Humira. And now you're wondering, what happens in March? We haveanother drug coming upthat is also getting filled in, finished at that samefacility. Will that get approved, or will it get delayed?

Harjes:Yeah.I think this would be a really good resolution for not just Regeneron and Sanofi particularly, but across the board,because we have seen it happen too many times in the past year.

Kristine Harjes owns shares of Chipotle Mexican Grill and Gilead Sciences. Todd Campbell owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Gilead Sciences. The Motley Fool has a disclosure policy.