The 3 Biggest Threats to Big Pharma

Many Big Pharma companies have been richly rewarded by investors over the last couple of years because they were able to bring a host of game-changing new drugs to market, as well as restructure their businesses to dramatically improve their bottom lines in the wake of the ongoing patent cliff. Nonetheless, the pharmaceutical industry as a whole is now facing several major headwinds that threaten to curtail this amazing period of rapid growth.

Source: Flickr via user Chris Potter

With this in mind, we asked three of our top healthcare contributors to outline the three biggest threats to Big Pharma that investors should be aware of moving forward.

: According to the Memorial Sloan Kettering Cancer Center, drugmakers slapped prices of nearly $10,000, or more, on eight of nine cancer drugs approved by the FDA since 2014, and last year a new generation of hepatitis C medicines hit the market with $1,000 per pill price tags.

Source: Gilead

The soaring cost of newly approved therapies like these has payers incredibly nervous and that's leading many of them to investigate new pricing models that could threaten Big Pharma's payday. For example, Express Scripts has floated the idea of a pay-for-performance model that would pay drugmakers more when their drug succeeds in a patient and less -- or nothing -- if their drug fails.

Insurers are right to be looking at new payment models given that they're likely to remain under considerable pressure from governments to keep premiums affordable. Last month, California's health-insurance exchangecapped copaysfor people paying for high-priced medicine, forcing insurers to make up the difference. This suggests that at some point the current trend in pricing will become untenable. After all, insurers are already operating on single-digit margins, so there's not a lot of fat for them to cut.

Keith Speights:Stiff competition ranks as another huge challenge facing many Big Pharma companies. And the biggest threats are coming from outside the ranks of the major drugmakers. Generic pharmaceutical companies and "Little Pharma" -- the smaller up-and-coming players -- could make life much tougher for Big Pharma in the years ahead.

Source: Pfizer

For example, look atPfizer'stop-selling drug, Lyrica. Pfizer made over $5.1 billion last year from the drug, which is used to treat several conditions, including fibromyalgia. But the company lost patent exclusivity for Lyrica in several key European markets in July 2014. An assortment of generic drugmakers are chomping at the bit to create their own versions of the drug. While Pfizer won a legal battle that holds off U.S. generic competition for Lyrica until 2018, the threat from generics is significant.

Meanwhile, smaller pharmaceutical companies are hoping to dethrone Lyrica with new drugs.Theravance BioPharmais in midstage clinical trials with TD-9855 targeting treatment of fibromyalgia, and the company thinks this drug could wind up being "more compelling" than existing treatment options.

What are Big Pharma companies like Pfizer doing to remain competitive? Spending a lot of money. They are investing in developing new drugs. And, in some cases, they'll buy some of those Little Pharma rivals to cover their flanks and gain access to more new products. Those Big Pharma companies that don't spend their money wisely could find themselves to ultimately be big losers.

George Budwell: Big Pharma's resurgence following the patent cliff has been closely tied to the advent of multiple new classes of game-changing products, such as cancer immunotherapies and potent cholesterol-lowering drugs known as PCSK9 inhibitors.

As these groundbreaking drugs make their way to the market, though, we're learning that their initial peak sales estimates might have been grossly overestimated for a variety of reasons.

As Keith noted, fierce competition is one factor that could cut deeply into the sales of any one new product. Last month, for example, an advisory panel for the U.S. Food and Drug Administration recommended the approval of two PCSK9 inhibitors, Repatha and Praluent, fromAmgenandSanofi/Regeneron,respectively, meaning that they'll now probably hit the market around the same time. And not to be left out,Pfizeris planning on filing for regulatory approval for its own PCSK9 inhibitor within the next two years.

When the Street originally pegged Praluent's peak sales at over $6 billion, however, the prevailing wisdom was that the drug would enjoy a somewhat lengthy first-mover advantage -- a competitive advantage that has since evaporated with the rapid development of Amgen's Repatha.

Source: Wikimedia

And then there is the problem of how widely some of these new drug classes will be used in the real world. The cancer immunotherapy craze had analysts suggesting that drugs based on the PD-1 and related PD-L1 proteins could generate sales in the stratosphere of $35 billion by 2020.

The clinical data, though, hints at a far leaner estimate. The basic issue is that patients who respond to these treatments tend to do so within three to four months, and their responses are often extremely durable. In short, there's little reason to continue treatment beyond the four-month benchmark in most cases, and this issue wasn't fully appreciated by the Street at first.

All told, Big Pharma's revenues and earnings are likely to continue to rise as these innovative new drugs barrel toward the market, but they probably won't touch the sky-high peak estimates the Street was floating only a few months ago.

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George Budwell has no position in any stocks mentioned. Keith Speights has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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