WSJ unfair to Biogen
On October 5, the country's preeminent financial newspaper, The Wall Street Journal, dropped a bomb on the Nasdaq Biotech ETF (NASDAQ:IBB). That ETF opened on October 5 at $318 and touched an intraday low of $292 on October 6. A WSJ article pointed out that Biogen (NASDAQ:BIIB), the leader in multiple sclerosis drugs and a heavy spender on R&D, had been raising prices on Avonex by an average of 16% per year despite decreasing demand. But the article did not mention the fact that everything else in Biogen's portfolio saw increasing demand. Avonex price increases were highlighted, without highlighting where the money went.
Biogen discloses the volume growth for each drug in its SEC filings. This made it an easy target, compared to a company like Valeant (NYSE:VRX) that steadfastly refuses to disclose this information on a per-drug basis. Biogen's stock price opened at $291 on the day of the article (October 5) and closed at $276 on October 6. Even though Valeant is used as a contrast to Biogen in this article, there are many drug companies with Valeant's low R&D, price-hike-heavy business model.
Valeant is just the most well-known of the bunch, with New York Times articles written about it:
"This year alone," notes the Times, "Valeant raised prices on its brand-name drugs an average of 66 percent, according to a Deutsche Bank analysis, about five times as much as its closest industry peers."
Focusing on price increases on the only drug in Biogen's portfolio with decreasing demand is unfair. This is a partial list of how the money is being used by Biogen:
• Biogen's ongoing multi-billion dollar effort to find a treatment for Alzheimer's disease
• Ongoing effort to find the first drug to reverse the neuron damage caused by multiple sclerosis (anti-LINGO)
• Ongoing effort to find the first treatment for the fatal pediatric disease, spinal muscular atrophy (NYSE:SMA), in partnership with ISIS Pharmaceuticals (NASDAQ:ISIS). SMA is the most common genetic cause of infant mortality.
• Biogen's new hemophila drugs
• Biogen's licensing of a molecule from Mitsubishi Tanabe for $544 million, aimed at various auto-immune diseases
• Tecfidera, Biogen's hot new oral pill for multiple sclerosis
Why, even the offending Avonex has been improved upon by Biogen with Zinbryta. SA News says: "24.6% of patients receiving ZINBRYTA showed no evidence of disease activity at two years compared to 14.2%" for Avonex.
While the success probability of the Alzheimer's treatment is up in the air due to a hiccup in the 6mg dose numbers, the anti-LINGO and ISIS joint venture treatment should be approved by the FDA in my opinion.
All these risky R&D efforts are funded by equity capital and commensurate rewards are expected. This is different from price-gouging; price-hiking by 5x is risk-free and moneylenders (credit investors) are willing to lend at six times EBITDA to practitioners such as Valeant. If Biogen asks the same moneylenders to fund its attempts to invent new cures for the aforementioned diseases, the moneylenders would throw Biogen out of the room.
The current media attention on drug pricing is I think a good thing for drug research, because as the CEO of pSivida said, something like Hillary Clinton's proposal might rid the industry of bad actors. I have said the same thing in previous articles. This is important for shareholders in the long term. Any society would prefer moderate price hikes to fund the discovery of cures for serious diseases, as opposed to companies that do steep price-gouging without R&D.
Perversion of the system
When Biogen's CEO, Dr. Scangos, was asked about Turing's price hike of Daraprim from $13.50 to $750 per pill, he replied that it was a "perversion of the system." The system is indeed perverted, but it has been perverted by the FDA in recent years in my opinion.
Bloomberg news recently wrote about free-market-destroying regulation at the FDA. In recent years, the FDA has awarded market exclusivity to age-old medications:
"That's just one of the side effects of a U.S. Food and Drug Administration plan to encourage testing of medicines that have been around longer than the modern FDA itself, and so have never gotten formal approval. Companies that do the tests are rewarded with licenses that can temporarily give them monopoly pricing power as most rivals are eased or kicked off the market."
Bloomberg also found:
"A price survey of more than 21,000 generic drugs for Bloomberg News by DRX, a unit of Connecture Inc. that tracks drug prices, found that more than 3,500 have doubled or more since late 2007, ranging from basic chemotherapy medicines to old antibiotics."
At the same time, the FDA has strangled free-market competition in generic drugs by dragging its feet on approvals. This article says:
"In 2013, the median time for generic drug approvals jumped to 36 months and is projected to reach 43 months in 2014 once the final numbers are in."
People need to look into what drugs have been discovered by the generic drug companies benefiting from this FDA bonanza. For example, Valeant's proudest achievement is a cure for toe-nail fungus called Jublia; it cures around one in six people who use it.
Most of the companies in the price hiking leader table drawn up by Deutsche Bank are generic drug companies. Valeant is by far the leader, fetching it a potential subpoena from Congress.
It doesn't require a high-school diploma to see that the price hikes by Biogen and Amgen (NASDAQ:AMGN) are very different from Valeant's price hikes. For example, this is what was said about Amgen:
"For example, Medicare payments for Neulasta, an infection-fighting drug sold by Amgen, rose 12% over the four years, while claims from doctors who used it fell 8%."
Amgen has been working on new drugs for cancer, heart disease, osteoporosis, etc. That kind of R&D requires ever-increasing dollars. The doctors and medical professionals who carry out such clinical trials expect to be paid at an increasing rate every year. Companies like Amgen and Biogen are very different from the generic drug companies that dominate Deutsche Bank's price-hike rankings.