As a scientist turned investor, I have to constantly remind myself that how well a drug works is not the most important thing to consider when investing.
Based on the email I get -- often from patients turned investors -- it seems like I'm not alone. It's easy to get excited about how well a drug works, but that clouds what investors should really be focused on.
What's most important for a drug? How well it sells. Sure, for most drugs, the efficacy of the drug is directly proportional to the drug's sales. Drugs that have activity that towers over the competition sell well and those that only work moderately will barely pay for their cost of development.
But there are a few drugs that have extraordinary activity and yet haven't lived up to their potential.
What else the drug does is important
It doesn't matter how well a drug works; if patients are scared of the side effects, they'll skip the drug and take one with lower efficacy. Check out the sales of Elan (NYSE: ELN ) and Biogen Idec's (Nasdaq: BIIB ) multiple sclerosis drug, Tysabri.
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Quarter ending
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March 2008
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June 2008
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September 2008
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December 2008
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March 2009
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Sales (in millions)
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$160
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$200
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$236
|
$218
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$227
|
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Quarter-over-quarter growth
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24%
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25%
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18%
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(7.6%)
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4.1%
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Source: Biogen Idec earnings releases.
Doctors and patients already knew that Tysabri was linked to a potentially deadly, rare brain disorder called progressive multifocal leukoencephalopathy (PML). It was pulled off the market in 2005 after the first cases were reported, but put back in the middle of 2006 after the FDA determined that the benefits of the drug outweighed the risk.
So what happened in the third quarter of 2008 that stifled growth? Patients were unfortunately reminded that the drug has potential side effects when two new cases of PML showed up. Some patients abandoned the drug for other multiple sclerosis treatments -- Biogen's Avonex, Teva Pharmaceutical's (Nasdaq: TEVA ) Copaxone, or Rebif from EMD Serono and Pfizer (NYSE: PFE ) -- and others who would have switched thought twice about it.
If Elan and Biogen can figure out a way to treat PML -- they're testing one of Roche's drugs in a clinical trial -- the companies might be able to get back to growing Tysabri sales by 25% quarter over quarter. But first they'll have to convince patients that death isn't a potential side effect of the drug.
Ouch, delivery matters
As far as I can tell, Amylin Pharmaceuticals' (Nasdaq: AMLN ) Byetta is a wonder drug. The drug lowers glucose levels in diabetics and has an added benefit of causing weight loss. Considering that 90% of type 2 diabetics are overweight or obese, the drug should be flying off the shelves.
But patients haven't taken a liking to Byetta. Merck's (NYSE: MRK ) Januvia was approved more than a year after Byetta, but sales of Januvia were nearly double that of Byetta last year. Amylin and marketing partner Eli Lilly (NYSE: LLY ) faced an uphill battle because Byetta is injected twice a day while Januvia is a pill. Swallowing a pill trumps injecting yourself any day.
Enter Alkermes to the rescue. The company's extended release technology allowed Amylin to develop a once-weekly version of Byetta that should be submitted to the FDA shortly. Injecting themselves once a week should be a reasonable trade-off for the added benefits of Byetta, and the second-generation drug will hopefully live up to its potential.
A blockbuster that could have been better
Once a patent expires and generic drugs enter the market, sales of the brand-name drug plummet, but drugs can stop living up to their potential because of indirect generic competition, too.
Take Pfizer's Lipitor, for example. Sure the drug is a blockbuster many times over, but imagine what it could have been had Merck's Zocor, a similar statin, not lost U.S. patent protection in the middle of 2006.
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2005
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2006
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2007
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2008
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|
Lipitor U.S. sales (millions)
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7,401
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$7,849
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$7,195
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$6,332
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Year-over-year increase (decrease)
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12%
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6%
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(8.3%)
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(12%)
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The availability of generic drugs that might not work as well, but that cost considerably less can hurt sales of even the best drug. With the economy in shambles and Obama spouting off about the high price of health care, the bystander generic effect will become an increasingly larger problem for drugmakers.
Don't be blinded by science
Investors need to understand the ins and outs of what's driving the industries they invest in. That's the only way to stay ahead of the curve.
Even though Buffett would disagree, I think investors should make an attempt to understand the science behind the drugs. But it's also important to look at the big picture and make sure that good science will turn into healthy sales.
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