How Biopharmas Battle for Billions

Billion-dollar blockbuster status is the holy grail of drug development; however, 90% of clinical trials fail and only a few drugs achieve this milestone. How do drugmakers overcome the odds?

In this episode of The Motley Fool's Industry Focus: Healthcare, host Kristine Harjes is joined by Motley Fool contributor Todd Campbell to discuss how efficacy, safety, price, and convenience affect sales at top companies, including Gilead Sciences (GILD -1.15%), AbbVie (ABBV 0.25%), and Bristol-Myers Squibb (BMY 0.96%).

A full transcript follows the video.

This video was recorded on March 7, 2018.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is March 7, and this is the Healthcare edition of the show. I'm your host, Kristine Harjes, and I have healthcare specialist Todd Campbell on the line. Welcome to the show, Todd!

Todd Campbell: Hi, Kristine! How are you today? Happy Wednesday!

Harjes: I'm doing great. Are you familiar with The Motley Fool tradition of Foolympics?

Campbell: No, tell me about them!

Harjes: OK. Every other year, The Fool runs its own version of the Olympics. We're divided up into teams, we name ourselves a country, and we participate in a variety of different physical and mental competitions. That's what we're in the midst of right now here at Fool HQ. And given that competition is a core value here at The Motley Fool, it gets super heated. You know what today's topic is, Todd. Does it make sense why it was top-of-mind?

Campbell: Absolutely. I'm excited for today's show, Kristine, because we get to take off our lab coats, our science hats that we usually wear, and put on our C-suite suits and our CEO hats.

Harjes: Yes. We're here today to talk about competition. When multiple drugs are competing for the same patients, how do you differentiate one from another, and how can you tell which one will ultimately end up winning the largest patient share? We took a look at the different ways we've seen drugs compete in real life, and we broke them down into four primary factors of competition. We'll dive into each one of them and give an example or two. First, let's take a look at what's at stake here.

Campbell: There's so much at stake. We've talked to listeners over the course of the last few years about different problems and challenges that have to be overcome by these companies that are developing these new drugs. First, you have patent protection. You have a capped, limited period of time that your product is going to be on the market, earning money. Somebody could come out and out-innovate you. And there's a tremendous amount of money at stake, $330 billion spent on prescription drugs. When you think about the fact that 90% of drugs that go into clinical trials end up failing and ending up in the dustbin, you want to make sure that the 10% that do cross the finish line are as successful as they possibly can be.

Harjes: We spend so much time on this show talking about drugs that haven't even hit the market yet and discussing the clinical trials and the data coming out of them. I'm looking forward today to looking a little bit farther down the timeline at what happens when these drugs are on the market. You hit the nail on the head that they only have so much time in which they'll generate money. These businesses are looking to grab as much market share as they possibly can in order to recoup their investment and also in order to further their R&D spending for drugs to come out in the future.

The very first factor to dig into is a no-brainer. This one is efficacy. How well does the drug work?

Campbell: Right. Can we build a better mousetrap than whatever the standard of care currently is for that indication? Can we reshape or revolutionize that indication so that we capture all of the money that's potentially up for grabs? Kristine, just in going through and thinking about how to discuss this with our listeners, I think you'll probably agree that the best example of efficacy and disruption in recent memory is Gilead Sciences and what it did in hepatitis C.

Harjes: Absolutely. When Gilead won approval for its hepatitis C drug Sovaldi in 2014, that was a complete game-changer. Previously, patients were looking at drugs that were just not very good at all. They were mostly effective, and they were a pain. But Gilead came out with Sovaldi, and it totally changed the game, with cure rates of upward of 90%. With that, it ate everybody's lunch. There were no other reasonable competitors at that point.

Campbell: Right, you had these old-style treatments for decades that included Ribavirin and Peginterferon. I think the functional cure rates of taking those over the course of very long treatment periods was only 50%, it was like a coin flip. Then, in 2011, Vertex got approved a drug called Incivek, which at the time was game-changing. But even then, the functional cure rate was only about 80%. So, when Gilead Sciences came out with Sovaldi, and later in the year Harvoni in 2014, and was able to increase those functional cure rates above 90%, it was game-changing.

I think, you look at this and you think back, how Gilead Sciences got to that point. Think about all of the people who were up in arms about how much money Gilead Sciences paid to get its hands on the drug that would eventually become Sovaldi. A lot of people were scratching their heads about that. Again, they did the numbers and they were looking at this saying, "If we can do this and we can come up with a functional cure rate efficacy that's really so much better than anything that's currently out there, well, then it could be a huge drug." And sure enough, these were huge drugs.

Harjes: Yeah. This drug ended up making Gilead Sciences so much money. It basically changed what the story behind Gilead Sciences was. This went from a company that was really just about HIV and added an entire blockbuster franchise.

Campbell: Yeah. At one point, I think they were close to doing $20 billion in annualized sales just from hepatitis C. That's pretty remarkable. It goes to show that, front and center on the minds of anyone involved in this business isn't just the idea of making money, but it's also this whole idea of, if we can disrupt by creating something that really, really works well, this much better drug that will, by the nature of it, end up being successful on its own.

Harjes: Gilead Sciences in hepatitis C is a pretty obvious example. But it's worth pointing out that there's a little bit of nuance here. For, example, you see pretty frequently two different drugs competing in the same market, and one will claim that in its trials, it had, say, a 90% cure rate, vs. the other one only had 80%. Unless you actually have a head-to-head trial, it can sometimes be hard to tell whether the one drug actually is better. That all comes down to trial design. Do you want to dive into that a little bit?

Campbell: Yeah. I'm so happy that you brought that up. I think it's important to remember. Obviously, we have different hurdles of efficacy to clear that we can actually categorize, how good is this drug, really? If you're comparing it to the easiest hurdle, which is a placebo, so, I'm doing nothing vs. taking this drug, well, that tells me something, but it doesn't necessarily tell me that this option is better than, say, the current standard of care. Unless, of course, you do a study that actually compares the two of them head to head, we don't know that.

The other thing, too, that I think investors have to remember is, you can demonstrate efficacy in multiple ways. We've talked about this on the show before with surrogate endpoints vs. the actual overall survival. So, using, say, response rate vs. overall survival, or progression-free survival. I'm talking mostly about cancer drugs here, but you could also look at it in autoimmune disease and say, what's the hurdle that we're actually trying to achieve to show that our Phase III trial pans out? I think investors have to be cognizant of that.

Harjes: Absolutely. So, that's efficacy. Let's turn to our second factor of competition, which is safety.

Campbell: Safety is interesting. You're looking at it and saying, I want to build a drug that works better as far as efficacy is concerned, but it doesn't really do me any good if I pick the wrong target or I use a mechanism of action that isn't going to be safe. If I launch a drug that I think is going to be competitive because it delivers solid efficacy, but then safety signals show up, it's basically going to collapse the commercial opportunity of that drug. 

Thinking about a good example for our listeners, turning back to Gilead Sciences, they actually had a drug that wasn't nearly as successful as their hep C franchise, and that's Zydelig, which is a drug for chronic lymphocytic leukemia. That won approval in 2004, around the same time as another competing drug in the same indication from Johnson & Johnson and AbbVie, which we've talked about on the show before, called Imbruvica.

Harjes: Yeah. These two were fierce competitors with one another. They were both targeting the same unmet need. It was an enormous, multi-billion-dollar indication. They were hoping that they'd be able to expand these drugs into earlier lines and potentially other cancers. But, neither drug was perfect. Safety ended up being a huge differentiator between the two of them. In March 2016, Zydelig's expansion trials had to be halted, which caused Gilead to have to discontinue the further development of this drug and add a black box warning, which is the FDA's most severe warning, on the label for the drug itself. And it just decimated Zydelig's commercial opportunity.

Campbell: Yeah. I remember thinking in 2013, before this drug launched, I was writing that Zydelig could be a blockbuster drug, it could have billion-dollar potential, this is a multibillion-dollar opportunity especially if you can move it up into earlier and earlier lines of treatment. But, when all was said and done, Zydelig's mechanism of action was inhibiting something called PI3K-delta, vs. Imbruvica's mechanism of action inhibiting the BtK protein, and BtK turned out to be safer. There were, unfortunately, some very sad fatalities caused in the trials evaluating Zydelig, and I think as a result, they had to shutter of the development. And Zydelig, while it's still on the market today because there are some patients that could still respond well to it, it's basically a niche drug. This was once going to be a billion-dollar blockbuster, and I think last year, the sales were maybe $150 million.

Harjes: Versus Imbruvica's sales, which were $2.5 billion in 2017. Something that I really want to emphasize here is, you have to consider the doctors' perspective. From that perspective, safety actually matters even more than efficacy. Think for a second about the Hippocratic Oath, to do no harm to your patients. So, even the most well-intentioned doctor is going to care more about avoiding bad outcomes than missing out on the best possible outcome and using a slightly more effective but maybe more dangerous drug. I think it's the logical choice every time to go for the safer drug. So, it really does matter. And labeling is also super important. That black box warning that I talked about, that's a blemish. Even if the black box is just to maybe narrow the patient pool slightly, having it on there is something that makes doctors very jittery and a little bit more hesitant to prescribe drugs that have some sort of safety hiccups.

Campbell: Kristine, that made me think, as investors, whenever we see a press release that comes out touting this great efficacy, I always, and you probably do, too, scan down about halfway and start looking for adverse events. I think that's a good reminder to all of our listeners that, when they're looking through phase 3 or phase 2 trial data, you want to not just focus on that efficacy. You want to go down there and look, were there any -- I'm most interested, Kristine, and you probably are, too, with the severe adverse events. That's grade 3 or higher events. And of all of them, I'm really interested in what's happening with liver toxicity. Those are some of the things, if you're trying to figure out, will this drug be better than the other drug, absent to head to head comparison, those are a couple things to take a look at.

Harjes: Yep. And one small tip for listeners that are trying to dig into these details, you'll sometimes see these adverse events referred to as SAE or AE, the acronym for severe adverse event and adverse event. If you're CTRL+F searching through any press releases and you're not finding anything when you spell out the words, try the acronym.

Campbell: Kristine, before we jump, one more point to follow on the back of that. It's important to remember that the safety hurdle will differ depending on the indication. You're going to have a slightly different safety hurdle for someone who has, say, late-stage cancer with very few treatment options versus, say, toenail fungus.

Harjes: Yeah, absolutely. And even in different lines of the same indication, it's a little bit more acceptable to have a questionable side effect profile if you're later down the line in treatment and patients have fewer options left. 

Our third factor of competition that we wanted to talk about today is price. This one is, I think, slightly less obvious than the others, and in particular it needs to be balanced with the other two, meaning efficacy and safety, because price alone isn't going to cut it if you have a drug like, say, Sovaldi. Sovaldi was able to price itself very high compared to what was on the market because it knocked it out of the park on safety and efficacy. But, as it turns out, that wasn't the end of the story. Eventually it did face competition from other hepatitis C drugs in this next generation wave of more safe and more effective drugs, based on price.

Campbell: Right, AbbVie and Merck, both of them. And you can imagine, Kristine, being in the war room of these C-suites trying to figure this out, because they're looking at this and saying, we know we're going up against Sovaldi and Harvoni, which are incredibly efficacious drugs with solid safety profiles. We think we can match or at least come up similarly to them on those two things. So then, how do we differentiate to make sure that we're able to win the market share away from them? And the next logical choice, then, would be on price. Can I battle on price? Can I undercut them, still make a nice profit for my investors, and capture a bulk of the market share?

Harjes: One strategic way that companies can do this is by negotiating directly with the PBMs to get preferred access to their formularies, which essentially blocks out your competition, if your drug is listed on, say, Express Scripts' preferred formulary and your competition isn't.

Campbell: Right. And that's why the Viekira Pak, which was AbbVie's first hepatitis C drug, when that came out, I think it won approval at the end of 2014, maybe launched in 2015. When they won approval, what they decided to do is, we can't necessarily beat Gilead's drugs on these other things like efficacy and safety. But what we can do is offer a bargain-basement price to Express Scripts, and basically get all of the business that way. And that's exactly what ended up happening. I think Sovaldi was priced at $84,000 for the treatment, I think Harvoni was $94,000, and Viekira Pak's wholesale acquisition cost came in around $83,500, but their net cost was probably much, much lower than that. And of course, that then forces Gilead to have to compete on price and lower their prices. And then when Merck's drug came out, compete again. And then, fast forward to 2017 with AbbVie's most recent drug that just launched, and I think that drug is priced at less than $30,000 for an eight-week course of treatment.

Harjes: And this is why, when you're looking at Gilead Sciences' results, you see hepatitis C sales falling off a cliff. Not only are they treating patients and curing them, which effectively makes your market smaller and smaller, but this price battle has made margins so tight for all of these companies that the market is not nearly the size that it once was.

Campbell: Right, a smaller market. And then, of course, competing on price to try and maintain market share, driving down the revenue on the unit volume that you are driving out the door. I think, from an investor's standpoint, you're looking at it and you have to recognize that drugs aren't your normal thing. When you're looking at this industry and investing in this industry for the first time, one of the things you have to realize right out of the gate is, this isn't like building a widget and saying, "I'm building a widget and then I'm going to mark it up 15%, and that's going to be my profit margin." 90% of the drugs are going to fail in your clinical trials, so you need to not only price for the cost to produce that drug once it wins approval, but you need to absorb the cost on all your failed drugs, and you need to price it to be able to fund future development of whatever the next innovative treatment is that you're going to launch.

Harjes: And of course, all the way, you have to be battling the public outcry about drug pricing. So, for sure, this is something that drug makers and doctors, payers, pretty much everybody in this country, is thinking about, is drug pricing. 

But, our fourth and final factor of competition is one that I don't think is really thought about as much, and this is the convenience factor.

Campbell: Right. And it actually dovetails into these other things pretty well. If you can make a drug more convenient to take -- and you can define convenience as, say, the dosing schedule is more favorable, or the time to take the drug, if it's an infusion drug, shrinks. Then, maybe you can eliminate some of the side effects that come along with taking the drug, and possibly carve out some costs that are associated with it. I was thinking this past week; you and I were talking before the show about what we're seeing going on right now in the ongoing battle for market share among PD-1 cancer treatments. That's been an absolute brawl since these drugs won approval in 2014. Bristol-Myers' Opdivo and Merck & Co's Keytruda.

Harjes: I'm so glad that we're talking about the PD-1 battle in an episode about competition, because this has been one of the most interesting brawls to watch over the past many years. Before we dive into the PD-1 battle, I do want to go back and emphasize the point that you made about convenience being a factor that plays into all of the other three that we talked about, efficacy, safety and price. You were completely right about safety lowering that side effect profile. Price, I also agree, if you're treating people less often, then you're bringing down all sorts of costs, from the direct costs to even less direct costs like time spent in a hospital or fewer office visits, even something like fewer disposables for whatever is used in the delivery of the drug itself.

I'll also add one more, which is how it plays into efficacy. Real life adherence is kind of tough. And sometimes you'll find, in the actual data for a drug that's on the market, it's not as effective as it was in trials. And a huge part of that is because people aren't good at following directions. So, if a drug is completely burdensome to take on the prescribed schedule, people might not be very good at following that schedule, and that can minimize the efficacy of the drug itself. If you can make it more convenient to take, you're decreasing the chance that non-compliance is going to mess with your efficacy.

Campbell: Absolutely. That's an awesome point, Kristine!

Harjes: All that being said, PD-1s. I'm going to kick it to you for this one, Todd.

Campbell: OK. It's probably important to have a little background on what PD-1s are. We've talked about it in the past. It's a checkpoint protein. In immune systems, on T cells, what oftentimes can happen with cancer is, they'll hijack a mechanism that basically flips a switch on that PD-1 protein and tells the T-cell, "Don't attack me, I'm a healthy cell." So, by inhibiting these PD-1s, what they do is inhibit the activity of PD-1, they basically remove or eliminate the ability for the cancer cell to hijack that mechanism.

Harjes: Yeah. Bristol and Merck had been neck-and-neck in developing these two types of drugs for quite a while. Eventually, it came to look like Keytruda was probably pulling ahead, specifically in first-line lung cancer, which is an enormous indication. We're now waiting for some interim data to see if maybe Opdivo can catch up here. 

One way in which Opdivo was able to get some pretty good results recently was just yesterday when the FDA approved a four-week dosing for Opdivo. Previously, it had been dosed every two weeks. So, going from every two weeks to every four weeks is doubling the convenience, essentially. For reference, Keytruda is dosed every three weeks. This will be for a majority of its approved indications, and that includes melanoma and second-line lung cancer and bladder cancer. Right now, it's the only PD-1 drug, and there are a lot of them out there besides just the two that we're talking about, that's approved for a four-week dosing schedule.

Campbell: Yeah. This is really a fascinating development. People are going to have to watch the next couple of quarters to see whether or not Opdivo starts to get back some of its mojo. You mentioned that Keytruda had won approval in first-line use in non-small lung cancer. That basically caused sales of Keytruda to skyrocket. And Opdivo sales in the U.S. have pretty much flatlined since then because you're using Keytruda now ahead of Opdivo, you're using Keytruda in the first-line setting and Opdivo isn't used in the first line setting. So, right now, Bristol-Myers' management is saying, how do we make sure that we sure up the market share that we do have in these later lines of treatment until we know that we can actually compete in the first line? And there's opportunity that they're exploring to be able to do that, but that's not approved yet. 

So, you look at it and say, if I can make this more convenient to the cancer infusion centers where these are being dosed, maybe I can make sure that I'm solidifying my relationship with those places and this drug continues to get used instead of Keytruda. That will be very interesting, to see how this plays out over the next couple of quarters. As you mentioned, Opdivo was every two weeks, and it was a one-hour infusion. Now, it can be either every two weeks or every four weeks for a half-hour infusion. Now, that infusion time matches Keytruda. But like you mentioned, the four-week dosing schedule is better than Keytruda's three-week.

Harjes: Yeah. If you look at the incentives from the perspective of these infusion centers, this looks pretty favorable, that you have drugs that take the same amount of time to do the infusion, but one of them now has to be done less frequently. That's a good thing. Some analysts are saying that this could help it expand this into the maintenance and adjuvant therapy settings. This is yet another example in this ferocious battle between Keytruda and Opdivo, where one drug is largely ahead and the other one starts to catch up. It's really just been fascinating to watch. 

I believe we did an entire episode on this battle about a year ago, if I'm remembering the timeline correctly. Any listeners that are interested in some of the details about the development of these two drugs and how the situation came to be the way it is today, shoot us a note at [email protected] and I'd be happy to send that episode along. 

Campbell: Yeah. One final takeaway, too, from my end, as to why we're spending time talking about this, Opdivo's sales in the fourth quarter alone were $1.36 billion. Keytruda's in the fourth quarter were $1.3 billion. So, they are literally neck and neck.

Harjes: But the growth rates are totally different, as you alluded to earlier. Opdivo's Q4 sales were only up 4% year over year, vs. Keytruda's, which were up 169%. So, for two nominal numbers that are fairly similar, the growth rates are totally different. But this battle is clearly not over. 

We are wrapping up for today. I hope you guys enjoyed this episode on competition and wish me some luck in the Foolympics. We're going through the end of this week. Currently, my country is in first place. I'm very excited, hoping to keep it that way. 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 the marvelous Austin Morgan. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!