Thursday, March 29, 2007

This Just In: Wall Street’s Finest Speechless




“I'm speechless right now. On that number. Can you repeat that again?”

—Michael Aberman, Credit Suisse
Alexion Pharmaceuticals conference call


“That number” to which the aforementioned analyst is referring is the wholesale price of a new biotech drug called Soliris, which will be the first and only treatment for a rare genetic blood disorder known as PNH.

PNH, for the record, currently afflicts 8 to 10,000 individuals in the U.S. and Europe. According to Alexion,

Patients with PNH may suffer from severe hemolysis, anemia, chronic fatigue, recurrent pain, pulmonary hypertension and intermittent episodes of dark colored urine, known as hemoglobinuria. Importantly, PNH patients are at increased risk of forming life-threatening blood clots, or thromboses, which are a major cause of death in this disease.

As with, for example, cancer, PNH can be diagnosed at any age, but the median age in a UK study was 42 years. The median survival period after diagnosis was 10 years, although fully one quarter of patients in one study survived 25 years following diagnosis with PNH.

You might think the good folks at Alexion who came up with what looks to be a much-needed and long awaited therapy for a rare disease would be sensitive to the raging debate on health care costs in general, and biologics in particular, now enveloping both politicians and bureaucrats—not just in Washington but in every state capital in the Union.

And perhaps they are.

But the price they came up with for Soliris, which as we have seen shocked at least one of Wall Street’s Finest into speechlessness, was $389,000 per year.

The full excerpt of the above-quoted dialogue, courtesy of the indispensable Street Events, is as follows:


Operator

Thank you. [OPERATOR INSTRUCTIONS] And we'll take our first question from Michael Aberman from Credit Suisse. Please go ahead, sir.

Michael Aberman, Credit Suisse - Analyst

I'm speechless right now. On that number. Can you repeat that again?

David Keiser, Alexion Pharmaceuticals - President, COO

The annual cost of treatment on the wholesale level is $389,000 annually.

Michael Aberman, Credit Suisse - Analyst

And can you describe on the wholesale level what kind of cost for distribution and how you maybe compare to some other rare disease drug prices and how you came up with that number?

Vikar Sinha, Alexion Pharmaceuticals - SVP, CFO

Hi, Michael this is Vikar Sinha

Michael Aberman, Credit Suisse - Analyst

Sure.

Vikar Sinha, Alexion Pharmaceuticals - SVP, CFO

Compared to other drugs, we have -- compared to -- you're talking about -- compared to other drugs in terms of pharmacoeconomics, Soliris meets the criteria recommended by the Citizens Council regarding the decision to pay premium prices for ultra orphan drugs. And we have looked at the degree of severity of the disease, the treatment provides health gains, environment stabilizing of the condition, and the disease or condition that is life threatening.

Leonard Bell, Alexion Pharmaceuticals - CEO

Michael, as you're aware probably most other drug for orphan diseases are dosed on a patient weighed basis and certainly Soliris is not. Due to weight-based dosing, the price of other therapies, as you know, can range beyond $1 million per patient per year. For example, the annual cost of a drug recently approved to treat an average size adult with [Pompe's] disease would be over $400,000, and similarly the annual cost for a drug recently approved to treat average sized adults with Hunter syndrome would also be over $800,000. At Alexion, of course we focused on the key criteria that David outlined, that is, the rarity of the disease, the compelling clinical benefit that PNH patients experience with Soliris therapy, now that we have an approved label and we understand what those benefits are agreed to be. The cost of discovery, development, and production. Importantly our costs at Alexion to sustain our ongoing commitment to the PNH community.

Michael Aberman, Credit Suisse - Analyst

Okay.

Leonard Bell, Alexion Pharmaceuticals - CEO

Does that provide you context?

Michael Aberman, Credit Suisse - Analyst

I guess so. It's just surprisingly high. I'll get back in the queue as I think of an additional question. Thanks.



To Alexion’s credit, management spent even more time later in the call elaborating on the logic and assumptions behind the $389,000 annual therapy cost at a time when Presidential politics could potentially make Soliris a Poster Child of Why We Need Cost Controls in Healthcare.

And while at least one of Wall Street’s Finest raised his earnings forecast based on the much-higher-than-expected price, one actually reduced his forecast owing to the concern that the uptake of Soliris would be hindered by thoughts of price-gouging.

Readers interested in Soliris, PNH, Alexion, the controversy surrounding high-priced biologics, or all four topics ought to listen to a replay of the call.

Just don't send a transcript to one of the Presidential candidates.



Jeff Matthews
I Am Not Making This Up


© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


18 comments:

magordon said...

If $389k per year is too high, what is a fair price for this drug? I have no idea as to the true economics in this particular case, but it's hard to dismiss the pricing decision just because $389k sounds expensive. 10,000 is a very small patient population, so to arrive at the price you would need to calculate how much Alexion invested to bring this drug to market and then provide for a fair return to compensate the company for pursuing a disease affecting such a small number of patients. If they can't earn a fair return, no company would work on cures for diseases that affect such small patient populations. Although I haven't followed Alexion and don't know how much they invested in development of this compound, I doubt it was a whole lot cheaper for them than it cost others to develop billion-dollar cancer drugs providing marginal benefit, but enjoying much larger addressable markets. Also, keep in mind that $389k is the wholesale price. The realized price may be lower.

Rhett said...

It may sound high at first glance but it's in line with drugs for comparably sized markets. Genzyme has built a great biotech company serving niche markets like this with drugs that cost several hundred grand a year. Some countries with state run health care have balked at paying and reserve coverage for patients with only the most severe forms of the disease but in general the patients get their drug and the company gets paid.

Question said...

Where can you find this transcript on Briefing.com? I can't find it anywhere.

kevinmr said...

Total R&D for Alexion in 2006 and 2005 is ~ 100m (this number also includes development costs for other drugs in their pipeline). Since Soliris is designated an orphan drug Alexion is eligible for tax cuts on research costs. The revenue Alexion may expect, assuming Soliris reaches 20% of the market at 1/2 their proposed wholesale price (~200k), translates to ~400m per year. Methinks $400m per year is more than a fair return.

kevinmr said...

Total R&D for Alexion in 2006 and 2005 is ~ 100m (this number also includes development costs for other drugs in their pipeline). Since Soliris is designated an orphan drug Alexion is eligible for tax cuts on research costs. The revenue Alexion may expect, assuming Soliris reaches 20% of the market at 1/2 their proposed wholesale price (~200k), translates to ~400m per year. Methinks $400m per year is more than a fair return.

Question said...

Where can you find this transcript on Briefing.com? I can't find it anywhere.

Sam S. Park said...

A study shows that average R&D cost of a drug, including failures, amounts to around $800M. (As of Dec ’06, ALXN’s retained losses were $637M – which is around the average R&D cost.)

Alexion stated that total operating costs will be between $160M to $180M for 2007.

If they capture 20% of the market, here are some rough estimates using the $800M as the initial outflow:

• A 5yr patent would give them about a 70% 5yr IRR
• 10yrs would be about 75% IRR

Those are some ridiculous IRRs given that it doesn’t take into account tax breaks. Just imagine what the IRR would be if they captured more of the market and included the tax breaks.

Some studies show that IRRs for new drugs range between 15% and 30%. I’d say that’s a nice investment if they get away with the nice annual price tag of $389K. I don’t know, but someone has to recheck their “pharmacoeconomics” numbers. Or maybe they’re only planning to get about 10% of the market.

Sam S. Park said...

I crunched the numbers to reflect more accuracy.

• 5 years of $130M outflow (about $650M of accumulated costs)
• 7 year exclusivity for orphan drugs
• Insurance will pick up the tab (about 85% of Americans are covered)
• 8,500 will get treatment
• Revenue at $3.3B at $389K per patient
• $180M total operating cost
• After tax income (taking into account credit for orphan drugs = 65% credit on R&D cost of about $85M) is about $2.1B

IRR 75%!!!

William said...

The real ethical issue here is whether you allow someone to die because the cost of treating their illness is more than they will contribute through longer life.

Aaron said...

And this is is why House Representative Henry Waxman (D-CA) is investigating the high prices of biotech drugs - I am not making this up. Readers can see for themselves by clicking here.

To question: You can read a copy of the transcript directly from Alexion's website for free simply by registering here.

allenli said...

kevinmr's calculation is way off. Using his assumptions, Alexion will gross 400k, not 400M.

Assuming 100% penetration at full wholesale price means 4M/yr in revs for the drug.

john lichtenstein said...

Allenli you and Kevin are doing the same math. In the USA we use M as an abbreviation for 1,000,000, and k as an abbreviation for 1,000.

Publius said...

Allen, what's wrong with Kevin's calculation?

He said:
1) 20% penetration. In a market of max 10,000 patients, that means 2,000 patients.

2) 1/2 the wholesale price. If wholesale is roughly $400,000, half that is $200,000.

Ergo:

2,000 patients * $200,000 per patient = $400mm in revenues.

You're missing some zeroes, bud.

allenli said...

Actually, my calcuations were off. Apologies!

kevinmr said...

allenli -

The $389k mentioned on Alexion webcast is per year per patient. Assuming 50% of that rate(~$200k) at a 20% penetration (~2000) = $200k * 2000 = $400m.

No?

Mongoose said...

If the pharma companies are price-gouging can someone explain why their profit growth has been so anemic? I realize their pipelines have been weak but it still doesn't seem like they're making money hand-over-fist to the detriment of consumers. Because their pipelines have been weak, they probably need to raise the prices of the drugs they do come out with to cover their substantial fixed costs.

Sam S. Park said...

I would have to guess the rising amount they allocate towards lobbying efforts will cut a little bit into their profit growth.

Profit margins for the big pharma guys are still high. Sure, the growth has been dismal lately, but maybe they should focus less on lobbying for protection and more in developing new and better medicine.

Their pipeline is small because a lot of them spend about twice as much on marketing costs then on R&D costs.

Also, their profit growth may have been reversing because patents could be running out, thus losing some market share. So I guess they throw more lobbying money to get extensions on patents.

"...not at the detriment to the consumers."

That's true if insurance and Medicare picks up the tab. However, it is a detriment to the taxpayers. I'm also guessing it's the lobbying that prevents Medicare from negotiating for lower prices.

They shouldn't raise prices because of weak a pipeline. The industry’s system is flawed. They should cut marketing costs, increase R&D, and allow fair competition. Their industry is artificially inflated because they bought Washington. And in the end, it is a detriment to the consumer.

john said...

Couple of things regarding the calculations

(1) They arent actually going to get 389k a year. That is a wholesale number

(2) More importantly, you need to realize that they could have spent that entire sum on research and got zilch if the drug didn't work. Talking about IRRs on a company like this isn't meaningful. Remember this - As a whole, the Biotech industry still hasn't recovered the money invested in it.

Lastly, the reason the pharma firms are not making big $$$$ has nothing to do with increased lobbying. The issue is more due to massive SG&A spending. Things have got way out of hand in this regard.