The mounting backlash against high prescription drug prices may foreshadow broad changes in the biotechnology business, calling into question whether drug makers and their investors will be able to make as much money from new therapies as they once expected.
When a Bain Capital hedge fund made a big investment in Spark Therapeutics Inc. last year, the bet was not only that the company would win approval of a breakthrough medicine but that it would be able to command a premium price.
Clinical trial results this month showed Spark’s experimental treatment helped restore vision in patients with a rare eye disease, putting it on track for what would be the first gene therapy approved in the United States. But whether the company will be able to charge hundreds of thousands of dollars per patient, as investors have expected, may no longer be a sure thing.
“We are in a scrutinized environment for drug prices,” said Matthew McPherron, managing director of Bain’s Brookside Capital fund in Boston, which invested an undisclosed sum in Philadelphia-based Spark. “Will they be able to get half a million dollars? It’s something we’re following closely.”
At stake for companies in Massachusetts and nationally is how much capital they can raise, the valuations investors will stomach, and the potential payoff for shareholders and insiders.
The expectation that drug makers will be able to set almost whatever price they choose in the United States has been built into the market values of companies working on novel treatments that save or extend lives. Spark’s stock market value is about $1.3 billion, and it is one of more than 15 biotechs, including Alnylam Pharmaceuticals Inc. and bluebird bio Inc. of Cambridge, that are worth at least $1.1 billion without having brought a single drug to market.
But investors are growing skittish. Biotech stocks have fallen more than 10 percent since mid-September, while shares of some pre-commercial biotechs have tumbled more than 20 percent. By contrast, a benchmark index for the notoriously risky sector surged 122 percent in 2013 and 2014.
The recent drop stemmed in part from reaction to a recent move by New York’s Turing Pharmaceuticals and its brash chief executive, Martin Shkreki, to acquire an infection-fighting generic medicine and boost its price to $750 per tablet, from $13.59. That prompted Democratic presidential candidates Hillary Clinton and Bernie Sanders to call for capping some drug prices. Adding to investors’ jitters was a Pacific Rim trade pact that appeared to loosen commercial protection for biotech drugs.
Last week, Valeant Pharmaceuticals Inc., a Canadian company that has also acquired drugs and raised their prices, said it had received subpoenas from US prosecutors seeking information on its pricing and distribution.
“Price pressures had been building, but cases like Turing were like throwing a match in a tinderbox,’’ said Leora Schiff, principal at Altius Strategy Consulting in Somerville, who discussed the changes at a Philadelphia conference last week. “We’re reaching the point where we’re overburdening the system with fabulous drugs we can’t afford at the prices companies are putting out there.”
Even before the Turing case, health insurers complained about the high price tags for drugs approved in the past 18 months to treat hepatitis C and high cholesterol, conditions affecting large numbers of patients. But many biotechs with the highest market values are following a playbook introduced by Cambridge’s Genzyme Corp. in the 1990s: Develop medicines for rare genetic disorders and price them at hundreds of thousands of dollars per patient.
Because the patient populations were small and there were few such drugs initially, insurers could absorb the costs. But as regulators approve more rare-disease drugs, the cost burden on insurers — and on employers buying insurance to cover workers — is increasing.
“Drug companies are going to have to do a better job at communicating to the public about what goes into their prices — and that’s what’s scaring investors,” said Ken Kaitin, director of the Tufts Center for the Study of Drug Development in Boston.
Some of the most promising biotechs are working on scientific approaches — such as gene silencing at Alnylam or cancer immunotherapy at Juno Therapeutics Inc. in Seattle — with potential to generate multiple drugs, each treating patients with specific genetic mutations.
Investor appetite for such companies was underscored in May, when Alexion Pharmaceuticals Inc. agreed to pay $8.4 billion for Synageva BioPharma Corp., a little-known Lexington company developing treatments for rare diseases.
But if assumptions about such valuations change, it could hamper the ability of early-stage drug-discovery companies to raise money, particularly if they’re seeking to access capital markets through initial public offerings of stock.
“If you’re looking to go public right now, you might be nervous,” said Michael Gilman, a venture partner at Atlas Venture and CEO of Padlock Therapeutics Inc. in Cambridge.
“It’s going to be harder for companies to pull off IPOs for a while. They’re going to have to look to private sources, or alliances with pharma companies, to fund their operations.”
David-Alexandre “DA” Gros, senior vice president at Alnylam, one of the highest-valued precommercial biotechs, said his company has stockpiled $1.4 billion in cash, enough to shield it from the market’s volatility and bankroll its research for the next five years.
“The fundamentals of the industry have not changed,” he said. “We’re in an era where we have an unprecedented understanding of disease biology and approaches to treating diseases, including what we do. I believe that innovation is going to continue to be rewarded.”
While no one disputes that pricing pressures are on the rise, many in the biotech field view much of the recent criticism in the context of presidential politics. They say it is unlikely that Congress, even one controlled by Democrats, would impose price controls on drugs.
“Biotech has made advances in the past few years that were undreamt of before,” said Steve Dickman, chief executive at the Cambridge consulting firm CBT Advisors, who has worked with bluebird and other life sciences companies. “Who wants to slow that down, let alone stop it?”
But others say the system can’t sustain a proliferating number of pricey drugs as the US population ages.
“I think this is the beginning of a change,” said James Love, director of the Washington public-interest group Knowledge Ecology International, which focuses on health care affordability. “It’s been a long time since I’ve heard candidates talk about drug prices.”