Biopharma, a high-flying industry for most of the past decade, may be coming down to earth.
The backlash against steep drug prices has become a rare subject of bipartisan agreement in Washington, D.C. Leading the charge is President Trump, who promised last week that his administration is “going to get drug prices so far lower than they are now your head will spin.”
But even before Congress considers measures, proposed by Democrats, to let Medicare negotiate the price of medicines for older Americans or permit lower-priced drugs to be imported from Canada, manufacturers already have begun to restrain their annual price increases on some medicines in a bid to placate critics.
Market forces are also working against biotech companies. Health insurers have been pushing back harder against covering the cost of expensive new treatments, such as a pair of new drugs that dramatically reduce cholesterol levels and the risk of heart attacks and strokes but carry list prices of more than $14,000 a year.
And the consolidation of pharmacy benefit managers into a handful of players who buy medicines in bulk has allowed them to demand deeper discounts and larger rebates.
All of this adds up to big changes in the business model of biopharma companies, which have long been accustomed to charging whatever the market will bear in the United States, the largest global market for prescription drugs. Some drugs that treat millions of patients can cost tens of thousands of dollars a year per patient; for medicines targeted at rare diseases, price tags of a quarter million dollars or more aren’t unusual.
“It’s moving from a high-growth industry to a slow-growth industry,” said Geoffrey Porges, biotechnology analyst for Boston health care investment bank Leerink Partners, who outlined the changing landscape earlier this month in a presentation to venture capitalists. “That’s a different profile for investors. Industry management teams and investors haven’t yet realized how different this is going to be.”
The fallout can be seen on several fronts, Porges said.
■ Many publicly traded biopharma companies will shift from growth stocks to value stocks as investors recognize their businesses remain solid but have limited upside potential. Stock analysts already have lowered their profit estimates for drug makers such as Gilead Sciences Inc., maker of a breakthrough, high-priced hepatitis C treatment, citing reduced profit potential.
■ Drug makers will have less appetite for risky research-and-development investments if they don’t see the prospect for financial rewards. Some will shift their focus to improving treatments that already exist or finding new uses for medicines already on the market.
■ It could become harder to raise money as venture capital and private-equity firms — as well as general investors — switch their investments to industries with bigger growth potential.
Price increases have been a key contributor to biopharma revenue increases of 6 to 8 percent in recent years, fueling double-digit increases in profit growth rates as companies capitalized on the strong market to buy back stock, Porges said. If prices fall, profit growth could slump to single digits, he warned.
“It’s not the good old days, that’s for sure,” he said.
Leora Schiff, principal at Altius Strategy Consulting in Somerville, said the pressure on pricing could force changes at drug makers that no longer are assured of being able to charge lofty prices when new medicines are approved and then hike costs even more annually. Companies may have to cut expenses or put more resources into understanding the basic biology of drug candidates earlier in the research process, she said, because they can’t afford as many failures in late-stage clinical trials.
“Companies are already dialing back on prices and trying to get out ahead of what’s coming,” Schiff said. “If Medicare is allowed to negotiate prices, that would have a big impact on the industry. Any restraints on prices will have an impact on profits and that, in turn, will have an impact on investments. If the price squeeze continues, companies are going to have to decrease their costs of getting drugs to market.”
Although she agreed that drug prices “have gone too far,” Schiff said much of the political posturing on the issue is divorced from reality. “When the president accuses drug makers of getting away with murder,” she said, “you need some adult voices in the room who understand the complexities and the dynamics between pricing and investment and the need of patients not to be thrown into financial disarray.”
Not everyone agrees drug prices will be coming way down, despite the rumbles in Washington. So far it’s been just a continuation of the industry-bashing rhetoric that’s been heard for years, said Lexington industry consultant Harry Glorikian, who said it’s just as likely the relaxing of regulations at the Food and Drug Administration will result in more drugs making it onto the marketplace sooner.
“I find it hard to believe there’s not going to be opportunities for growth in this dynamic industry,” Glorikian said. “I’m not saying there won’t be price adjustments. Companies have to do a better job justifying why drugs are priced as they are. But if you have a new drug that moves the needle for patients, I still believe you’re going to be able to get a premium price.”