The Cross-Border Biotech Blog

Biotechnology, Health and Business in Canada, the United States and Worldwide

Valuation and Other Biotech Mysteries – Part 10: Some Pharmaceutical Industry History

[Ed. This is the tenth part in Wayne’s series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.]

Very few novel drug development companies have made, or are likely to make, the transition to profitable and sustainable entities which market their own drugs in competition with pharma companies. Most companies have chosen to license their products to larger pharma companies, generally during the clinical development program. In addition, all drug development companies are potential acquisition targets. Since the larger pharma companies play such an important role in the fate of the smaller companies, it is important to understand both the history and current status of the pharmaceutical industry.

The modern pharmaceutical industry started in the 1800s as the patent medicine industry, which sold a lot of herb and alcohol combinations. In the late 1800s and early 1900s, the chemical industry entered the sector, manufacturing natural products such as vitamins and acetylsalicylic acid, for which the original brand product was Aspirin. Various biological products were added through the 1950s, including penicillin, insulin, early vaccines and human blood fractions. The first products based on scientific drug design emerged in the late 1950s and early 1960s including Valium (diazepam), Haldol (haloperidol) and Inderal (propranolol).

The first drug to reach $1 billion in annual sales – blockbuster status – was Tagamet (cimetidine) for the treatment of excess gastric acid (ulcers). It was developed by Smith, Kline & French (SK&F) and launched in the U.K. in 1976 and in the U.S. in 1979.

  • What happened to Tagamet? It was followed by Zantac (ranitidine) from Glaxo Labs, which dominated the H2-antagonist drug class.
  • What happened to the drug class? The 4 branded drugs of this drug class all lost patent protection and were replaced by generics and OTC versions. In addition, the medical condition was determined to be an infection (H. pylori) and the treatment regimen changed to include antibiotics.
  • What happened to SK&F? It was unable to develop new blockbusters to follow-up Tagamet and ended up being acquired by Glaxo, now GlaxoSmithKline or GSK.

The blockbuster drug strategy emerged in the 1980s and started to show the results in the 1990s. The U.S. approval dates of some of the recent and current blockbusters are shown below.

Small Molecules

  • 1992 – Norvasc
  • 1993 – Effexor, Risperdal
  • 1996 – Diovan, Lipitor, Zyprexa
  • 1997 – Plavix
  • 2000 – Advair
  • 2001 – Nexium
  • 2003 – Crestor

Biologics

  • 1997 – Rituxan
  • 1998 – Enbrel, Herceptin, Remicade
  • 2001 – Aranesp
  • 2002 – Humira, Neulasta
  • 2004 – Avastin

Smart patenting strategies and data exclusivity will give about 10 to 15 years of market exclusivity to most novel drugs. The products above have recently or will soon go over patent cliffs and face competition from generics for the small molecules or biosimilars for the biologics. The patent cliffs were visible to the entire industry and its investors essentially from the date of product approval.

Look at a long term stock chart of several of the major pharma companies and you will see that they have a similar pattern. Compare the share price movements to the history outlined above. You can do this for all the big pharma companies, mapping product, corporate and industry events on the share price charts.

  • Flat and very low share price through 1980, reflecting the lack of any growth triggers in the product portfolios
  • Rising share price in the 1980s, as the potential for blockbusters became apparent
  • Very rapidly rising share price in the 1990s triggered by clinical data and approval of potential blockbusters, with a pause from about 1993 to 1995 when Hillary Clinton threatened to control drug prices, and reaching a peak in about 1999
  • Volatile and variable decline through to the financial crisis in late 2008, impacted by many factors including the approach of the patent cliffs
  • Variable bounce from the late 2008 lows, reflecting both the general market bounce and changes in pharma company strategies

What does this have to do with valuation? The boards and managements of the pharma companies are focused on their company’s valuation, specifically the share price and dividend. They are implementing strategies to maintain valuation, although there is no agreement on the correct strategy for the industry. These strategies are impacting the smaller biotech companies and their valuations. In the next blog, we will look at some of the historical and recent strategies which pharma has implemented.

A recent Pharmalot post gave some updated information on clinical trial costs and stated that these cost have risen substantially. Some of the 2011 average per-patient trial costs (US$) were:

  • Phase 1 – $21,883;
  • Phase 2 – $36,070;
  • Phase 3a – $47,523;
  • Phase 3b – $47,095;
  • Phase 4 – $17.042;
  • Cardiovascular Phase 2 – $33,700;
  • Cardiovascular Phase 3a – $21,750;
  • Oncology Phase 2 – $73,303;
  • Oncology Phase 3a – $57,207;
  • Diabetes Phase 2 – $8,854; and
  • Diabetes Phase 3a costs – $12,667.

One response to “Valuation and Other Biotech Mysteries – Part 10: Some Pharmaceutical Industry History

  1. Pingback: Valuation and Other Biotech Mysteries – Part 11: Changes in Pharmaceutical Industry Product Portfolios and Strategies « The Cross-Border Biotech Blog

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