Biologics or Not?

A white paper on Pharmaceuticals industry by PricewaterhouseCoopers (PWC) mentioned that 55 of the 106 (~52%) blockbusters on the market in 2007 were for specialist treatments. The report further stated that the sales of all specialist therapies could reach US$295-300 billion by end of 2008, accounting for 44% of worldwide spending on prescription pharmaceuticals. With these data, it is clear the demand for specialist medicines is climbing up. And so the most important question in the mind of most pharma industry CEOs is definitely: Should we venture into the business of specialist treatments?

From the economic perspective, the answer is clearly yes as shown by the data above. However, in our complex world, decisions are not made solely from a single perspective. The work of an economist, for example, always involves a balancing act, requiring one to defend his beliefs but at the same time, being mindful of the views of the opposition. This often results in economist supporting a bipartisan policy between his intended policy and that of his rivals, achieving success for those he represented but dampening the impact on those he didn’t represent.

This brings me to the main objective for writing this article: To challenge decision-makers to think twice before giving his nod to venture into this business. Note that I have made the assumption that venturing into the business of specialist treatment means venturing into biologics since it is the preferred type of drugs. First, the cost of developing a biologic (as this protein-based compound is called) is approximately US$1.2 billion, close to US$400m more than the average for a small molecule. Each biologic, on the other hand, is only capable of providing treatment to a mere 3% of the population. This will certainly increase the price of each unit of drug as the development cost of the biologic now has to be distributed over a smaller number of units, in accordance with the much smaller population that it treats. Without subsidy, only a select few can afford it. Can the revenue obtained from the smaller population cover the cost of development, marketing and etc?

A subsidy, on the other hand, does not equate to no troubles. The higher price is sure to increase the level of scrutiny of approving authorities before the subsidy is disbursed to the patients or the company. Can the company sustain itself when this arises? Will it encounter cash-flow problems?

I have also simplified the decision-making process by not taking into consideration the hot issue of “pay for performance”, which essentially shift the price determination activity from the company to payers (government and patients). Without “pay for performance”, all it takes is a patient in need of treatment and a health professional prescribing a drug for the company to obtain the revenue which it has fixed. With “pay for performance”, another factor has to be taken into consideration: outcome of the treatment. If it is below expectations, the revenue obtained may be drastically reduced.

Second, unlike small molecules, each biologic appears to have a broader range of activity and has higher probability of generating immune response. Anyone marketing it must have considerable scientific knowledge, in particular those relating to the risk, so as to communicate it clearly to the relevant people.

In addition, as the price determination activity has effectively shifted from company to payers, marketing and sales people have to engage these people beyond the conventional task of promoting their drugs. They must be able to feed the views of the payers to the various functions within the company, particularly the R&D function so that they can be taken as one of the many considerations of the development process.

Last but not least, many biologics have to be ordered when needed instead of being stock-up, as they are expensive (you don’t want to lock your money in inventories) and have short lifespan. They also must be transported under special conditions because they are prone to degradation. The development of the necessary infrastructures as well as the training of manpower to support all these are sure to further bump up the cost of specialized treatment.

In conclusion, the decision to venture into specialist treatments is not driven by economic perspective alone. It is imperative that many factors such as those shared above be taken into considerations.