The Sovaldi Case: Is American Biotech History About to Repeat Itself?

Recent Congressional investigations over the pricing scheme of Gilead’s much-heralded hepatitis C drug Sovaldi – and a decline in stocks across the biotech sector – rings a familiar bell, writes Tom Norton.

Twenty years ago in May, US Senator Joe Lieberman carefully questioned biotech CEO Harry Penner of then Neurogen Corporation about why his company’s stock had taken a dive [transcript p. 94]:

Sen. Lieberman: Do you have any doubt that the actions that were at least included in the original Administration (Clinton Health Care) proposal, such as the price controls and the breakthrough drug committee, Medicaid black-listing, would have a very serious negative effect on the availability of capital for a company like yours?

Mr. Penner: There is no question about it.  As I indicated in my testimony, the present effect on our stock has been something in the neighborhood of a 50- to 60-percent decline.

Sen. Lieberman: There is no other reason for that drop to have occurred, is that correct?

Mr. Penner: No; none at all.

Senator Lieberman: There is no other variable out there?

Mr. Penner: Not at all, and I think the (biotech) industry figures are more in the nature of two-thirds.
[Note: Neurogen was acquired by Ligand Pharmaceuticals in 2009.]

On March 21, 2014, I read with interest a page one Wall Street Journal  ‘markets’ story that reported on the rapid decline in the stock market value of biotech leader, Gilead. The piece attributed the fall in the stock’s price to the attentions of a Congressional committee that was seeking specific pricing information on the firm’s new, breakthrough Hepatitis C product, Sovaldi.

In particular, the WSJ stated that several congressional members had decided it was time to investigate the announced pricing of this remarkable drug, which the members apparently saw as exorbitant.  A

from the House of Representatives Committee on Energy and Commerce, released to the public, was sent to Gilead’s management on March 20.  In rather terse language, the House Committee asked Gilead to answer several broad pricing questions by Thursday, April 3.

As of this writing, Gilead stock has sustained about a 17% fall since that story in the WSJ broke. In addition, the entire biotech sector, clearly influenced by Gilead’s Congressional troubles, has experienced a similar decline over the past week.

As I reflected on these developments, I couldn’t help but wonder: Is American biotech history about to repeat itself? Consider the following:

More than 20 years ago, while working for a large pharmaceutical concern, I sat in on several Congressional committee hearings that were designed to investigate the pricing practices of the US pharmaceutical industry. In tone and focus, all of the activity had one overriding theme: Prescription drugs are too expensive.

During this period, the leader of the “Rx fair pricing” movement, Sen. David Pryor (D-AR), released what he deemed to be a landmark study on drug pricing. The report, “Prescription Drug Prices: Are We Getting Our Money’s Worth?” posed a series of hypothetical questions to the industry, and concluded with a long list of alleged pricing grievances that quickly became the basis for a wide ranging attack on industry pricing practices.  In the end, these charges formally found voice within the 1993 Clinton Health Care legislation [See “Monitoring Breakthrough Drugs”].

As I reviewed the questions Congress put to Gilead this past week, I was struck at how similar they were to those that Senator Pryor and his congressional allies had placed before the industry 20 years earlier. The 2014 Gilead Congressional questions included:

• The methodology used by Gilead to establish Sovaldi’s pricing?

• The extent to which Gilead is providing discounts to low-income patients and key government or private-sector purchasers of the drug?

• The value to the company of the expedited review provided under the FDA’s Priority Review and Breakthrough Therapy designation and how any savings provided by expedited review factored into the pricing for the drug?

• The public health impact of insurers’ and public health programs’ decisions not to cover Sovaldi for all patients with Hepatitis C?

Back in 1990s when the Rx industry received these types of questions, they were nearly impossible to answer to the satisfaction of Congress primarily due to the width and depth of the query. As a result, any answer the Rx industry provided to Congress invariably led to a labyrinth of aggressive follow-on questions, which usually resulted in progressively ‘poorer quality’ responses from industry, as Congress saw it.  At the end of these encounters, Congress frequently concluded that industry was “hiding something” about its pricing practices or, in the worst case, not providing the “truth” to Congress.

And so, last week, reading over the broad questions sent to Gilead, it came to me: Could this Gilead situation ultimately be leading to the same type of stalemated outcome industry experienced in the ‘90’s, triggering substantial market fall out for today’s biotech companies – similar to that experienced by the biotech industry two decades ago?

As a refresher, here’s what happened back then:

• Once the 1993 Clinton Health bill was formally introduced, venture capitalists fled the Rx scene in droves.

• Why?  The very first whiff of Clinton’s government intervention in pricing caused them to pull stakes and move onto to other investments.

• As a direct result, Pharma stocks, particularly those of the then nascent biotech industry, took an enormous equity hit in 1993-94. US biotech stock prices crashed and numerous biotech companies began to live on the edge financially, or worse.

By 1994, this situation had turned into a general biotech market rout. Aside from the exchange (above) between Sen. Joe Lieberman and Neurogen CEO Harry Penner, Health Affairs stated the case succinctly during the summer of 1994: “According to Alex Brown and Sons, the prices of many biotechnology stocks fell 30-40 percent in 1993…suggesting that the market capitalization of the entire industry was negatively affected by the climate of health care reform.”

And finally, we find this key summary on what healthcare reform was doing to pharma and the biotech industry in a Business Week article published on March 7, 1993: “The (Clinton) Administration is committed to paring the share of gross domestic product–14%, or $835 billion, last year–consumed by health-care costs.  Drug prices, which are 7% to 10% of that and have risen faster than inflation for a dozen years, make a tempting target. So it’s no surprise that Clinton and Congress are preparing plans to restrain prescription- drug costs…

“The question now is: Can prices be tamed without crushing innovation in a leading-edge industry? Many economists and industry executives say no–particularly if it means strict controls on new-product prices. That would ‘be a disaster,’ says Joshua Boger, president of Vertex Pharmaceuticals Inc.(biotech) in Cambridge, Mass. Without hefty prices and profits, the investors who finance biotech will flee, as they’ve done since talk of controls began…”

And so, here we are in the spring of 2014. Unlike 1994, we actually have a new US health care law, one that is clearly predicated on the concept of general “price controls” in one form or another.  Regarding Rx pricing, we have a President who has specifically stated the he is interested in restraining “the pricing of prescription drugs” through “bulk purchasing” schemes in Medicare.

Take the the bubbling cauldron of ‘price controls’ and add in a Congressional probe into one of the most promising biotech drugs to appear in the last decade, and you have to ask yourself, where is this headed?

Let’s go back to the WSJ article that gave me deja vu in the first place. The basic industry concern about any Congressional action is clearly stated:

“(The Congressional inquiry) is not what investors want to hear. Pricing power for breakthrough drugs has been a big part of the bull case for the biotech sector, which far outpaced the broader market over the past year.

“When there are price concerns in a name (like Gilead) that is the poster-child, essentially, the lead horse in biotech, it spooks [investors] a little bit,” said David Seaburg, head of equity sales trading at New York brokerage Cowen & Co.”

The broader question: Is the Sovaldi situation the leading edge of another American biotech collapse similar to the one experienced in the 1990’s?

As I stated several weeks ago in this publication, numerous factors are clearly converging this year, putting extraordinary pressure on the introduction of new Rx drugs in 2014.

However, when you add something like a “Congressional probe” to this unsettled environment, well, it could prove to be the proverbial “gasoline” thrown onto an already burning fire, creating an effect similar to that experienced during the great biotech equity conflagration of the 1990’s.

For the sake of the millions of patients who have benefited from the tremendous health advances that American biotechnology has managed to produce since recovering from that ‘90’s debacle, I do hope I have this wrong.  In fact, over the last day or so, Gilead has recovered a little ground in the market.

However, keep an eye on how Gilead responds to Congress on April 3^rd - and, more importantly, how Congress responds to Gilead’s answers going forward.  If Congressional interest fades, this is likely where all of this ends; if not, there is more to come in this story and it is unlikely to be good.

Tom Norton is principal at NHD Smart Communications. He can be reached at tnorton@nhdcomm.com.