Outlook 2008: Rubin's Rubric
The good news is that the success of the Medicare prescription plan has neutralized the issue of prices, shifting the focus to the problem of the uninsured. Candidates in both parties have come out in favor of universal coverage, but with HMOs and PBMs having done a pretty good job in controlling Medicare Rx costs, not even Hillary Clinton, Rubin thinks, is likely to tinker with the system. Further defusing the price issue is the fact that some 70% of prescriptions are now filled with generics, and that percentage will grow as more major products go off patent. So while the election may generate another year of negative headlines, she concludes, “pharma will be less of a punching bag than it was before.”
In an exclusive interview in her midtown Manhattan office, Rubin, who is managing director at Morgan Stanley, sounded cautiously optimistic. While she anticipates strong volume gains overall, there will also be problems that could prove difficult for some companies. After four years of miserable underperformance, she explains, profitability bottomed out in December 2005 when leading companies turned things around with serious efforts to cut costs. Now, however, there is a new challenge: the looming wave of blockbuster patent expirations (Lipitor, Zyprexa, Plavix, Diovan, Effexor XR, Advair), and she is puzzled by the failure of corporate CEOs—with some signal exceptions—to prepare for the inevitable hits their companies will take. As a result she foresees a bifurcation in the industry, with winners on one side and companies with negative growth on the other. “The election is just rhetoric,” she warns, “but patent expirations will be a serious issue over the next five years.” To start with the good news, here are her picks as winners.
Merck's standout performance
As if it weren't enough to bounce back from the Vioxx setback, Merck turned in a standout performance this year, with more good news to come.
Says Rubin: “Merck has really monopolized the new product story this year, and I believe that it will continue to do so going forward. In the last two years, the company got eight new products approved, including four vaccines, and just last week [as we spoke], they received FDA approval for Isentress, the first in a new class of antiretroviral agents. My prediction for the next two years is that this success rate will continue with the likely approval of Cordaptive, a niacin-like product. Niacin was sidelined because it causes flushing, but Cordaptive has niacin's advantage—that it raises HDL—without flushing. This could be of particular interest since the failure of Pfizer's torcetrapib, which also was expected to raise HDL, removed a competitor from the field.”
“Meanwhile,” she says, “Merck's marketed products are continuing to do well. Gardasil, the vaccine that can prevent cervical cancer, could reach $1.5 billion in sales in its first full year on the market. That's pretty remarkable, especially since it was initially approved only for 9 to 26 year olds. I expect that next year it will be approved for women 26 to 45, and it could also win an indication for boys 9 to 18. On top of that there is a huge opportunity outside the US. Put all that together, and Gardasil could reach total sales of $4-5 billion.”
Another potential multi-billion dollar product is Januvia, the first in a new class of oral antidiabetics. Rubin adds that these products, as well as others, were developed by Merck, not acquired. So given the length of time it takes to bring drugs to market, does that mean that Richard Clark, the current CEO, just got lucky, and that credit should go to Raymond Gilmartin, his Vioxx-axed predecessor? No, she says with some emphasis. While it's true that timing is everything, it was Clark who set fire under the company, aggressively cut costs, and set very ambitious goals which he then exceeded. And credit must go to Peter Kim, who attracted talent from other companies as president of Merck Research Laboratories. But then she concedes, “If Ray Gilmartin had stuck around another two years, it would certainly have improved his rep.”
Joining Merck in the winners' circle is a company that recently was considered to be in trouble: Schering-Plough.
Hopeful sign number one is that Schering is not facing any blockbuster patent expirations until 2016. More important is the continued strong growth of its marketed products, on top of which it will soon add Organon's healthy pipeline. It all leads Rubin to anticipate that Schering will grow well above the industry average for the next eight years.
The Schering/Organon merger is expected to be completed by the end of this year, and the deal includes two products with huge potential. One is sugammadex, an agent to reverse neuromuscular blockade in surgery. The other is asenapine, a new antipsychotic for the treatment of schizophrenia and bipolar disease.
Coping with a harsher FDA
To put Merck's achievement in context, consider the parallel experience of Wyeth, which has a lot of products awaiting approval, but has not been able to get them past what Rubin refers to as a more risk-averse, “harsher” FDA. While most of the Wyeth candidates are me-too drugs, Merck was able not only to develop an amazing number of innovative potential top performers, but to navigate a tough regulatory environment.
Which leads to the next question: What is likely to happen to the regulatory climate? Answer: It will probably get worse…if it's possible for it to get any worse. FDA has become increasingly unpredictable, pulling drugs off the market for no reason anyone can figure out. They took Zelnorm off for cardiovascular side effects that were already covered in the package insert—and then put it back. Furthermore, a new president of either party is likely to want to choose a new commissioner, adding another element of uncertainty. It also appears that FDA is making decisions based on relative efficacy, asking for evidence that products under review are an improvement over what's already on the market. “And that,” asserts Rubin, “is not their role.” The resulting trend is that drugs are getting approved much more slowly in the US than in Europe. Hurt by the political fallout after Vioxx, the agency is frankly scared, and finds it easier to say no than yes. On the other hand, Rubin doesn't see PDUFA-IV as having much of an impact, since companies had already begun to spend more money on post-marketing safety studies. Eventually, she predicts hopefully, the pendulum will swing back. Once consumers start to complain, Congress will get on FDA's back about approval delays, and the cycle will start over again.
A problem to wish for
Asked about the likelihood of headline-making mergers in 2008, Rubin points to a paradox. The major pharmaceutical companies are sitting on a net cash position of $29 billion, a nest egg poised to grow to $127 billion by 2011. So what are they going to do with all that cash? Spending it to acquire or merge with other companies would seem like a logical solution, but it hasn't happened. It makes Rubin wonder how seriously company CEOs take the coming wave of patent expirations. Two factors may offer an explanation. One is that there simply are not many M&A candidates left. All the obvious ones—the Upjohns, the Pharmacias, the Genentechs, and most recently Organon—have been snapped up. The other is that the historical track record of industry mergers has been mixed at best. Take Pfizer's recent history, acquiring Esperion at a cost of $1 billion, plus paying $2 billion for Vicuron. Now comes the Exubera disaster. First Pfizer paid $1.3 billion for Sanofi's European rights to the drug; then just this October it gave up on Exubera altogether, taking, after two unsuccessful years, an additional $2.8 billion charge. Rubin calls it “a shocking example of terrible capital allocation.”
Acknowledging that Lilly's acquisition of ICOS looks set to be a home run, Rubin doubts that we will see large-scale mergers any time soon, and she doesn't believe that Sanofi's acquisition of Bristol Myers-Squibb will ever go through. The buying binge that created the largest companies in the industry—Pfizer and Sanofi—proved unsuccessful for both, she notes. Instead, she anticipates smaller company deals, as well as additional specific product development partnerships. “I was optimistic in late 2005,” she sums up. “Now, with the pending election and massive patent expirations, I'm a little less optimistic on the whole, but some companies will continue to do very well.”