Pharma TBTF

We’ve been wondering what Pharma’s gonna do when the patents expire (NYT article, here. )

Answer: nothing.

Or rather, sit around and wait for a bail out.

And some say they’re going to M&A their way out of it. Bad idea!



Backing up, what’s the problem?

Answer:  All these great zillion dollar drugs are going off patent, like, soon.

Question: How did it happen, that all these once gushing pipelines went dry all at once?

We have an answer, explained using the following chart:



Click on it if you can’t see it clearly.

1989 was  the year Madonna filed for divorce from Sean Penn, and right about the same time, that first batch of blockbuster patents was filed by all those pharmas at the bottom of the chart, (Warner Lambert and lipitor, to name the most noteworthy).

Now, 20+ years later, Sean Penn is off to Haiti with Charlie Sheen, and most of those early patents are expired or coming up for expiration. But, more importantly, look at the top of the lineage — there are a handful of pharmas (less now, if one were to update it).

Pharma has now set itself up to be too big to fail.

Hence, the empty pipelines. Why bother inventing if you can just get the government to give you a handout? (More below).

So, why did the industry shake out like this?

And, we remember meetings from some time ago where corporate pharma schmoos sat around playing 2+2=5, in trying to figure out which merger would place them above some other company in terms of market cap.

It’s not that these M&A’s weren’t reviewed for anti-competitive effect under Hart-Scott-Rodino (and your loyal bloggist did plenty of the HSR analyses for all sorts of permutations not on that chart, that never happened).

No, the FTC  missed the forest for the trees. Horizontal mergers were analyzed in light of reducing competition in relevant markets defined by individual therapeutic markets, rather than in the pharma market as a whole. They didn’t see that reducing the number of players resulted in reducing competition, and innovation.

The focus was on efficiencies, Chicago school style. Why have 2 departments for clinical trials? Buy the company, make one department, remove inefficiencies, and everyone is more competitive and drugs cost less.

Except that’s not what happened.

So, a first bail out in the FTC turning a blind eye to antitrust/anticompetition concerns, and now a second bail out.

This second one will probably be in the form of patent term extensions or data exclusivity extensions, same difference, really.   And, there’s raising the bar on biosimilars, as protection against biological generics. The Supreme Court has already declined to review the pay-for-delay case, so a pharma can pay a generic to not come on the market, just like the government pays farmers not to grow stuff. It’s a subsidy.  It’s a government handout in the form of laws designed to prop up premium pricing for those who did nothing but sit around, quashing innovation, and practicing (in our view) a sloppy version of control fraud.

So, we’re calling it like we see it: Bail out.   This is governmental monopoly-pricing protection.

Color me socialist, but as with any taxpayer corporate welfare, the taxpayer should have as say as to what happens next.  Of course, we volunteer for any and all of these positions. We’re very comfortable in swivel chairs, particularly those big cushy ones in board rooms.

Our first item of business would be to immediately vote to undo all the M&A that went on during the past 10-15 years, and revive the 25-30 pharmas that there used to be. We’d immediately undo large portions of the companies, and combine them with smaller companies, but always limited in size so that the top 75% of the pharma market as a whole isn’t concentrated in just a handful of firms.

Some claim that none of this matters because Medicare reimbursement is the biggest force behind innovation.

No,  from where we sit, that puts the cart before the horse. If there were competition to begin with, Medicare reimbursement wouldn’t be the biggest financial incentive. It would be gaining market share/opening new markets.

Others have noted that the M&A trend results in magnified failures, that is, there’s lots of good ideas in the lab, but when you get behind the power point in the conference room, they’re always NPV zero, or anything under $100MM doesn’t cut it (that’s changing now).  It’s the law of big numbers, and if you’re a big company, then a $100MM is not material.

Now, we actually like the ginormous profits. Think about trying to start a drug company. You need a billion dollars for 10 years (if you’re lucky). Who’s gonna give you that? No one if your stuff can be copied. So we understand the patent/profit element.  But, you can’t throw logs in the road against competition forever.  The whole point of patent law — promoting innovation — is turned on its head when you keep rolling over the patent term (or, in the drug industry, data exclusivity). 

Nor do we think price supports are the answer. Pharma Jeopardy! Canadian drugs for $200: Answer is, “nothing.”  The Question? What’s the last lifesaving drug that’s come out of Canada (with the Patented Medicine Price Review Board). They rely on US R&D and then don’t want to chip in to pay for it. (Sorry Canada but all this reimportation nonsense is really a scam.) Speaking of those durn furners stealin’ our jobs, we’d also like to make Puerto Rico a state, and get off the 936/transfer pricing economy. Isn’t there some way to replace the jobs in Puerto Rico and move the finish and fill out of hurricane zones, and repatriate some of the corporate taxes?

Sorry for the digression. Back on point: Now that pharma is TBTF, what does it do?

It cooks up schemes to milk as much money as possible out of existing drug profits.

This is why we’re seeing all the qui tams for off label promotion, dirty factories, low budget third world clinical trials, product recalls. Just read the news, and that’s only the ones who are caught.