Welcome back from the Labor day break. I’m still working on re-establishing my site, so please keep your browser pointed at thehealthcareblog.com and in the meantime I’ll keep posting! When it’s safe to go back to matthewholt.net I’ll let you know here!

So a funny thing has been happening in  the small and medium cap Biotech market. (And by that I’m lumping in virtually any company that is developing pharma products but doesn’t sell them yet).  After getting somewhat swept up in the dotcom fever of 1999 and early 2000. Biotech’s woes grew over the next two years, and by the time of the Iraq war several small biotech companies were selling for close to the value of their cash on hand. Now the Burrils Biotech Indicies have all shot skywards for this year. In particular their Select biotech index is up over 55% (to end July) compared to the NASDAQ’s 33% improvement so far in 2003. The small cap biotech market which tracked by the Burrils index was 84 at the end of 2002 and fell to 68 (down 18%) by the end of February as war loomed. It was 113 at the end of July, up 34% on the year and up roughly 66% since its war-induced lows. Finally we are beginning to see possible signs of life in the Biotech IPO market. For instance Cancervax filed for an IPO in mid-July, albeit selling some insurance stock to current investors in case it doesn’t get out the door.

This tells you a couple of things.  Given that the science hasn’t changed too much in 7 short months, this market remains very, very volatile.  After all , we’re talking about a market for drugs that usually have several years of testing to go through before they are ready for the nod from the FDA. But it also tells you that at least some investors believe that there will be a market for these new and usually very expensive drugs in the medium-term future. So while the major pharmaceutical companies continue to have their problems, the pipeline of new biotech offerings looks to be in good enough financial shape that the rest of the healthcare system will be getting the benefits, and of course the costs, of these drugs in years to come!

And in the interests of full disclosure, I own stock in one small-cap biotech company Pain Therapeutics (PTIE).  I just wish I’d bought a hell of a lot more back in March!

When I got into health care one of the big fusses was whether Genentech’s Activase (TPA) was more effective than Streptokinase in clot-busting immediately after heart attacks. You may recall that in the late 1980s Genetech made its name and fortune on the back of the fact that a huge clinical trial evidenced that Activase saved 2 more lives per thousand incidentsat a cost of ten times the amount. While the health service researchers amongst us thought that this was a huge price to pay for a few incremental lives saved, a combination of aggressive marketing by Genentech, ER docs wanting the best outcomes (and being fearful of malpractice lawyers, some of whom showed up on briefings from Genentech detailers) and insurers OKing the bills mean that it became the treatment of choice and a $250m drug by the early 1990s.  It’s still around that level of sales ten years later.

NEJM has a danish study this morning that shows that acute angioplasty has better outcomes than clot-busting drugs by a factor of more than 2:1 and nearly 4:1 for stopping repeat MIs within 30 days. So can we expect a massive increase in angioplasty and a decrease in clot-buster use?  And if not, can we not also expect an increase in suits against hospitals using clot-busters instead of angioplasty?

Today’s NYT has an article (Reg Reqd) pointing out how vulnerable the PPI (ant–ulcer/anti-heartburn) drug market is to the oncoming generic versions of Prilosec.  Prilosec has been about the most successful drug in history (somewhere around $6 bn a year at its height) and catapulted Astra-Zeneca into the first rank of pharma companies.  They’ve also successfully switched their marketing focus to consumers and doctors over to its successor drug, Nexium, including moving the "purplepill" website. The Times reports that generic makers including division of Novartis and of P&G are going to come after the markets of Nexium, Protonix and the rest with generic Prilosec, and it’ll cost 1/5th the price. Wellpoint, the health plan which successfully got the FDA to agree to move Claritin and its allergy competitors to OTC status, is already planning to move as many of its members as it can to the generic Prilosec.

This is beginning to remind me of the early 1990s when there were few new blockbusters, and many old ones, including the first PPIs Zantac and Tagamet,  were coming off patent. Some companies then tried to manage a "brand to OTC" strategy, such as Syntex with the brand (Naproxen) that is now the OTC drug Alleve.  Syntex found that the sales for the brand fell off a cliff rather than rolled down a slope (and part of the result was their being swallowed by Roche). Then as now drug companies were concerned about the impact of a big new government program, and their stock prices were at bigtime lows. Look at this chart of Merck’s historic price and compare the 1992-94 dip to the one in the last 2 years)

However, overall drug companies have continued to be remarkably successful in both delaying the introduction of generics, albeit by using loopholes that have been partially closed, and at convincing doctors not to bite the hand that feeds them, even though some say they want to. What really will make the difference in their future is the next set of blockbusters.

You can historically look at parts of health care where drugs have replaced hospitalization. For instance anti-biotics replaced TB Sanatoriums, which represented some 30% of health care spending in the 1920s and 1930s, and indeed the first PPIs essentially replaced ulcer surgery. You can also argue that the statins are doing a pre-emptive strike on heart surgery rates in 10-20 years time.  But with no imminent blockbuster class on the near horizon, big pharma is scrambling to discover which part of today’s health care system they’re going to replace with a pill, or which unrecognized "disease" they can convince people they can cure (think Viagra).  Because that’s the road to another stock run-up as we saw in the late 1990s. I don’t think it will be as easy for them this time, but don’t write this industry off!

My now defunct dotcom i-Beacon was buried deep in the Rx market research space (and, yes, the pun is deliberate). A new report from Cutting Edge Information suggests that we were onto something. (The report summary/ad piece is here, but if you want the whole thing you need the odd $5,000). An average of $26 million on market research is spent per drug over its life, with over 70% of that spent post-launch.  Assuming that you can triple those numbers for a blockbuster of $1 billion, and again assume that most of that is spent in the first two years, a reasonable guestimate is that a new blockbuster has $30-40m spent on market research annually, which is roughly 30% of what is spent on consumer advertising for a similar drug and probably only 10-15% of what’s spent on marketing to doctors.  All in all you can understand why the pharma business is so critical for market research companies.  We used to estimate that that the whole market research and sales data market totalled $1.2 billion in the US compared to something like $8-12 billion spent on marketing and sales teams (of roughly a $100 billion market).