Don’t ask if there’s a biotech bubble. Ask why we have another bubble.

Summary: Powerful trends occur when multiple waves combine. So it is with the biotech bubble, where our inability to learn about our out-of-control financial sector meets the grifter economy. The results will be spectacular, and typical of our time — powerful benefits to society manipulated to produce massive profits for the 1%. As you read this remember that it need not be this way.

This is a follow-up to Economics gets interesting as the economy darkens while stocks bubble. {2nd of 2 posts today.}

Back to the Future


  1. The dream machine
  2. About the profits of Big Pharma
  3. The grifter economy
  4. About the patent cliff
  5. The slowdown in drug discovery
  6. Conclusion
  7. For More Information

(1)  The dream machine

Credit Suisse published a report about the biotech industry with deserves attention. Here is a brief excerpt.

Biotech Has Been the Best Performing Sector For 5 Years In a Row – No Sector Has Ever Done That!

Given the unprecedented performance in the biotech sector – are we in a “biotech bubble”? We are in completely unprecedented times for the stock performance of the biotech sector:

  • Since 1/1/2011 the BTK {NYSE Biotech Index} has delivered 204% performance vs. 64% for the S&P500. The BTK is up nearly 400% since the previous peak reached during the mother of all bull markets, i.e. the dotcom fuelled 1999/2000 frenzy. The cumulative market cap of the 5 large caps is $513B currently up from $128B at the beginning of 2011 (and $82B at the beginning of 2001);
  • Biotech was the top performing sector for the last 5 years – 2011-2015;
  • The number of IPO’s in 2014 (82 IPOs) has eclipsed the previous peak (67 IPOs) in 2000. There have been 12 IPOs YTD; (d) Multi $B valuations for SMID caps are now the norm. There are currently 44 public biotechs with >$2B market caps (outside the 5 large caps), 1 year ago there were only 26 and in 2011 just 14.

The success of large cap biotech has been due to a fundamental shift from Biotech 1.0 to 2.0. … It’s the cool science baby:

Another potential argument supporting biotech valuation is along the lines that all the cool science is in biotech: CAR-T, RNAi, gene therapy, stem cells, Egg precursor, etc. These technologies are unquestionably super-scientifically interesting, but FYI none of them are new per se with the genesis of these technologies frequently going back to more than 20 years ago (again, EggPC is the baby here, pun intended).

… What certainly is true, is that our scientific understanding of each of these technologies has massively improved and with it the ability to make the technologies “drug-able”. Combine this with the above mentioned ability of these companies to finance through equity markets (and thus retain the value of any oil well gushing vs. giving the value to the proverbial sugar-daddy of pharma) and the market enthusiasm (aka valuation) of “cutting-edge” biotech is understandable.

My guess is that this is bubble will end like the tech bubble. Late to the party investors will get toasted, the technology will fulfill the boosters’ dreams only but far later than they expected, and this report will go to the same file as the equally (i.e., very) well-researched exhaustive reports of 1999. It’s founded on dreams of the future based on a few years of good results from the drug R&D pipeline (after a long drought).

On a deeper level it results from a misunderstanding of the business. The genius of Big Pharm is how they have offloaded much of the immense R&D risk onto investors in biotech stocks — while they exploit our mad health care system to siphon vast profits from the productive economy. It’s the classic outsized middle–man profits seen in degenerate societies.

Here we take a brief look at both trends.

Test tubes

(2) About the profits of Big Pharma

The skyrocketing profits of drug companies do not result from blockbuster innovations. In fact the opposite is true. During the past decade there have been scores of articles about “A Dearth in Innovation for Key Drugs” (New York Times) — Excerpt:

There is clearly something wrong with pharmaceutical innovation. … No major new type of antibiotic has been developed since the late 1980s, according to the W.H.O. From 2011 to 2013, the Food and Drug Administration approved only three new molecular entities to combat bacterial diseases — the lowest rate since the 1940s. “No sane company will develop the next antibiotic,” said Michael S. Kinch, who led a team at the Yale Center for Molecular Discovery tracking the evolution of pharmaceutical innovation over the last two centuries. … And this is hardly the drug industry’s only problem. Antibiotics, Professor Kinch told me, “are the canary in the coal mine.”

This is particularly striking at a time when the pharmaceutical industry is unusually optimistic about the future of medical innovation. … The pipeline today, which includes tailored treatments for cancer, newfangled vaccines and therapies for tough diseases like hepatitis C, is robust. So far this decade, the F.D.A. has approved drugs at a pace second only to the 1990s. In 2012, the FDA approved 37 new drugs, the most in 15 years.

… pharmaceutical and biotechnology firms are betting on personalized therapies — mostly targeting specific varieties of cancers — and drugs for so-called orphan diseases, which affect very small populations. “More people are studying orphan diseases than have orphan diseases,” Professor Kinch said jokingly. Of the new drugs that the F.D.A. approved in 2013, about 70% were specialty drugs — which are used by less than 1% of the population, according to the drug benefits manager Express Scripts.

… They receive expedited approval from the F.D.A. Clinical trials are inherently less expensive because the drugs are aimed at a small population. And insurance companies are willing to pay $100,000 a year for a drug that few patients will use. “Companies are flocking to rare diseases,” said John LaMattina, a former head of research at Pfizer who now writes a blog about pharmaceutical research. “They might only make $500 million in sales a year, but their costs are much lower.”

Similar considerations have pushed pharmaceutical companies into newfangled biological drugs at the expense of old-fashioned compounds. Standard brand-name drugs lose 80 percent of the market within a year of patent expiration. Biologicals face much less generic competition, protected both by regulation and the fact that it is tough to determine the equivalency of different biological agents.

The wave of protests over the $84,000 cost per course of Gilead’s blockbuster new drug to treat hepatitis C, Sovaldi, highlights the kind of strain that can be caused when mass market therapies are priced like niche specialty drugs.

Being the NY Times, they only lightly touch on the underlying profiteering of Big Pharma. Others are not so reticent.

Griftopia by Matt Taibbi
Available on Amazon.

(3)  The grifter economy: pharmaceutical division

Profits are high in the socialized economy of drugs. It’s the anti-libertarian world, where profits from government protections (patents) and revenue comes from a cartel of government (half of spending) and insurance companies. It’s difficult to exaggerate the greed and lawbreaking that power Big Pharma. Here’s a brief look at the system: “Pharmaceutical industry gets high on fat profits“, BBC, 6 November 2014 — Excerpt:

Imagine an industry that generates higher profit margins than any other and is no stranger to multi-billion dollar fines for malpractice. Throw in widespread accusations of collusion and over-charging, and banking no doubt springs to mind.

… With some drugs costing upwards of $100,000 for a full course, and with the cost of manufacturing just a tiny fraction of this, it’s not hard to see why. Last year, 100 leading oncologists from around the world wrote an open letter in the journal Blood calling for a reduction in the price of cancer drugs.

… Drug companies justify the high prices they charge by arguing that their research and development (R&D) costs are huge. On average, only three in 10 drugs launched are profitable, with one of those going on to be a blockbuster with $1bn-plus revenues a year. Many more do not even make it to market.

But as the table below shows, drug companies spend far more on marketing drugs – in some cases twice as much – than on developing them. And besides, profit margins take into account R&D costs.

This is the first in a two-part series on pharmaceutical companies. The second looks at how and why fundamental change will take place in the industry.

One aspect of the unfree market of drugs: advertising to consumers (where they don’t pay for the product), as explained by Stewart Lyman (Lyman BioPharma Consulting):

Data compiled by CMR International and IMS Health show that while drug sales increased nearly 2.5 fold from 1997 to 2007, the number of new drug approvals dropped nearly by half. The increase in drug sales paralleled the nearly 300 percent increase in direct-to-consumer prescription drug advertising from 1997-2005, according to the Government Accountability Office. Prescription drug advertising dollars, once unshackled for television in 1997, went primarily to promote new drugs with the longest patent lives. … The equations here are pretty simple. More spending on direct-to-consumer prescription advertising has generated more sales.

For more about this see The Guardian’s “The real reason drugs cost so much – and why big pharma is so rich – The lack of a free market makes drugs very expensive, and increasing market consolidation will exacerbate the problem.

(4)  About the patent cliff

A common myth is the “patent cliff”: that drug companies profits vaporize after their patents expire. “EvaluatePharma’s consensus forecast data reveals that equity analysts expect only 36% of the sales at risk of generic erosion in 2015 actually to be lost.”  (source: Vantage). Big Pharma have learned to game the system, creating minor improvements that generate new parents — with advertising to doctors and patients to block consideration of cost effectiveness. The industry would not last a year if everyone adopted Kaiser Permanente’s pharmaceutical purchasing policies (e.g., not salespeople allowed in to see doctors).

For more details see the New York Times’ “Rapid Price Increases for Some Generic Drugs Catch Users by Surprise“.

Fixing the Gap

(5)  About the slowdown in drug discovery

The biotech boom is odd given concern about the drug innovation slowdown. I highly recommended this explanation: “How to improve R&D productivity: the pharmaceutical industry’s grand challenge“, Steven M. Paul et al, Nature Reviews Drug Discovery, March 2010

A key aspect of this problem is the decreasing number of truly innovative new medicines approved by the US Food and Drug Administration (FDA) and other major regulatory bodies around the world over the past 5 years (in which 50% fewer new molecular entities (NMEs) were approved compared with the previous 5 years).

In 2007, for example, only 19 NMEs (including biologics) were approved by the FDA, the fewest number of NMEs approved since 1983, and the number rose only slightly to 21 in 2008. Of the 21 new drugs approved by the FDA in 2008, only 6 were developed by the 15 largest pharmaceutical companies and only 29% would be considered ‘first-in-class’ medicines. In 2009, 24 new drugs were approved, 10 of which were developed by large pharmaceutical companies and only 17% of which could be considered first-in-class.

Some have argued that the number of approved ‘mechanistically innovative’ and first-in-class NMEs have remained stable at about 5–6 per year. However, the number of potential revenue-generating drugs (innovative or otherwise) as a percentage of R&D expenditures has undeniably fallen sharply.

Also see “Integrative approach in the era of failing drug discovery and development“, Keehyun Earma and Yung E. Earmb, Integrative Medicine Research, December 2014. For more on the odds of successful drug development see this post.

Reform Button

(6)  Conclusion

Three of our most profitable sectors — education, defense and health care — show America evolving into a grifter economy, where our elites exploit their political power to extract “rents” from the rest of us. It’s the natural result of growing inequality, with wealth and income concentrating in the 1%. Of course they use their strength to future increase their power. It’s the great circle of life in action.

It need not be like this. The Founder’s machinery lies idle, but will generate self-government — but we’re the power source. Our time, effort and money — risking much — are the only means to produce liberty and prosperity. We’ve forgotten that, but can remember. For details see all posts about Reforming America: steps to political change.

(7)  For More Information

If you liked this post, like us on Facebook and follow us on Twitter. See all posts about our health care system, especially The core truth about our mad health care system, and What does the health care debate reveal about us, and our future?

See all posts about financial bubbles, and especially these:

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