If you’re in the market for a whipping boy there are few options more readily available than the pharmaceutical industry. You take a couple corporate behemoths, point out their combined scandals ranging from pushing opiates to up-charging for critical treatments, and eventually, you have a universally assailable target. I get it. Pharma sucks. But guess what? So does every other industry. Dig long enough and you will find some fatal flaw no matter where you look. This is all to say that this post is not about taking a moral stance vis-à-vis the practices of pharma.
Instead, we’re going to talk about the business of pharma.
The pharmaceutical industry consists of two types of companies: the big boys, and the biotechs. The big boys are the household names of Johnson & Johnson, Novartis, Bristol Myers Squibb, Pfizer, etc… These firms – as the category name suggests – are big. They make the pharmaceutical world go round thanks to their scale and resources. If you want to get a non-small cell lung cancer treatment option into the market, you need the dollars and workforce that a big boy can provide.
With the biotechs, the story is drastically different. These firms are the pharmaceutical equivalent of exploration companies in the mining sector – they are looking for gold mines. These firms start with a leadership team that consists of a few scientists and physicians who have a hunch or decent idea. This can, for example, take the form of a given delivery vehicle that could be utilized for a single treatment option. The real gold mine is when a biotech can apply their product to a single disease state but then quickly tackle many via slight changes. You can think of it like a screwdriver with changeable heads for increased utility. You save on development costs while capturing similar revenue down the line – assuming everything goes all hunky dory.
Biotechs do not typically want to become big boys. What you have is a leadership team with a finite number of decent ideas. They go out and raise capital in private and junior-public markets to fund discovery efforts along with the first clinical trial stages. If they can get past a phase 1a or 1b trial on their own, then typically they will go out to look for a big boy to ‘partner’ with them. These partnerships take the form of a Pfizer entering into a development agreement to fund clinical trials so long as the results remain positive. An example of this would be MeiraGTx partnering with Janssen over the development of gene therapies aimed at the Inherited Retinal Disease (IRD) space.
If you are a biotech all you want in life is for one of the big boys to fund your trials and pay your newly acquired fat salary while boosting equity valuation. It sounds like this should be a rather straight forward endeavor but in practice, it is exceptionally difficult to pull off. For example, AGTC’s share price has gone from above $27 in 2014 to $0.28 these days due to an inability to translate ideas into partnerships. To kick the AGTC horse again, their stock is down over 98% since their IPO. It’s a tough business but hey, risk is the possibility of good or bad shit happening to you. If you want to make it big you gotta wager that you might equally end up in the gutter.
With biotechs, the business development trajectory is rather straightforward. Either your idea is good or it’s shit – as will come out in the clinical trial efforts. On the other side of the spectrum, the big boys play in a different manner.
If you are a bona fide member of the big pharma club you are not in the business of finding miracle cures. Instead, you are in the business of finding the right biotech to partner with and then carry their ideas into market. Think of the Pfizer-BioNTech covid vaccine partnership. Pfizer brought the resources, BioNTech brought the product.
But what types of products are the big firms interested in? Well, there are a few key characteristics that make for a good opportunity: patent protection, limited to no competition, cross indication applicability, and a large enough (or desperate enough) patient population.
Let’s take the aforementioned IRD space as an example. The MeiraGTx and AGTC potential offerings both look to tackle X-Linked Retinitis Pigmentosa (XLRP). XLRP is a type of genetically induced blindness. There is currently no existing treatment option for the disease meaning there’s no incumbent to disrupt.
Any XLRP treatment option will be covered under patents for their regulatorily defined periods so that checks the first box. In terms of competition, the AGTC and MeiraGTx clinical trials are the most advanced with few direct competitors rising up in the space – box two checked. What makes any gene therapy vehicle in the IRD space potentially lucrative is that the retina is complex enough that treatment options that work for it ought to be rather easily applicable elsewhere. Basically, if it works at the retina it can work in multiple other body locales. Therefore, efforts in this space aren’t just about treating this one niche condition.
And lastly, the population is large enough – with 200 new patients in advanced economies per year (p.7) – that at a $500,000 or more price tag there are decent recurring revenue opportunities. It helps that this disease causes blindness since it is quite hard to find anyone who wouldn’t pay any price in order to see. Thus, the IRD space is quintessentially characteristic of a field that large pharmaceutical companies want to target.
However, as you can imagine it’s not quite as straightforward as the last few paragraphs would have you believe. Why? Because there’s nothing pharma hates more than seeing a competitor make a profit.
Let’s look at Regeneron and Bayer’s Eylea product, which primarily targets age-related macular degeneration. Last year the drug brought in around $9.2-billion in revenue – an absolute blockbuster in the pharma world. Understandably, this level of success has led to competing efforts to grab a slice of that pie. One of the direct competitors is Roche’s Vabysmo.
The level of competition between the two offerings was visible at this month’s American Academy of Ophthalmology (AAO) conference where the two brands had massive booths, large salesforces, and print ads on every available surface onsite. Eylea even went a step further and had transport vans with screens on each side illegally parked outside the convention location in Chicago racking up parking tickets. Hell, the brand seemed to have paid Uber drivers in the area to wrap their vehicles in advertising content to rep the brand as they pick up riders at the convention center all weekend.
Eylea is attempting to maintain market share while the Vabysmo folks are looking to convert doctors into writing prescriptions for them. This may come as somewhat concerning to the average person since you would assume that physicians only prescribe drugs based on what their professional opinion tells them is the best option but it’s more complicated than that. It is not that physicians are complete corporate shills. Instead, each brand has its talking points as to why they are better than the competition. The talking points typically come down to differences in adverse events or ease of treatment. Eyes closed, they’re the same, but the talking points seek to differentiate the two in the eyes of physicians. It’s not about being different it’s about being perceived as different.
Sticking with the theme of healthcare conventions for a second. You can see the entire pharmaceutical business model from walking around a convention. Not every brand – and not even every big brand – will send a team to a given specialty’s convention. Instead, they send the brands that are capable of generating outsized profits. Hence why Eylea and Vabysmo went hard at the AAO. Additionally, you’ll find brands that are looking to increase prescriptions by broadening the prescriber base.
Increasingly, profit opportunities are found in treating more and more niche conditions. However, the niche nature of said conditions means that only a subset of specialists deals with the diseases on a regular basis. When a treatment option comes out, it is these specialists who prescribe the drug first. However, there are only so many specialists available to diagnose patients. So how do you boost your quarterlies? Great question.
What happens in pharma land is that brands will pile in a great deal of money to educate non-specialists (i.e. generalists) on how to diagnose and treat the disease state that their drug treats.
As an example – sticking with the eye folks – you can look at a brand like Tepezza that treats Thyroid Eye Disease (TED). TED is a relatively rare disease that traditionally would require an endocrinologist, neuro-ophthalmologist, and other specialists to come together to diagnose. What Tepezza wants to do – as the only FDA-approved treatment option – is eliminate the need for several specialists collaborating to make a diagnosis and instead give the general ophthalmologist enough information to – with specialist input when needed – diagnose and treat their patients suffering with TED.
It's this educational push to expand the prescriber base that explains why Tepezza got an Eylea-sized both at AAO this year, sponsored a ‘charging station,’ and hung-up printed material all over the McCormick Center.
Just to cover all bases here, the reason why most brands in a treatment category are not present at a given specialty’s convention is that there is a finite window of profitability for drugs that limit their abilities to justify the cost of having a large presence and workforce at an event.
Over time, competition and patent expiration eliminate the out-sized profits. For anyone who has taken intro-economics, you would recognize that under conditions of perfect or near-perfect competition marginal revenue equals marginal cost which equals the price. In short, if a drug is no longer shitting out golden eggs, then you cannot be in the business of promoting it in any meaningful sense.
What’s the level of effort that these brands put into capturing a glimmer of attention from physicians? Well, according to preliminary numbers, the AAO (it happened last weekend which is why it’s top of mind) estimated that 6,773 US-based healthcare practitioners attended their event as compared to 5,367 exhibitor representatives – a ratio of 0.8 reps per doctor. My estimate is that 95% of reps are at their booths at any one time while maybe 3% of physicians are in the exhibition hall meaning that there are around 5,098 reps chasing 203 doctors at a given moment. This would carry a real rep-to-doc ratio of 25:1 which means that pharma reps are basically the professional equivalent of ugly men on Tinder.
So, let’s summarize this bad boy. The pharmaceutical industry consists of biotechs and large firms. The biotechs want to survive long enough to receive partnerships with the big boys. The big boys want to find biotechs with products that will be successful while also presenting opportunities for outsized profits. The profits come from being one of the first options to treat a large/desperate patient population. If there is only one treatment option, then the focus is on expanding prescriber numbers to maximize revenues.
If there is competition in a space then it is all about maintaining market share for as long as possible before prices drop to such a level as to destroy profits. All other activities are superfluous to the overall objective of piling up fat stacks.
If you want to understand the business of pharma then you have to grapple with the realities of the previous two paragraphs. It’s not about what a firm does today, but what they are doing to capture the pipeline in new verticals or fend off/dominate the competition in an immensely lucrative category for as long as possible. Pharmaceutical companies put their promotional efforts into a select number of brands for a reason – it’s because they are the ones who drive the bottom line everything else is just filler.