In conversation with Jason Kolbert
As head of healthcare research and as the senior biotechnology analyst with Maxim Group, Jason Kolbert has worked extensively in the healthcare sector. This includes pharma experience with Schering-Plough in Japan, as a fund manager and as an equity analyst for the past 20 years. Prior to joining Maxim, he spent seven years at Susquehanna International Group, where he managed a healthcare fund, and later founded Susquehanna’s sell-side biotechnology team. Jason began his career as a healthcare associate and analyst for Salomon Smith Barney. He is frequently quoted in Barron’s and is regularly featured on CNBC. In this interview with BioTuesdays, Mr. Kolbert discusses topical issues affecting biotech and pharma.
What topics are hot in biotech these days?
At the top of the list are the presidential cycle and its impact on innovation and valuations. This is the one topic that fund managers we interact with have been talking about for months. Another important topic is the data trough in terms of pivotal trial readouts and how it has contributed to the recent weakness in the sector.
Let’s begin with the presidential cycle.
It was very clear to me that Hilary would not have been a positive force for the pharmaceutical industry. Donald Trump, on the other hand, regardless of what you think of his personal character, is clearly pro-business. He fully understands things like offshore manufacturing, lower tax rates and financial incentives. In a Trump presidency, biotech and pharma industries should benefit and there is reason to believe that valuations will rally. We expect the outcome of this election to have a lasting impact on valuations and innovations, with things like R&D tax credits having an important long-term impact on company pipelines and productivity.
What impact does innovation have on healthcare costs?
Innovation in pharma is not completely understood in terms of its impact in actually lowering the cost of health care. New product innovation often translates into better outcomes and better long-term productivity for patients, and less in-hospital time. Historically, new drugs ultimately lower the cost of health care. While we hear a lot of commentary about expensive new therapies to treat things like cancer, the reality is that there is a natural mechanism in place by which the cost of these therapies goes down because, in a very competitive environment, second and third generation versions of those drugs reduce prices.
Of course, there have been abuses of the system, as in the case of Mylan and EpiPen. There is no question that when pharma companies manage a product life cycle and rapidly increase the price of an existing product, what they’re doing is taking advantage of a weak system. However, there is still a government system in place to review generics and we have not seen a generic version of EpiPen, even though there are companies like Adamis Pharmaceuticals that are waiting for FDA approval of their versions of a generic EpiPen. So I think that a more efficient government focus on natural mechanisms now in place would be a better way to have cost controls without sacrificing innovation. In a Trump presidency, I believe this natural mechanism will become more effective.
Can you elaborate on the weakness of valuations in the sector?
After five years of outperformance, the biotechnology indexes have now underperformed the general market. After reaching its peak in July 2015, the NASDAQ Biotechnology Index (NBI) began to decline for the balance of last year and into 2016. In 2015, the NBI gained 56% by July, while in June 2016, the index was at minus 5.4%. Although the index has been gradually improving since its June low, it may be some time before previous highs can be recaptured.
A part of the recent weakness in the sector has been caused by concerns for more government intervention, price controls and more aggressive legislation that support generics and biogenerics under a Clinton administration. For example, the trigger may well have been a Clinton campaign ad titled, Predatory, which depicted an 800% price hike for one of Valeant Pharmaceuticals’ drugs, DHE, used for the treatment of migraines. The cost of therapy with DHE, which went generic in 2003, increased from $180 for 10 injections in the 1980s, to $14,700 for the same quantity under Valeant. Plus, there was the Turing Pharmaceuticals acquisition of Daraprim, a medication used to treat parasitic infections listed on the World Health Organization’s List of Essential Medicines Turing increased the price per pill by 5,500%, to $750 from $13.50.
How did this happen? There is supposed to be natural competition in the marketplace as multiple generics compete for market share; however, the process for approval of generic medicines has itself created barriers that slow progression of generic competition in the market, which allows a single source product to inflate prices. One solution could be more generic competition, coupled with more clarity on the approval pathway for generics.
What’s the impact of the data trough on valuations?
We haven’t seen a lot of data in 2016 or the data that we have seen has been disappointing. This has prompted portfolio managers to exit the space as they look for other sectors that are under performing or are momentum driven. Biotech is momentum driven and right now, the momentum is negative.
For the most part, we’re seeing large cap pharma and large cap biotech having trouble with tougher comparisons this year. Take Gilead, for example. It’s a great company and the stock effectively doubled from late 2013 through 2015 on the introduction of Gilead’s hepatitis C pill, Solvaldi/Harvoni. But the Street is sending the stock down because the company has hit its high water mark and is facing tougher comparisons this year. The law of big numbers is catching up with companies like Gilead; as revenue and profit jump, it becomes more difficult to grow. So Gilead either has to make acquisitions or push their internal products faster. And with an acquisition comes the complexities of integration and you need a major acquisition to move the needle when your revenue is north of $10-billion, which is where Gilead is.
What’s the outlook for 2017?
We believe the very difficult comparisons this year and the data trough will set the stage for a much better year in 2017. The comps will get easier as we get out into 2017, so growth will pick up but at a slower rate than we saw in 2015. This is the phenomenon that Big Pharma faced in the 1990s when companies like Pfizer launched blockbuster drugs like Lipitor. The question became how do you top these blockbusters. The same phenomenon is now exerting itself in biotech. We believe new cancer immunotherapies like checkpoint inhibitors and CAR T-cells are very viable and will come to fruition but will be very expensive. Ultimately, their costs will come down if manufacturing efficiencies rise, but that hasn’t been worked out yet.
Do you see any paradigm shifts in medicine?
I am very bullish long-term about regenerative medicine, which involves using your own or another person’s stem cells to repair things like cartilage and secondary damage post-stroke. A few examples of companies in this sector with potential transformative therapies are Athersys, which could have the first treatment for stroke in 30 years; Mesoblast, which is developing stem cell therapies for congestive heart failure and lower back pain; and Cytori Therapeutics’ potential treatment for scleroderma-associated hand dysfunction. These could be huge breakthrough therapies, which could change the way we look at disease. Very smart investors will be looking at the sector’s short-term weakness driven by the data trough and presidential cycle, and build their positions now for the coming years through 2019. Not only will these new therapies drive innovation and valuations of their originators, but they can also transform the cost of treating stoke, for example. And this is going to be the only way to lower the rising burden of health care. We also see governments in Europe, Japan and the U.S. all moving to support regulation around the use of stem cell therapies.
What’s the status of growth of generics?
Generics continue to be part of the natural cost control mechanism that reduces the cost of drugs. More than 90% of the U.S. branded medications will become generic by 2020, according to the IMS Institute, suggesting that generic drugs will become dominant in the pharmaceutical market for the next decade, making the space highly competitive. Into this dynamic, India continues to evolve as a generic powerhouse. Three of the 10 largest generic players are headquartered in India. The country currently ranks fourth in the world among the highest generic pharmaceutical producers and contributes 20% of global generic drug exports. In addition, some 80% of HIV/AIDS medicines are generic drugs produced by Indian companies. The U.S. is India’s largest drug export destination, with around 27% of India’s pharmaceutical exports to the U.S. in 2014, representing nearly $4-billion in revenue. The low cost of manufacturing makes India an attractive destination for contract research and the availability of a large patient pool makes it appealing for clinical trials.