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Daily Intelligence Briefing – December 4, 2017

FEATURED TOPIC: BIG PHARMA’S BUSINESS MODEL IS UNDER SIEGE

The pharmaceutical industry has taken some hard blows this year in the form of drug pricing regulation in a growing number of states, a wave of litigation from over 100 states and cities across America relating to the opioid crisis, efforts todismantle Obamacare which could result in fewer insured and therefore a smaller customer base, and heated criticism about the escalating cost of drugs. There are new developments on the horizon that will put the established business model for researching, testing, manufacturing, and monetizing drugs under even more pressure. 

For one, competition is intensifying from biosimilar and generic drugs. Passage of the Competition and Patent Term Restoration Act (aka the 1984 Hatch-Waxman Act) opened up the market for off-label versions of previously exclusive drugs so successfully that by 2014, 85% of all prescription drug purchases were of generics. Last year, Americans spent $450 billion on prescription medicines, with 74% of that spending going to brand name drugs compared to 80% a decade ago. This year, U.S. generic drug approvals hit a record high, and that will only accelerate thanks to the FDA’s recent efforts to pave a clearer path for the approval process.

Then, there is the fact that Amazon has been looking to enter the health care market and is reportedly in high-level talks with Novartis and Mylan, respectively the second largest and fourth largest generic drug manufacturers in the world. While the immediate threat is to drug distributors and pharmacy companies, Amazon’s focus on generics will certainly have a negative impact on sales of brand name drugs and on the bottom line of the pharmaceutical companies that make them.

Biosimilar drugs also pose a challenge to Big Pharma. A “biosimilar” is a copy of a medication made out of living cells, just as a copy of a chemical-based drug is known as a “generic”. Although biosimilars  have only a tiny share of the drug market right now, they are poised to capture an unprecedented position in the biopharmaceutical industry and could cut U.S. health spending by $54 billion over the next decade.

There is also a renewed push for the U.S. government to take more aggressive steps to control drug prices, which congress will deliberate on during the Senate Health Committee hearing scheduled for December 12. That recommendation comes from the National Academies of Sciences, Engineering and Medicine, a panel that advises the nation on science and medicine. The panel is advocating new regulations that the pharma industry will balk at, including suggestions that the government use its purchasing power to negotiate lower prescription drug prices for American patients, and that the U.S. discourage direct-to-consumer ads for prescription medications. These proposals are based on the group’s findings (published in the report Making Medicines Affordable: A National Imperative) that the pharmaceutical supply chain has evolved into a complex system that is rife with conflicts of interests. As a result, some drug makers are taking advantage of government policies that were designed to promote innovation, instead bending these policies to protect their patents and block competition. 

Another looming issue for drug makers is that a tax credit they have been able to claim for three decades is on the chopping block under the Republican Tax Plan. The Orphan Drug Act of 1983 allows drug manufacturers to claim a 50% tax credit for the cost of clinical trials of orphan drugs, which are intended to treat rare diseases. Orphan drugs often carry five-digit price tags and have become a very lucrative market. Orphan drug sales hit $36 billion, or 8% of the $450 billion that Americans spent on drugs last year. That market is expected to account for 22% of global drug sales, excluding generics, by 2022. As such, the Orphan Drug tax credit has become central to the business model of many pharmaceutical companies. Eliminating the tax credit would cost the industry $2.8 billion in 2018, and more in the following years. Consequently, fewer orphan drugs will come to market in the future which also means lower sales.

With their business models under siege, drug companies are increasingly resorting to colorful strategies to stave off the competition and wring out as much profit as possible. Take the example of Allergan. The pharma giant, in an effort to protect its income stream, has struck an unusual deal that transfers all IP rights for one of its most profitable drugs to the Mohawk Tribe. The drug in question, Restasis, generated $1.5 billion in net sales last year, essentially 10% of Allergan’s net sales. According to the arrangement, Allergan will continue to manufacture and market the drug, but under an exclusive license from the tribe. In exchange, the Mohawk Tribe will receive a one-time payment of $13.75 million, and up to $15 million annually in royalty payments from Allergan. The reason Allergan chose this strategy is because Native American tribes are granted sovereign immunity, which protects their patents from being challenged. Such a deal would make it difficult for generic drug makers to cut in and produce cheaper alternatives to the drug. If the Allergan / Mohawk Tribe deal goes unchallenged, it would create a precedence that could “upend established business models for the pharmaceutical industry, challenge the paradigm of U.S. patent laws, and create the next big Indian tribe revenue stream”.  But it remains to be seen whether this bold strategy will actually work.

On October 27, MRP added SHORT U.S. PHARMACEUTICALS to our list of investment themes. The disruptive factors mentioned above provide additional reasons for concern. Amazon has a lot of spending power, and some drug makers could experience a pop if they are rumored to be acqusition targets. However, the outlook for the sector as a whole is cloudy. As such, we are reaffirming our short recommendation. 

HERE in the meantime are some related articles on Regional Banking (the stories are summarized in the BIOTECH & HEALTHCARE Section):

  • Pharma – Amazon is in exploratory talks with generic-drug makers  
  • Pharma – Pharma’s Status Quo May Be Doomed  
  • Pharma – Pharma’s broken business model: An industry on the brink of terminal decline  
  • Pharma – Purdue Pharma Discloses Negotiations With AGs on Opioids  
  • Pharma – FDA to pave clearer path for generic drugs 
  • Pharma – U.S. Government Should Negotiate Drug Prices, Adviser Group Says

CHART: PHARMACEUTICALS ETF (PPH) VS THE S&P 500 

 

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OTHER STORIES HIGHLIGHTED IN TODAY’S DIBS:

  • Markets: 
    • Crytocurrencies – Bitcoin Heads to Wall Street Whether Regulators Are Ready or Not
  • Economics and Trade: 
    • Trade – As Nafta Tensions Simmer, Canada Pursues Trade With Asia  
    • Factory Activity – Global manufacturing hits multiyear high as growth gathers pace  
  • Finance: 
    • Cards – Here’s the Credit Card That’s Gathering Dust in Your Wallet  
    • VC – There’s an implosion of early-stage VC funding, and no one’s talking about it 
  • Technology: 
    • AI – Your car may say more about you than you think  
    • Blockchain – The first blockchain smartphone will come preloaded with mobile Ethereum client Status 
    • Internet – Bitcoin bubble could ‘decentralize internet’ and threaten power of tech giants, VC says  
  • Transportation:  
    • Logistics – E-Commerce Boosts U.S. Shipping Networks
  • Commodities: 
    • Ag – Coconut shortages starting to impact some consumers 
    • Oil – U.S. Vastly Overstates Oil Output Forecasts, MIT Study Suggests  
    • Steel – China Inflames U.S. Ire in Steel Dispute 
  • Energy & Environment: 
    • Batteries – Tesla switches on world’s biggest lithium-ion battery
  • Biotech: 
    • CRISPR – Biohackers Disregard FDA Warning on DIY Gene Therapy  
    • Health Care – Next U.S. Restructuring Epidemic: Sick Health-Care Companies  
  • Endnote: 
    • CHART – Pharma’s broken business model: An industry on the brink of terminal decline

JOE MAC’S MARKET VIEWPOINT

CURRENT MRP THEMES

  Autos  (S)

  Electric Utilities  (L)

  TIPS  (L) / Short-Dated UST (S)

  Defense  (L)

  Industrials & Materials (L)

  U.S. Financials & Regional Banks (L)

  Emerging Markets (L)

  Oil & U.S. Energy  (L)

  U.S. Homebuilders & Construction (L)

  France  (L), India (L)

  Palladium  (L)

  U.S. Healthcare Providers & Pharma (S)

  Gold & Gold Miners (L)

  Robotics & Automation (L)

  Video Gaming (L)

  Lithium (L)

  Steel  (L)

  Value over Growth  (L)


About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. 

   MAJOR DATA POINTS

Top   

  • United States, Construction Spending, MoM, OCT: 1.4% from prior 0.3%
  • United States, Baker-Hughes Rig Count, WoW, 12/1: 929 from prior 923
  • Peru, Inflation Rate, YoY, NOV: 1.54% from prior 2.04%
  • Estonia, Retail Sales, YoY, OCT: 2% from prior 1%
  • Czech Republic, GDP Growth Rate, YoY, Q3: 3% from prior 3.6%
  • Brazil, GDP Growth Rate, YoY, Q3: 1.4% from prior 0.4%

   MARKETS

Top   

Crytocurrencies – Bitcoin Heads to Wall Street Whether Regulators Are Ready or Not  

Two U.S. exchanges, including the parent of the venerable Chicago Mercantile Exchange, are racing to embrace bitcoin, dragging federal regulators into a realm skeptics call a fad and fraud. The development shows how some big financial players are moving to co-opt the volatile cryptocurrency and lure more mainstream investors into the market, even before regulators have agreed on just what bitcoin is.

CME Group Inc.’s contracts will debut Dec. 18. Cboe Global Markets Inc. didn’t announce a start date. Both got the green light Friday after going through a process called self-certification — a pledge to the U.S. Commodity Futures Trading Commission that the products don’t run afoul of the law. The moves are a watershed for Wall Street professionals — including institutional investors and high-speed traders — who’ve been eager to bet on cryptocurrencies and their wild swings, but worried about doing so on mostly unregulated markets. The new products are subject to CFTC oversight.  B 

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   ECONOMICS AND TRADE

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Trade – As Nafta Tensions Simmer, Canada Pursues Trade With Asia  

Canada is pursuing expanded trade with China as part of a pivot to Asia that comes as significant differences cast a shadow over negotiations to overhaul the North American Free Trade Agreement. Prime Minister Justin Trudeau is scheduled to arrive in China on Sunday for a trip that will include stops in Beijing and Guangzhou, and the two countries are widely expected to announce the start of talks on a free-trade deal during his visit. China and Canada wrapped up the latest round of exploratory talks in September.

The trip could help strengthen Canada’s hand in Nafta talks by signaling to Washington there are other markets where it can seek freer trade. Still, there are significant hurdles to a far-reaching trade deal with Beijing, including trepidation at home. Plus, Canada risks causing friction with trading partners that Canadian firms rely on for sales. China is Canada’s second-biggest trading partner, with annual two-way trade in goods between the two countries of more than 85 billion Canadian dollars ($66.4 billion), according to Canada’s foreign ministry. The share of Canadian exports headed to China has surged this decade, from 0.9% in 2000 to 4% last year, a compound annual growth rate of 11.5%. WSJ

Factory Activity – Global manufacturing hits multiyear high as growth gathers pace  

Factories across the world were at their busiest for decades during November when a global upswing in economic activity and trade boosted manufacturing activity. In surveys published on Friday, the Dutch manufacturing purchasing managers’ index for November hit a record high, the Italian index reported the strongest new orders in 17 years and Ireland’s the strongest rate of growth for 18 years.Overall eurozone manufacturing expanded at the second-highest rate on record. The IHS Markit purchasing managers’ index for the currency bloc came in at 60.1. Anything above 50 indicates expansion, a reading beaten only by one survey in April 2000.

But the rise in activity was not limited to the eurozone: British factories were at their busiest in more than four years in November, the Japanese manufacturing PMI, also published on Friday, pointed to the strongest growth for 44 months, and South Korea recorded a 55-month high. The strong and widespread growth across all major economies has boosted global trade, especially in economies that are heavily integrated in international supply chains, said Ben May, director of global macroeconomics at Oxford Economics. FT

  FINANCE

Top   

Cards – Here’s the Credit Card That’s Gathering Dust in Your Wallet 

Long a staple in consumers’ wallets, credit cards offered by giant retailers like Sears Holdings Corp. and Macy’s Inc. are losing out as retailers shutter locations and consumers flock to shopping at online rivals like Amazon.com Inc. The cards, the latest victim of the long decline of the mall retail business, are also being hit by increasingly generous rewards from credit cards—such as cash back and points for vacations—that consumers can use at most places.

Those problems are only part of the challenge facing the large store-card issuers, a group led by Synchrony Financial and Alliance Data Systems Corp., along with some large banks including Citigroup Inc. Soft sales at some retailers and a tepid nine-year U.S. recovery are also rattling this business.But few analysts expect the traditional store-card niche to reverse its long decline any time soon. Some investors are betting that the standalone card issuers will be among the most vulnerable financial firms the next time the economy tips into recession.

It’s “a vicious cycle of consumers moving spending online, going to stores less and spending less” on the cards compared with the general cards that can be used in most locations, said Matthew O’Neill, an analyst following retail card issuers at Autonomous Research. Store credit cards that can only be used at a specific retail chain accounted for 5.9% of total credit card purchase volume in 2016, down from 18% in 1990, according to trade publication the Nilson Report. WSJ    

 

VC – There’s an implosion of early-stage VC funding, and no one’s talking about it

Amid record amounts of capital raised by VCs worldwide, and a sharp rise in the number of private “unicorns” valued at $1 billion-plus, there has been a quiet, barely noticed implosion in early-stage VC activity worldwide. The chart below is dramatic, and accurate. Since 2014, the number of VC rounds in technology companies worldwide has nearly halved, from 19,000 to 10,000, according to PitchBook. During that time, the drop in VC funding amount has been nowhere near as dramatic, highlighting that VCs are concentrating investment into fewer later-stage companies.

This is now a three-year trend, so cannot be “blamed” on macro or short-term factors. More worryingly, it comes at a time of unprecedented stock market valuations worldwide. The data shows by far the sharpest fall in activity has been in early- and seed-stage rounds. In fact, later rounds have remained fairly flat the last three years, and A and B rounds have fallen, but not nearly by as much. Overall we believe 2012-16 was a bubble in early-stage funding driven by the fundamental platform shift to mobile. In easy hindsight, too many companies raised “concept” money, and an unprecedented number failed early and “failed fast.” The VC market for seed and early-stage failed with them, falling to half its size in three short years. TC   

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  TECH

Top   

AI – Your car may say more about you than you think  

Forget about poring over voter registration rolls or census numbers: To parse out a neighborhood’s political leanings, just look at the cars on the street or, better yet, let a computer algorithm do it for you. Stanford researchers used machine-learning algorithms to analyze more than 50 million images publicly available on Google Street View, and found connections between cars, demographics, and politics.

Sedans were most strongly associated with Democratic precincts, while extended-cab pickup trucks were most strongly associated with Republican precincts, they found. “We found that by driving through a city while counting sedans and pickup trucks, it is possible to reliably determine whether the city voted Democratic or Republican: If there are more sedans, it probably voted Democrat (88% chance), and if there are more pickup trucks, it probably voted Republican (82% chance),” the researchers said. MW

Blockchain – The first blockchain smartphone will come preloaded with mobile Ethereum client Status 

Blockchain technologies aren’t limited to the virtual world. The foundation of decentralized cryptocurrencies such as Bitcoin and Ethereum is also being applied to hardware products. Sirin Labs — the company that created the $14,000 Solarin smartphone — earlier this year announced a smartphone named Finney, which it claims is the only smartphone in the world that’s entirely secure. That means it is safe enough to hold cryptographic coins.

Today, Sirin has announced that Finney will come preloaded with mobile Ethereum client Status. The integration will enable seamless use of both the Finney and Status tokens. Status, which successfully raised more than $100 million in less than 24 hours via its SNT token sale, is currently developing its solution — an open source messaging platform and mobile browser that allows users to interact with decentralized applications (dApps) that run on the Ethereum network. That means Finney will come preloaded with the ability to access encrypted messages, smart contracts, digital currencies, and more. VB

Internet – Bitcoin bubble could ‘decentralize internet’ and threaten power of tech giants, VC says  

Bitcoin’s rise could help lead to the creation of a so-called “decentralized internet” that could take power away from large technology firms, two venture capitalists told CNBC on Thursday. The internet works thanks to large centralized services such as server owners, cloud providers, search engines and social media. As a result, many internet giants are dominant in their respective area of the internet.

A decentralized internet promises to spread the running of these services across users. So, a number of independent machines would power services across the web. The money pouring into cryptocurrencies like bitcoin is helping to bring resources to developing a decentralized internet, according to Hemant Taneja, managing director at U.S. venture capital firm General Catalyst. CNBC

  TRANSPORTATION

Top   

Logistics – E-Commerce Boosts U.S. Shipping Networks 

Resurgent demand in the long-stagnant industrial sector and a big seasonal boost in e-commerce are pushing more goods through shipping networks on the land, water and air, say operators who expect the strengthening U.S. economy to keep the growth going into 2018. From seaports in Southern California to truck docks at central Ohio warehouses, shipping across the U.S. is picking up at a pace that freight companies say they haven’t seen in several years.

The Commerce Department reported Wednesday that U.S. economic output grew at a 3.3%annual rate in the third quarter, faster than earlier estimated, and the reports from shipping sites suggest the muscular economic growth is continuing in the fourth quarter. Freight volumes at the ports of Los Angeles and Long Beach usually begin to slow as Black Friday nears, but Mr. VanDerWaag said his drivers remained as busy as ever. The nation’s top ports of entry, Los Angeles-Long Beach and New York-New Jersey, in October imported a combined 1,031,127 20-foot-equivalent units, a standard measure for container cargo in October. 

Demand is also surging on the roads. The Cass Truckload Linehaul Index, which measures per-mile pricing for truckload carriers, rose 5.5% year-over-year in October, reaching an all-time high. Cass also reported that October freight shipments rose 2.9% and companies spent 11.2% more to ship goods in October than they did a year ago, a sign that transport prices are rising as retailers and manufacturers compete for space in increasingly crowded transport networks. WSJ

  COMMODITIES

Top   

Ag – Coconut shortages starting to impact some consumers 

Bloomberg reported that a global coconut shortage caused the temporary removal of a popular breakfast item at sandwich chain Pret A Manger. However, the company told The Telegraph newspaper that its coconut porridge — made with coconut milk, oats and red quinoa — would be back as soon as a coconut ingredient shipment was delivered.

Even though 2.5 million more acres of coconut palms have been planted during the past 10 years, overall productivity is down because of aging plantations, pests and diseases, according to a recent UN study Bloomberg cited. The situation pushed spot prices to a record level earlier this year. The popularity of food products made with coconut — including snacks, flour, oil and beverages — has grown to the point that about one in every 20 products sold in supermarkets today contains some form of the ingredient, according to Fairfood, a nonprofit organization based in the Netherlands. FoodDive

Oil – U.S. Vastly Overstates Oil Output Forecasts, MIT Study Suggests 

Turns out, America’s decade-long shale boom might just end up being a little too good to be true.There’s no denying that fracking has turned the U.S. into a force in the global oil and gas markets, which has more than a few people abuzz about the prospect of energy independence. But now, researchers at MIT have uncovered one potentially game-changing detail: a flaw in the Energy Department’s official forecast, which may vastly overstate oil and gas production in the years to come.

The culprit, they say, lies in the Energy Information Administration’s premise that better technology has been behind nearly all the recent output gains, and will continue to boost production for the foreseeable future. That’s not quite right. Instead, the research suggests increases have been largely due to something more mundane: low energy prices, which led drillers to focus on sweet spots where oil and gas are easiest to extract. There’s little doubt the technologies used to extract oil and natural gas trapped within rock formations thousands of feet below the Earth’s surface — like drill heads, mapping software, fracking techniques and so on — have gotten better. B 

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Steel – China Inflames U.S. Ire in Steel Dispute 

A showdown among the world’s major steelmaking countries failed Thursday to patch a widening rift between the U.S. and China after Beijing refused to act more aggressively to cut global oversupply. China, which is the world’s biggest steelmaker and produces almost half of all steel, says it is pursuing painful reforms to its industry and insists other producers should also cut capacity. But the U.S. and other countries see China as the main culprit behind oversupply and question its pledges of cutbacks.

Mr. Greer said the U.S. remained open to international talks but “will not hesitate to use the tools available under legal authorities to firmly respond to the causes and consequences of steel excess capacity.” He declined to comment on the timeline or options available to unilaterally put new tariffs on steel, but the breakdown of the talks in Berlin is likely to stoke domestic pressure on the Trump administration to move ahead with long-promised steel import curbs. Those measures have been delayed in part pending the outcome of this week’s forum.

In a separate fight, the U.S. and the European Union joined forces this month at the World Trade Organization in Geneva to secure the right to brand China a “non-market economy”—a label that gives Washington and Brussels extra discretion to slap high duties on Chinese exports. While China has protested that status, the U.S. and EU say Chinese state intervention has unfairly fueled overcapacity in steel and other sectors. WSJ  

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  ENERGY & ENVIRONMENT

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Batteries – Tesla switches on world’s biggest lithium-ion battery  

The world’s biggest lithium-ion battery has begun dispatching power into Australia’s energy grid, delivering on an audacious promise by Tesla’s Elon Musk to build the storage solution within 100 days or provide it for free. Please use the sharing tools found via the email icon at the top of articles. Tesla’s Powerpack battery system is connected to a wind farm in South Australia and has the capacity to supply 30,000 homes for one hour, which is three times as powerful as any other batteries currently installed.It has been subsidised by the state government, which is building greater resilience into its power network following blackouts last year that sparked a nationwide debate about the reliability of renewable energy.

It marks the latest phase of a lithium-ion battery revolution, which advocates say is transforming the world’s energy systems by enabling the integration of low-cost solar and wind power into national grids. But the technology has faced criticism in Australia, where a dispute between the government and the opposition over the future of coal generation and the reliability of renewables has plunged energy policy into disarray. FT

  BIOTECH & HEALTHCARE

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Pharma – Amazon is in exploratory talks with generic-drug makers 

Amazon has held preliminary talks with makers of generic drugs about its potential entry into the pharmacy space, according to people familiar with the discussions. The conversations, including with generics giants Mylan and Sandoz, a unit of Novartis, have been high-level, and the nature of Amazon’s plans isn’t yet clear, said the people, who asked not to be named because the discussions aren’t public.

One of the people said the conversations are about Amazon taking a role in drug purchasing, potentially disrupting a space now dominated by distributors McKesson, AmerisourceBergen and Cardinal Health. Generics manufacturers are eager to establish a relationship with Amazon as part of 2018 business plans, the person said.

It’s a topic of intense speculation on Wall Street and in the pharmaceutical industry. Many drug company executives, including the CEOs of Pfizer and Allergan, were asked about the prospect of working with Amazon on their most recent quarterly earnings conference calls. They responded enthusiastically but said no formal discussions were taking place. CNBC

Pharma – Pharma’s Status Quo May Be Doomed 

There are plenty of grim takes on the future of the pharma industry, but perhaps none have been quite as dire as a recent analysis from Novartis AG executive Kelvin Stott, which makes the minor claim that the biopharma business model is fatally flawed and doomed to terminal decline. He may have a point.

At its core, pharma involves plowing money into R&D and collecting profits from successful drugs. But those research efforts are subject to the law of diminishing returns — they’re getting more expensive and less profitable over time.  There are many reasons for that, including rising clinical trial cost and complexity, higher failure rates, and pressure from payers. But all of those are symptoms of a more basic issue: A lot of the low-hanging drug-development fruit has already been picked. Pharma has understandably prioritized the biggest, easiest, and cheapest opportunities. As a result, there are a lot of good medicines already out there, and many are available as cheap generics or soon will be.

More money is being spent for lesser results, or on less-productive activities such as advertising in crowded drug classes. As R&D spending gets less profitable, there’s less profit to spend on R&D, and you get a vicious cycle of decline. Stott believes the inflection point for terminal decline could be as soon as 2020.

This would have major consequences for investors and pharma firms. The next generation of medicines may be chronically less profitable than the preceding one, and sale expectations may be much too high. Big biopharma in general may struggle to deliver the growth and profitability investors have enjoyed in the past. BBW

Pharma – Pharma’s broken business model: An industry on the brink of terminal decline 

Like many industries, Pharma’s business model fundamentally depends on productive innovation to create value by delivering greater customer benefits. Further, sustainable growth and value creation depend on steady R&D productivity with a positive return on investment (ROI), in order to drive future revenues that can be re-invested back into R&D. In recent years, however, it has become clear that Pharma has a serious problem with declining R&D productivity.

We can greatly simplify this picture by considering only the average return on investment across the industry as a whole, and across multiple years of P&L data from EvaluatePharma, we see a downward trend. Now the scariest thing about this analysis, is just how robust, consistent and rapid is the downward trend in return on investment over a period of over 20 years. But moreover, these results confirm that return on investment in Pharma R&D is already below the cost of capital, and projected to hit zero within just 2 or 3 years.

As each new drug improves the current standard of care, this only raises the bar for the next drug, making it more expensive, difficult and unlikely to achieve any incremental improvement, while also reducing the potential scope for improvement. In essence, drug discovery is rather like drilling for oil, where we progressively prioritize and exploit the biggest, best, cheapest and easiest opportunities with the highest expected returns first, leaving less attractive opportunities with lower returns for later. Eventually, we are left spending more value than we are possibly able to extract. LinkedIn Pulse

Pharma – Purdue Pharma Discloses Negotiations With AGs on Opioids 

Purdue Pharma LP acknowledged in a letter that the maker of the opioid painkiller Oxycontin is in “negotiations’’ with state attorneys general over lawsuits accusing the company of creating a public-health crisis with its mishandling of the drug.

Bloomberg News reported on Nov. 17 that the company’s lawyers had been floating proposals for a global settlement of all opioid claims against Purdue and other drugmakers including Johnson & Johnson, Endo international Plc and Teva Pharmaceutical Industries.

A study in the October 2016 issue of Medical Care Journal put the economic cost of opioid overdose, abuse and dependence at $78.5 billion. Health care accounts for about one-third of the cost, while lost productivity in nonfatal cases add another $20 billion, according to the journal published by Wolters Kluwer. The epidemic cost the American economy $504 billion in 2015, which was the equivalent of 2.8 percent of gross domestic product that year, according to a report this month by the Council of Economic Advisers.

Purdue, Johnson & Johnson and some lawyers for cities and counties that have sued want the more than 60 lawsuits filed so far in federal courts across the country to be combined for information exchanges and test trials. The consolidation is intended to save money by avoiding duplication. B

Pharma – FDA to pave clearer path for generic drugs

The Food and Drug Administration aims to make it easier for generic-pharmaceutical developers to plan how they can copy complex drugs, which should ultimately lower pharmaceutical prices when more of the cheaper drugs enter the market.

Certain drugs have been difficult to replicate and gain regulatory approval for, particularly drug-device combinations like EpiPen, because there has been minimal guidance from the FDA on how to adequately do so. The agency has committed to explaining how to copy complex drugs at least two years in advance of the first potential generic entrant. While the guidance provides some flexibility in evaluating drugs that face roadblocks to market, there is some gray area in defining how much generics can vary.

Prices typically fall more significantly when there are multiple generic alternatives on the market, according to the FDA. Modern HC

Pharma – U.S. Government Should Negotiate Drug Prices, Adviser Group Says 

Congress should authorize the government to use its purchasing power to get better deals on drugs it buys through Medicare, the National Academies of Sciences, Engineering and Medicine said in a report Thursday. The group also suggested the U.S. discourage direct-to-consumer ads for prescription medications.

The report will likely add fuel to a recurring debate in the U.S., where unlike most of the rest of the world the government doesn’t directly regulate medicine prices and is prohibited from negotiating prices in the Medicare drug-benefit program for the elderly. Pharmaceutical lobbies have strongly resisted changes over the years. President Donald Trump threatened to force bidding wars early in his presidency, but hasn’t taken any action so far. The National Academies of Sciences, Engineering and Medicine blames high prices on America’s convoluted drug-supply chain, including intermediaries that privately negotiate discounts on behalf of clients such as insurers and employers.

The administration is examining the idea of passing on manufacturer rebates in Medicare directly to beneficiaries. That would lower the price for individuals, but not necessarily the total cost of the treatments. On Thursday PhRMA released a report examining the U.S. drug distribution system. It blamed insurers and benefit managers for failing to pass on negotiated drug discounts to patients. They often keep the discounts, leading to higher out-of-pocket costs for patients whose co-pays and deductibles based on the higher, non-negotiated price. B

CRISPR – Biohackers Disregard FDA Warning on DIY Gene Therapy 

Despite a warning from the federal government about do-it-yourself gene therapy, two companies say they’ll continue offering DNA-altering materials to the public.The companies, The Odin and Ascendance Biomedical, both recently posted videos online of people self-administering DNA molecules their labs had produced. Following wide distribution of the videos, the U.S. Food and Drug Administration last week issued a harshly worded statementcautioning consumers against DIY gene-therapy kits and calling their sale illegal. “The sale of these products is against the law. FDA is concerned about the safety risks involved,” the agency said.

The agency declined to specify what products it was referring to. Executives at both firms said they might be the target of the warning, but they have not been contacted by the FDA. Normally, drug makers must seek the agency’s permission to test new drugs, a process that often takes years and costs hundreds of millions of dollars. But now a growing number of cases of DIY gene therapy are putting the health regulator in a difficult situation as individuals argue that no law stops them from self-administering the substances. In fact, there is a long history of scientists carrying out experiments on themselves, including some Nobel Prize winners. MIT

Health Care – Next U.S. Restructuring Epidemic: Sick Health-Care Companies  

A growing number of health-care companies may face near-death experiences of their own.A wave of hospitals and other medical companies are likely to restructure their debt or file for bankruptcy in the coming year, following the recent spate of failing retailers and energy drillers, according to restructuring professionals. Regulatory changes, technological advances and the rise of urgent-care centers have created a “perfect storm” for health-care companies, said David Neier, a partner in the New York office of law firm Winston & Strawn LLC.

Some signs are already there: Health-care bankruptcy filings have more than tripled this year according to data compiled by Bloomberg, and an index of Chapter 11 filings by companies with more than $1 million of assets has reached record highs in four of the last six quarters, according to law firm Polsinelli PC. Junk bonds from companies in the industry have dropped 1.4 percent this month, a steeper decline than the broader high-yield market, according to Bloomberg Barclays index data.The pain for the sector comes as bankruptcy filings across the broader economy have plunged since 2010.Hospitals, including private rural ones, may be among the hardest hit, Winston & Strawn’s Neier said. B  

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  ENDNOTE

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CHART – Pharma’s broken business model: An industry on the brink of terminal decline

Like many industries, Pharma’s business model fundamentally depends on productive innovation to create value by delivering greater customer benefits. Further, sustainable growth and value creation depend on steady R&D productivity with a positive return on investment (ROI), in order to drive future revenues that can be re-invested back into R&D. In recent years, however, it has become clear that Pharma has a serious problem with declining R&D productivity.  BBW      

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