Healthy Skepticism Library item: 9069

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Publication type: news

Anand G.
From Wall Street, a Warning About Cancer-Drug Prices
Wall Street Journal 2007 Mar 15A1
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Full text:

Morgan Stanley Analyst Creates Stir in Industry As He Sees a Backlash

Two years ago, Steven Harr urged Genentech Inc. to lower the price of a key drug that was helping buoy its stock price. He was an unlikely messenger because of his job: a Wall Street research analyst whose investing clients crave profits.

In a conference room with 30 senior managers from the biotech company, Dr. Harr said he feared patients wouldn’t be able to afford the drug Avastin, which costs about $47,000 for the average 10-month course of treatment for colorectal cancer. He warned that Congress “will get involved when its constituents can’t get drugs.” Genentech later capped Avastin’s price, acknowledging the influence of Dr. Harr, among many others.

From his perch at Morgan Stanley, the 36-year-old Dr. Harr has become an important gadfly on the most controversial issue in the biotech industry: drug pricing. A burst of expensive new drugs — routinely costing tens of thousands of dollars a year — is boosting the fortunes of biotech companies, which say the prices reward investors, reflect the difficulty of developing these medicines and fuel vital research. But the costs are setting off a growing outcry from patient advocates, doctors and Congress, which is considering two bills aiming to bring prices down.

Wall Street analysts rarely speak out for fear of alienating the companies they cover. But as Dr. Harr sees it, the high costs are bad for business. He has repeatedly argued that rising drug prices could trigger government controls, hurting the industry long term. He says soaring cancer-drug prices, generating fat profit margins, aren’t sustainable.

“I do not favor government setting prices on drugs because it will stymie innovation,” he says, “but it is my fear that this will happen.”

Advances in research are changing cancer from a death sentence to a chronic disease for many people. That is also bringing huge new costs: In 2002, cancer drugs accounted for 13% of the nation’s drug spending, according to Morgan Stanley; this year it says such spending is projected to almost double, to 22%.

For now, the high prices of cancer drugs are continuing to boost the stocks of companies that make them. Indeed, investors who followed Dr. Harr’s advice on Genentech stock would have missed out on a 25% surge in the two years he urged caution on the shares.

Propelled by sales of expensive new drugs, Genentech, based in South San Francisco, Calif., is one of the world’s fastest-growing companies. It reported revenue of $9.3 billion in 2006, a 40% increase from 2005. Net income rose 64% in 2006 to $2.1 billion.

But a pushback on drug prices is gathering steam in the Democrat-controlled Congress. And already, the two biggest biotechs, Genentech and Amgen Inc., have taken initiatives to cap prices of certain cancer drugs.

Dr. Harr “pointed out a potential risk that wasn’t completely understood by everyone,” says Jay Markowitz, a surgeon and now a biotechnology analyst at mutual-fund company T. Rowe Price Group.

“What he said was relevant and it was necessary, but it was not a popular thought,” adds Bill Slattery, a partner at Deerfield Partners, a New York health-care investment fund that has invested in Genentech.

Dr. Harr grew up in Omaha, Neb., the second of four children of an attorney and a journalist. Conversations at the family dinner table were often debates on issues of the day; because of his strong opinions, his father sarcastically dubbed him “the diplomat.”

After graduating from Johns Hopkins School of Medicine, Dr. Harr was finishing his residency at the University of California, San Francisco, when he grew interested in biotechnology. In 2000, instead of beginning a cardiology fellowship, he headed to Wall Street. He followed a friend to the former boutique investment bank Robertson Stephens, which hired him as a junior analyst. Two years later, he moved to Morgan Stanley.

Cancer-drug prices moved to a new level of the stratosphere in 2004, when two products came to market at huge premiums over others in the field. Erbitux, made by ImClone Systems Inc. and partner Bristol-Myers Squibb Co., was introduced at $10,000 a month. That was about $40,000 for the course of treatment for the average late-stage colorectal-cancer patient for whom it was marketed.

The price shocked Dr. Harr. Biotech drugs, which are produced by live cells, were generally more expensive than pills that are a mixture of chemicals. But this was twice the price of other new cancer drugs on the market, and many times the cost of older drugs.

In his Manhattan office overlooking the Hudson River, Dr. Harr phoned oncologists asking how the price might affect their prescribing. Traditionally, price hadn’t affected demand for oncology treatments. Now, he wondered if that would change.

Leonard Saltz, an oncologist at New York’s Memorial Sloan-Kettering Cancer Center who led a key clinical trial of Erbitux, told Dr. Harr he was eager to use the drug, but worried about the cost. “I was outraged at the price and feared it would affect patients’ ability to benefit from the drug,” Dr. Saltz recalls.

Dr. Harr says his concerns increased two weeks later, when the Food and Drug Administration approved Genentech’s Avastin for earlier-stage colorectal cancer. The company announced a lower monthly cost of about $4,400, but patients could stay on the drug longer. The average price for a course of therapy would be slightly higher than with Erbitux — about $47,000.

Dr. Harr began covering Genentech in June 2004, with a “hold” recommendation on its stock, which most investors take to mean they shouldn’t buy it. He predicted its stock would rise to $68 from $60 over the next year, but warned of possible pushback on price. The key risk, he said, was Avastin’s cost.

The next year, Genentech wowed an audience at an American Society of Clinical Oncology meeting in Orlando, Fla., with clinical-trial results showing Avastin also extended survival of patients with breast cancer and lung cancer. But patients in these trials were given double the dose of Avastin used in colorectal cancer — meaning their average cost of treatment could be much higher.

That day and the next, Dr. Harr buttonholed oncologists and Genentech officials, pressing them about how patients could afford even the co-payment. He raised this concern with Genentech Chief Financial Officer David Ebersman. “Many plans have a 20% co-payment — that’s $8,000. That’s a big bite,” he recalls saying. For breast cancer patients, it could be twice as high. “That’s when patient groups start to get upset. What are you guys doing to ensure patients have access to the life-saving drug?” he asked.

Dr. Ebersman described programs Genentech had in place to help the uninsured receive free drugs, recalls Dr. Harr. Dr. Ebersman says he doesn’t recall specifics of their conversation.

In June 2005, Genentech invited Dr. Harr to address its annual off-site meeting for senior management in Half Moon Bay, Calif. Dr. Harr still had a “hold” rating on the stock, with many other analysts calling it a “buy.” Yet Dr. Ebersman says he believed Dr. Harr was “very thoughtful” and had “interesting insights.”

In his presentation, Dr. Harr clicked to a slide saying the “market structure effectively provides no mechanism for price control in oncology other than companies’ goodwill and tolerance for adverse publicity.”

Dr. Harr knew this was a thorny issue. And Genentech has been one of Morgan Stanley’s corporate clients. In addition to managing Genentech stock offerings over the years, the big securities firm was vying for a role in a coming $2 billion Genentech bond offering. (Morgan Stanley later received a co-management role in the deal.) Dr. Harr’s bosses declined to comment for this article. He was promoted to a managing director last December.

Often, Wall Street research analysts steer clear of criticizing corporate clients for fear of losing financing business as a result. But Dr. Harr put up another slide at his presentation, telling the group he believed “Genentech may be trading short-term profits at a cost to its own (and the industry’s) long-term returns.”

His suggestion: Genentech should impose a cap on the price each patient pays for Avastin.

For the next hour, the group debated the issue. Genentech managers challenged him, with one demanding he provide an example of any other monopoly industry that had voluntarily lowered prices for fear of government intervention. Perhaps the oil industry, Dr. Harr responded, before conceding he was stumped.

A few days later, Dr. Harr published a 33-page report, maintaining his “hold” on Genentech stock.

The next week, Dr. Harr asked an associate to calculate what portion oncology represented of total U.S. drug spending. When he saw the numbers, he says, he was stunned: By 2007, cancer drugs were projected to account for almost a quarter of the nation’s drug spending. In September 2005, Dr. Harr released the numbers in a report. “The government or private payers will eventually push back on price or reimbursement,” he wrote.

Two months later, Dr. Harr initiated a survey of oncologists about prescribing Avastin for breast and lung cancers, based on the promising clinical-trial data. He says most physicians surveyed weren’t prescribing the drug in breast and lung cancer for fear of not being reimbursed. Avastin and Erbitux are given to patients intravenously in doctors’ offices. Doctors buy the drug ahead of time, infuse it into patients and then wait to be reimbursed. Any refusal by insurers to reimburse would leave doctors thousands of dollars in debt.

Meanwhile, other companies were bringing out cancer drugs at similarly high prices, even for cheaper-to-produce pills. Celgene Corp. of Summit, N.J., priced a new pill for a rare blood disease that often leads to cancer at about $4,600 a month, saying it cost less than the alternative for many patients: blood transfusions. Pfizer Inc. brought the cancer drug Sutent to market at $4,200 a month.

In the spring of last year, a taxpayer group in California began publicly condemning Genentech for charging too much for Avastin, noting that the federal government’s National Institutes of Health had subsidized some clinical trials of the drug. Not long after, Genentech said it was considering capping the price of Avastin.

Last May, ImClone said it and Bristol-Myers Squibb were weighing a price limit on Erbitux if it is approved in earlier-stage cancer, where patients would use the therapy for more time.

Dr. Harr, in a May report highlighting the potential for price caps and Genentech’s sustained growth, upgraded the stock to a “buy” — even as he continued to maintain that Avastin’s price was “unsustainable” in the long run. Genentech shares have risen about 7% since Dr. Harr’s “buy” recommendation.

On Oct. 3, when Amgen won approval for a new cancer drug, Vectibix, the company unveiled a cap: The drug would cost $8,000 a month, but patients would receive it free after co-payments exceeded 5% of their adjusted gross income.

An Amgen spokesman says the company imposed the cap to help patients, consulting with physicians and many others, and that Dr. Harr’s warnings about drug costs were “not a consideration in our pricing strategy.”

A week later, in announcing the approval of Avastin in combination with chemotherapy for non-small-cell lung cancer, Genentech described its own plan. The company said it would impose a cap of $55,000 per patient annually, regardless of insurance or income.

Genentech says it decided on the cap after soliciting input from not just Dr. Harr but hundreds of others, including patients, advocacy groups, physicians and the financial community.

“We do have a healthy margin on our drugs,” Arthur Levinson, Genentech’s chief executive officer, says. “If patients are on the drug a long time, we could afford to keep the price down.” But Genentech will run into trouble if there is too much pressure on price, Dr. Levinson says. “If we lowered the prices 30%, we’d get no credit and we’d go broke.”

In November, when Democrats took control of Congress, Nancy Pelosi, the incoming Speaker of the House, put controlling drug prices at the top of the Democratic agenda. Soon after, the House passed a bill that would amend the Medicare prescription-drug benefit, to allow the government to negotiate prices with the pharmaceutical industry. The bill is pending in the Senate.

Last month, Rep. Henry Waxman, a California Democrat, introduced a bill to make it easier for generic versions of biotech drugs to come to market after patents expire, aiming to lower prices by fostering competition. Sen. Hillary Clinton is co-sponsoring a similar Senate bill. Genentech’s Dr. Levinson recently traveled to Washington to lobby against the bills, contending they wouldn’t ensure that copied versions would be as safe and effective as originals. Dr. Levinson says he doesn’t oppose generic biotech drugs, but says: “There’s a lack of appreciation for the complex science involved.”

Some patient advocates believe a showdown is coming. “It’s clear that the days of unlimited pricing power are ending,” says Abbey Meyers, president of the National Organization for Rare Disorders, a patient group. “The only question is how far Congress will go.”

Write to Geeta Anand at geeta.anand@wsj.com