Drug Discovery Cost Rise 145% — You are Catching a Break

The premier study on drug development costs was released and the results will astonish—costs have increased by 145% in the past decade (1). In 2003 the Tufts Center for the Study of Drug Development released what has become the financial benchmark for comparing drug development costs. In 2003 the average cost was estimated to be $800 million. The new cost--$2.6 billion. But I'll explain below, why consumers are actually getting a great deal on what they pay at the pharmacy for drugs.

—Overview of the studies—

The study breaks down costs into four buckets (2)(3):

1. Pre-clinical/pre-human discovery costs
2. Clinical study and trial costs
3. Failure rates
4. A “cost of money factor” e.g. monies that could be invested elsewhere

The total costs for the discovery, trial and failure rates equals $1,395 million. The total time costs (cost of money) equals $1,163, in sum totaling $2,558 million.

The 2003 study, used product data that entered human testing during 1983-1994. The 2014 study, used product data that entered human testing during 1995-2007.

—My Take: Consumers are Getting a Fair Deal —

Comparing the Tufts study to the macro environment of inflationary costs bears out the relative stability of drug cost increases passed onto the U.S. consumer. The Consumer Price Index (CPI) represents a “basket of essentials” most U.S. households purchase each month—things like groceries, gasoline, electricity, shelter, medical necessities, etc… During the past decade the CPI has increased by 2.1% per year (4). This means on average you and I paid 2.1% more each year for our essential goods and services.

The CPI also tracks medical specific costs, both health services and health products. Since 2005, you and I are paying 35% more for medical services and drugs. Comparatively, if you choose to believe in the merit of the Tufts study, drug manufacturers have incurred a 145% increase in costs to discover and develop new drugs before those drugs are manufactured, marketed, sold, and then supported for safety and phase 4 research. Include these additional necessary support functions and costs grew closer to 200% since 2003.

If not for the continuous technological, process, and cost-saving efficiencies of drug manufacturers and health payers—you, myself and the rest of the country would have felt a much greater impact in our collective wallets with every filled prescription.

Navigate Your Company to Health, visit www.compassx.com

Kyle J. Heppenstall

—How can we help you in 2015? —

1. You are a leader in the Health and Life Science industry
2. You lead or support one of these functions: Project Management Office, Sales and Marketing Operations, Corporate Supporting Functions (Finance, Legal, HR, Compliance, Procurement), or Technology Projects
3. Have technical pains in: SalesForce.com, Business Intelligence, Mobility, HRIS, or Cloud/SaaS strategy
4. Need to flawlessly execute a strategic project in the next 90 days
5. Feel like your overpaying the “Big Box Consulting Firms” and want a better alternative

If you answered "Yes" on 3-out-of-5 questions — We should talk, please email me at kyleh@compassx.com

—Resources—

• (1) Press Release http://csdd.tufts.edu/news/complete_story/pr_tufts_csdd_2014_cost_study
• (2) Slide deck presentation via webcasthttp://csdd.tufts.edu/news/complete_story/cost_study_press_event_webcast
• (3) Background of the Study http://csdd.tufts.edu/files/uploads/cost_study_backgrounder.pdf
• (4) Bureau of Labor Statistics 2014 CPI summaryhttp://www.bls.gov/news.release/cpi.nr0.htm

Health Sector Logs Big Gains in 2014 -- Four Predictions for 2015

2014 has concluded and it was very kind to the portfolios of Health and Life Science executives. During 2014 the Dow Jones U.S. Healthcare broad industry index returned 25% (second only to Utilities +26%). Healthcare also ranked first in three year annualized returns (+27%). The Dow Jones U.S. Healthcare index includes: Providers, Equipment, Supplies, Biotech and Pharma (1). The companies featured in my blog have done even better, returning on average +82% this year. Here is a recap of our featured stories and how those companies performed in 2014. I also provide four early predictions for 2015.

-2014 Featured Blog Stories in Review-

February 2014, Gilead Sciences Inc. (GILD) +26% - I actually wrote two featured articles about Gilead and their game changing product - Sovaldi. The first feature discussed the incredible upside revenue predictions, the second was a follow up with expected headwinds they would face during the year, namely Sovaldi's U.S. cost per treatment (~$80,000-90,000). The pressure on costs came from all directions: U.S. Law makers, foreign governments, physician groups, patient class action lawsuits, health insurance payers and finally from a direct competitor AbbVie, who signed an exclusive deal with one of the largest PBMs--Express Scripts to exclusively use their Hep C product Viekira Pak. Gilead has recently lost -20% of its' stock price, but I still like their long term prospects (see my 2015 predictions below).

April 2014, Allergan Inc. (AGN) +93% - I explained why Valeant's initial proposal had no legs (too low an offer, too heavily reliant on Valeant stock, and not enough upfront cash involved). I suggested Valeant needed to focus on managing their own debt levels before taking on more leverage "How does Valeant spell R&D? D-E-B-T". I also predicted the likely "White Knight" scenario, but admittedly didn't have the eventual suitor Actavis any where on my radar. Valeant has retreated for now to focus on "cutting debt and increasing their own stock price."

May 2014, Exact Sciences Corp. (EXAS) +127% - My most timely call of 2014; EXAS left most companies in the dust from June onwards (currently trading at $27).Exact Sciences brought a game changing colon cancer screening test to market, a test that is much less invasive and almost as accurate as the current "gold standard" in colorectal cancer screening.

--What will 2015 bring? Four early predictions--

1. Healthcare sector outperforms the S&P 500 (2).

I like our sector again to churn out street beating profits, dividends, and new products. I'm predicting beating the S&P 500 index in 2015.

2. Health Providers finish as one-of-the-top-twenty-percent Dow Jones sub-sectors(3).

Providers continue their momentum, with a strong tailwind from Obamacare more and more patients now have health insurance. Insured patients mean paying patients for providers who have a heavy fixed cost model (buildings, equipment, payroll). Every additional paying patient drives higher net profits.

3. Biotech finishes as one-of-the-top-twenty-percent Dow Jones sub-sectors (3).

Currently already riding a three-year-annualized-return of 47% (second only to...would you have guessed...Airlines? +66%) biotech is going to continue its' charge. My play in this space is simple-cheap money allows more innovators more swings. Or stated another way, low interest rates and a surge in overall wealth allows money to be invested in this traditionally risky space. More money allows more companies to take products to market.

4. Gilead Sciences beats the S&P 500.

I believe the recent -20% correction (see above) is more pullback opportunity than continued decline. Gilead still has the premier product with Sovaldi, has first mover advantage, an incredible pipeline and a forward PE of only 10. Even with a price reduction and increased rebates on the flagship product Sovaldi, my bet is a broad market beat in 2015.

Hoping you all have another great year in 2015!

You can follow my blog here: http://www.compassx.com/knowledge-center/blog/

Kyle J. Heppenstall | Managing Director | CompassX Consulting

--About CompassX--

Health & Life Science is Our Passion

Hard fought results, perfect project execution on strategically aligned assignments, this is what we do best. Founded in 2009, CompassX Consulting serves Health and Life Science clients on the West coast.

--Notes & Disclosures--

Note: I've tried to make these predictions include specific metrics to measure against next year. My goal is to win 3-out-of-4. This article was originally published on 04-Jan-2015.

Disclosures: My blogs and articles are intended to provide Health and Life Science executives broad industry news and trends not investing advice. I am not a professional analyst, broker, or financial advisor. I currently hold shares in Healthcare and Life Science mutual funds & ETFs and Gilead Sciences.

-Footnotes-

(1) DJ Health Care index places Health payers (e.g. health insurance) into their Financial broad industry index.

http://www.djindexes.com/mdsidx/downloads/Sector_Classification_Structure_Definitions.pdf

(2) Based on the Dow Jones U.S. Total Market Industry Groups >> Health Care Index (DJUSHC) http://www.djindexes.com/sectors/

(3) Top twenty percent is equivalent to a finish of twenty-three or less out of the 114 sub-sectors in the Dow Jones U.S. Total Market Industry Groups

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