Washington Editor

First, it was the dot-coms in the '90s. Then the mortgage industry went bust in the first decade of the 21st century. Will biotech be the next to see its bubble burst?

"We are in a pre-crisis mode," Steve Brozak, president of Westfield Bakerink Brozak LLC, said, comparing the biotech industry to the mortgage fiasco of the past few years. The culprits, in his eyes, are pricing pressures and regulatory uncertainty, compounded by a drug development system that doesn't work and "merger mania."

"The pricing compounding we have seen is now devastating the system," Brozak told BioWorld Insight.

Douglas Lind, managing partner of GBP Capital, agreed that pricing pressures, when coupled with regulatory inconsistencies, don't bode well for the industry. "We're in unprecedented times in this country," he said, noting that as a result of the federal deficit, the cost of health care – specifically, drug pricing – has become a target.

Consequently, "the current trajectory of price increases across the health care system is not sustainable," Lind told BioWorld Insight. As a result, he added, investing in biopharma today is a different game than it was in the 1980s and 1990s and it is more difficult to see a return on investment.

Historically, drug pricing discussions have been driven by what the market will bear and how profits can be maximized. But with the government living on borrowed money, headlines fingering industry excesses and third-party payers tying benefit to reimbursement, there will be more pressure for government to step into the drug pricing arena, Lind predicted.

It's already happening in several European countries where government budget crises are affecting access to nonessential drugs.

The U.S. is not immune. To date, the government hasn't set drug prices, but the regulatory framework is there – through enforcement of FDA exclusivity, approvals and Medicare coverage decisions – to affect pricing.

The recent tempest stirred up when KV Pharmaceutical Co. increased the price of a type of progesterone gave biopharma a glimpse of what the future could hold, Lind said.

The progesterone formulation, used to prevent premature births, had been available for years at compounding pharmacies at $10 to $20 per weekly injection. But when KV, of Bridgeton, Mo., was granted seven years of marketing exclusivity in March under the Orphan Drug Act for its Makena, it set the price at $1,600 an injection.

The FDA's mission is about the safety and efficacy of a drug – not its price. But in this instance, the outcry from the public and Congress was so loud that the agency agreed to use its enforcement discretion, giving compounding pharmacies the go-ahead to continue making their cheap alternatives regardless of KV's exclusivity.

Generally, marketing exclusivity, given as an incentive to encourage innovation and the development of orphan drugs, means the FDA will not license another company's version of that drug for the same indication for the life of the exclusivity. The agency made a point, in this case, of the fact that compounding pharmacies don't "market" the progesterone formulation.

Following the FDA's announcement, KV slashed Makena's price nearly 55 percent and offered discounts to Medicaid and insurance companies. Since third-party payers would be covering the bulk of the cost, KV noted that 85 percent of the women prescribed the drug would pay $20 or less out of pocket for each injection.

While the KV incident is unique, it shows the government's willingness to affect drug pricing through regulatory action. "I think this is a very slippery slope when they do things like this," Peter Pitts, president of the Center for Medicine in the Public Interest, told BioWorld Insight.

Discretionary enforcement of drug regulations because of cost can become a "very potent political weapon," he noted, that can be used on the next product Congress thinks is priced too high.

"When you start trading pricing for safety, dangerous things happen," he warned.

George Gordon, a life sciences antitrust partner at Dechert LLP, said Congress needs to tread carefully before letting such a unique case give rise to a legislative remedy. Unfortunately, "the sound bite is easier and easier to quantify" for those pushing for lower drug prices, he said, but it's a lot more difficult to frame a sound bite that explains the need for a pricing system and incentives to encourage innovation.

"You do need to maintain the incentive structure," he said.

Whether the price of drugs should be regulated is an ongoing philosophical debate, Ann Pease, a life sciences intellectual property partner at Dechert, said. She pointed to the arguments in Congress last year over the length of biosimilar exclusivity, noting it is still being debated even though the Affordable Care Act set it at 12 years.

The current climate creates new challenges for biopharma if it wants to keep government out of the pricing business. Instead of asking whether a candidate will make it to Phase III development, Lind said companies should be asking whether the drug, if approved, would be reimbursed.

New drugs can no longer produce only marginal benefits if they are to be reimbursed, Lind said. Instead, they must demonstrate meaningful improvement and show, up front, that they can save the health care system money. "That's the balance we all have to strike," he added.