WASHINGTON -- At a recent hearing on prescription drugpricing before the Health and Environment Subcommittee ofthe House Energy and Commerce Committee, Genentech Inc.'schief executive officer, Kirk Raab, argued the biotechnologyindustry's case against perceived price control elements inPresident Clinton's health care reform proposal.
Raab, who is also the chairman of the Biotechnology IndustryOrganization (BIO), offered a set of arguments that has becomea standard lobbying theme and has won BIO an impressivenumber of meetings at the White House and with members ofCongress. Raab made compelling arguments for reliance on theforces of the free market to curb drug costs and recommendedthat the federal government improve its ability to gather anddisseminate information about the cost-effectiveness of drugs.
BIO has lobbied hard against perceived price control elementsin President Clinton's health care reform proposal, including theestablishment of a breakthrough drug committee to review the"reasonableness" of prices for new drugs, a required rebate forMedicare drugs, and drug-blacklisting authority for thesecretary of Health and Human Services.
However, many insiders argue that political necessity hasforced BIO and its members to overstate and oversimplify theindustry's case. Among the 1993 trends often attributed to thethreat of price controls are the drop in biotechnology stockprices, cuts in biotechnology company R&D programs and a"crisis" for biotechnology companies trying to raise money inthe public equity markets.
A Strategy of Overstatement
Cynthia Robbins-Roth, chief executive officer of BioVenturePublishing in San Mateo, Calif., said a strategy of overstatementhas helped BIO achieve its goal of attracting lawmakers'attention. "Their political savvy is incredible," she said. But sheworries that the strategy may backfire.
"Suggestions that the industry will be devastated by anyformal scrutiny of drug prices sends a message to investorsthat this industry is so fragile it can't survive in anenvironment that demands functional businesses," saidRobbins-Roth. "In the end, the biotech industry will be judgedby the same standard that any other industry is judged by: Canyou deliver a product to the marketplace and make a profit?"
Jim McCamant, editor of The Medical Technology Stock Letterin Berkeley, Calif., agreed. "Part of what BIO is trying to sell isfear, and I think Wall Street has overreacted," he said. "Themessage may be effective politically, but on an interim basis itmay be hurting the industry."
Hazards of Simplification
Raab's Feb. 8 testimony highlights some of the hazards inherentin trying to capture the truth about a complex industry. Forexample, he cited the 32.6 percent drop in the AMEXBiotechnology Stock Index as evidence of the biotechnologysector's plight last year. Although the AMEX index is certainly avalid measure, it includes only 15 top-tier companies, three ofwhich are Amgen Inc., Centocor Inc. and Synergen Inc., all ofwhich suffered enormous losses in 1993 unrelated to healthcare reform issues.
Analyzed with the same equal-dollar weighting used by theAMEX index, stock prices in BioWorld's universe of 220 publicbiotech companies dropped just 6 percent in 1993. Using acomparable weighting scheme, New York-based Oppenheimer& Co.'s Biotech 100 Index (comprised of 100 companies rankedby market capitalization) showed that stock prices dropped 5percent in 1993.
Raab also cited three examples of companies forced to cut R&Dprograms due to a lack of capital: Cytogen Corp. of Princeton,N.J., ImmuCell Corp. of Portland, Maine, and Viagene Inc. of SanDiego. The overt message was that the threat of price controlswas the primary reason their research was curtailed.
While valuable research was certainly cut last year due tomarket conditions, none of the three companies Raab citedlikely represents a "pure play" casualty of health care reformschemes. Analysts said Cytogen has suffered primarily due todisappointing sales of its OncoScint product, and ImmuCell hashad a decidedly checkered financial past, including a 1-for-100reverse stock split in 1990. Viagene did cut back to threeclinical trials from a planned five for a new HIV drug indevelopment, but the company's president, Robert Abbott,conceded that overall market setbacks such as Synergen's andCentocor's disasters could be cited as significant reasons forViagene's travails in going public and raising funds.
Perhaps the strongest financial argument Raab offered was thatthe cost-of-capital for biotechnology companies increased in1993. He noted that the average size of public offerings wasdown from 1992, and that while the total amount raised by theindustry changed little from 1992 to 1993, the mix of financialinput changed in important ways. Last year saw a markedincrease in public investments in private equity (PIPEs) inwhich public companies sold stock to private investors at adiscount to the market price.
Few would take issue with the shifting mix of industry funding,but the cost of capital argument is a complex one. Raab said theincrease of PIPE deals was evidence of the rising cost of capital.However, most of the major PIPE deals done in 1993 sold at a10 percent discount to market -- about the same percent dropa company would normally see in its stock price afterannouncing a public stock offering. (The stock price usuallydrops because investors view follow-on offerings as a dilutivefinancial move.) On top of that, public deals cost companies anadditional 10 to 12 percent in fees, compared with PIPE fees,which average between 5 and 7 percent.
According to Mark Edwards of the financial consulting firmRecombinant Capital in San Francisco, tracking the rise and fallof the true cost of capital depends on how you define yourterms. He said the cost-of-capital issue is currently beingstudied but no one has yet published the numbers to provethat the cost is actually rising.
Carl Feldbaum, BIO's president, said he has never argued thatthe breakthrough drug committee will "kill" the industry orthat all of biotechnology's problems arise from health carereform. "We've been very careful not to resort to hyperbole,"he said. Nonetheless, he stressed that to be successful onCapitol Hill, "one must have a simple message, delivered withforce, ad nauseum."
Feldbaum said that despite criticisms of its strategy, BIO hasbeen successful in getting the "price control" label to stick tooffending elements of Clinton's plan. As a result, BIO is nowengaged in "serious and substantive" negotiations withadministration officials. "It's all on the table now," he said."We're talking about specific changes, deletions, alterations. It'sserious now and a little bit painful because we don't want tofray a constructive relationship."
-- By Lisa Piercey Washington Editor
(c) 1997 American Health Consultants. All rights reserved.