GILD by Association

Biotech stocks have suffered massive losses with the IBB biotech index down 20% over the last 1 ½ months.  This followed a sustained bull market with a 300% increase since the US Housing Bubble bottom.  RNAi Therapeutics stocks could not duck this trend and suffered similar, if not exaggerated losses: bellwether Alnylam down almost 50% since their $700M Genzyme deal, Arrowhead Resesarch down 40% since their all-time high, and even the most undervalued of them all, Tekmira, down a solid 30% off the pricing of their secondary barely a month ago.  Should investors worry?

The causes of the pullback in the biotech market can be attributed to at least three factors: 1) a general downturn in secular growth stocks that have done quite well recently; 2) worries that interest rates are on the upswing and could divert capital flow away from stocks with little or no current earnings; and finally 3) a sense that society will stop paying for expensive drugs. 

Although the era of ‘resource-constrained’ healthcare has long arrived in Europe, the fact that US lawmakers made an example out of HCV wonderdrug Sovaldi (sofosbuvir) as a wildly overpriced drug, sent shudders through the biotech investment community.  If a $84,000 price tag for a cure of HCV is deemed too much despite the fact that it will extend life by years for the average patient and save the healthcare system much more over the long-term in terms of reduced costs related to liver-related complications…then what about say orphan drug pricing for which $300-500k per patient every year has not become that uncommon?  To wit, orphan diseases represent a fertile ground for RNAi Therapeutics as illustrated by Alnylam’s phase III candidate for TTR amyloidosis, ALN-TTR02. 

‘Resource-constraint healthcare systems’ is certainly something that I occasionally hear here at the European Liver Meeting (EASL) which celebrates the very Sovaldi and general progress made in treating HCV, yet tries to deal with the problem of how to get it patients due to cost issues in light of the millions infected and that would be treated today if cost were not an issue.

Interestingly, nobody here criticizes the drug makers for overcharging.  I don’t think this is because they are paying for our lunches, but because the medical and long-term pharmacoeconomic and quality-of-life benefits of curing HCV are so obvious.  In general, I believe the Sovaldi issue will be short-lived and accelerate a transition to a value-based reimbursement system with the benefit of curtailing some of the drug pricing mis-behavior we have seen (you all know them).  However, beyond that, I expect that we will still be willing to spend much on our health and drug costs accounting for just ~10% of overall healthcare costs, the pharmaceutical industry should be able to make the case that innovative drugs that make a solid difference in patients' lives out to be rewarded financially.  Remember this when small, innovative biotechnology companies are undercapitalized to the point of becoming financially non-viable yet patients clamoring for new treatments.  RNAi Therapeutics was in that precarious position just 2 1/2 years ago and RNAi investors deserve every cent they raked in on the stock market when the sector recovered. Every cent.

If you look at the RNAi Therapeutics pipeline addressing the roots of and seeking cures for diseases ranging from the severe and orphan like TTR amyloidosis and solid cancers, to the chronic and debilitating like HBV and alcohol dependence, it will be RNAi companies that will stand first in line to benefit from the value-based cost model of healthcare.   The continued flow of clinical trial data (watch ARC520, TKM-PLK1, ALN-TTR02, and ALN-AT3 this year) should make that obvious and allow RNAi Therapeutics to break out from the biotech crowd and bounce back.  And even if the monetary policy makers increased interest rates, I don’t think it would be much in this deflationary environment, and a 1% short-term interest rate should not divert capital flow all that much.