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Drug Pricing: how much would you pay for a quick cure?

Political pressure to curb the costs of drugs is growing. Sam Isaly, manager of the Worldwide Healthcare Trust, responds.

Drug Pricing: how much would you pay for a quick cure?

Few people had heard of Turing Pharmaceuticals until last week but the decision of the small, privately owned US firm to hike the cost of one of its treatments is making one leading investor wary of backing big drugs companies.

Sam Isaly, manager of the Worldwide Healthcare Trust (WWH ), said the controversy over Turing’s attempt to pass on a 5,000% price increase on a drug sometimes used to treat AIDS sufferers, showed the rising political threat facing US pharmaceutical giants.

Last week pharmaceutical and biotech stocks tumbled after Hilary Clinton, the leading contender to be the Democrat party’s next presidential candidate, responded to the row over Turing by saying she would seek to cut the cost of drugs if she gained power.

Clinton intervened after Martin Shkreli, Turing’s boss and a former hedge fund manager, denied he was profiteering by raising the cost of Daraprim from $13.50 to $750 a pill after acquiring the drug last year.

Developed 62 years ago, Daraprim treats toxoplasmosis, a parasitic disease that affects people with weakened immune systems. Shkreli claimed he would reinvest the bulk of his profits in improving the treatment. He later backed down and said he would lower the price to an unspecified level.

The rise of 'biosimilars'

Isaly, who has trebled his shareholders’ money in the past five years, said healthcare would attract increasing political attention in the run-up to next year’s presidential election.

An avowed Republican, Isaly (pictured) told investors at the trust’s annual general meeting last week that while the Democrats focused on price, the Republicans would attempt to overturn ‘Obamacare’, which has been the current government’s landmark reform of healthcare.

Given the complexities of America’s constitution and political systems, Isaly said he did not expect politicians to achieve much: ‘I do not expect significant change if either a Democrat of a fellow Republican are elected.’

Nevertheless, the political heat comes at a sensitive time for the major drugs’ companies who face the threat of ‘biosimilars’. These are a new wave of low-cost treatments that mimic complex biotechnology drugs.

Novartis of Switzerland this month launched the first biosimilar in the US, a copycat version of Amgen Inc’s ‘best-selling Neupogen, used to boost the white-blood cell count of patients undergoing chemotherapy.

Isaly, managing partner of OrbiMed Advisors in New York, said there were up to 50 biosimilars in development seeking to replace a dozen of the industry’s ‘blockbusters’ as patent protections expired.

Although Isaly remained bullish on the $1 trillion healthcare sector – which is growing at 6% a year as a result of population growth and rapid scientific innovation – he said he was ‘picky’ over big pharma stocks.

The manager said he held nearly 22% of WWH in stocks like Novartis, Bristol-Myers Squibb and AbbVie, less than half the amount big companies like represent in the MSCI World Healthcare index, the trust’s benchmark.

By contrast, he was ‘overweight’ specialist pharmaceutical companies developing biosimilars and other generic versions of existing treatments, such as Ono Pharmaceutical and Impax Laboratories.

He was particularly keen on big biotechs, where his main holdings were Regeneron Pharmaceuticals, Amgen and Biogen. Stocks like this represented nearly 19% of the fund at the end of August, compared to 13% in the healthcare index, and offered better value than the major pharmaceuticals.

Small, riskier, ‘emerging’ biotech companies accounted for 13% of the portfolio, much more than their 3% presence in the MSCI index.

Gene therapy

Isaly cited Bluebird Bio as one of a range of companies applying gene therapy to the treatment of single cell diseases. The Nasdaq-listed stock has been a heavy faller in recent days but Isaly said it was close to finding a cure for sickle cell anaemia, a hereditary blood disorder.

Isaly said the beauty of gene therapy was that it offered the prospect of short – or even single-dose – cures for previously intractable diseases.

This raised the question of price: Referring to the push and pull between drugs companies and consumers, he asked: ‘What do you pay for the single injection that will cure you?’

While industry lobbyists focused on pharmaceuticals' need to recoup the cost of developing new drugs, which Isaly estimated was $200 million a time, the manager suggested the sector retained a lot of pricing power in its most innovative companies.

In the past decade, WWH has delivered a near 300% total return to shareholders. Biotech Growth (BIOG ), a sister fund also managed by Orbimed, which is more focused on biotech companies, has generated 544%, the best return in the investment trust sector.

Monday was a tough day for the funds, however. BIOG and rival International Biotechnology Trust (IBT ) tumbled over 10% while WWH slid nearly 7% to £17 a share.

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by Daniel Grote on Apr 23, 2018 at 14:05

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