Comparative Medicine Could Sink Your Stocks

by Brian Orelli - June 20, 2009 - 0 comments

The health-care reform debate has heated up again this week, with President Obama giving a speech to the American Medical Association and Republicans gearing up for a fight to keep the government from encroaching further into the industry.

There's a lot to debate -- a public insurance plan, follow-on biologics, and Medicare Advantage payments,
for example. But the one that scares me as an investor, and should
probably scare other health-care investors, is the government's plan to
get into comparative medicine. The effect on companies is very
unpredictable.

Compare and contrast

Drugs can be
compared in a couple of different ways. The cleaner way to make a
comparison is with a direct head-to-head clinical trial where patients
are randomized in groups taking different medicines and followed until
some clinical outcome occurs. But, as you might guess, this is costly.

So, instead, we're likely to see a lot of studies done the dirtier
way, using meta-analysis, especially with an expected increased use of
electronic medical records. This is where investigators comb through
databases looking for patients on different drugs for the same
condition to compare. The Food and Drug Administration already does
something similar using patient databases from UnitedHealth Group (NYSE: UNH) and WellPoint to try and spot
side effects caused by drugs. But these after-the-fact studies really
need to be followed up with cleaner, hypothesis-driven, comparative
clinical trials to make sure the findings are relevant.

Comparative studies aren't really new. In highly competitive
therapeutic areas like diabetes, companies usually have to run
head-to-head trials to get doctors to prescribe their drug. Both Novo Nordisk and Amylin Pharmaceuticals,
which have drugs before the Food and Drug Administration, have tested
their drug candidates against drugs that are currently available. When
companies run comparison trials, they take on the risk of failure. I
mean, if the new drug turns out to be worse ... oops.

But, when the government runs the clinical trials, the companies
assume a level of risk they have no control over. For instance, last
year the National Institutes of Health ran a study that found Gilead Sciences' (Nasdaq: GILD) Truvada HIV combo drug outperformed GlaxoSmithKline's
Epzicom compound. The results seem to be helping Gilead capture new
patients. Last quarter, sales of Truvada were up 23% with a slight
currency headwind compared to just a 10% rise of Epzicom at constant
currencies. Glaxo seems to be the loser here, from something outside
its control.

The clear winner here will be generic-drug makers like Teva Pharmaceuticals (Nasdaq: TEVA) and Mylan.
Their low margins would never let them run a head-to-head comparison
trial against a branded drug, not to mention the fact that such a trial
would help out competitors selling the same generic drug. But if the
government is willing to pay for those trials, the generic-drug
companies are in an almost no-lose situation.

Slippery slope

The question then
becomes: what to do with the data from a comparison trial? Currently
it's just out there -- perhaps with some touting from the winning
company -- but doctors and patients usually get to make up their minds
about whether to follow the conclusions of the study or not.

But if the government's goal is to lower the cost of health care, it
might start requiring doctors to use the "winning" drug, especially if
it’s a generic. And then you can take that a step further and figure
the government might try to put a price tag on the incremental benefit
a drug brings. How much is the extra 1.6 months of extended survival --
or whatever it turns out to be in a true head-to-head trial -- worth
for Dendreon's (Nasdaq: DNDN) Provenge compared to sanofi-aventis' Taxotere? And is that worth the likely price difference in treatments?

Slippery slope indeed.

The end result of the added risk -- a company not only has to show
that the drug works, but that it works better -- might stifle
innovation. Companies may avoid developing drugs for fear of marketing
failure due to comparative studies, which would be a shame for both
patients and investors. After all, the world's best selling drug, Pfizer's (NYSE: PFE) Lipitor, was essentially a "me-too" drug, following fellow statins made by Merck (NYSE: MRK) and Bristol-Myers Squibb (NYSE: BMY).

What's a Foolish investor to do?

The
best thing is probably to do nothing, for now. We're likely a ways away
from seeing the full impact of comparative medicine. But, because it’s
a big unknown with huge potential to move toward socialized medicine,
investors need to be extremely careful and be willing to jump ship if it comes to that.

Compare and contrast this Foolishness:

If the rules of drug development are changing, go with the flow.
One stock to rule them all.
Rule No. 1: It's OK to lose money.

Last edited by harsheeb on Sat, 06/20/2009 - 07:49 | Write to author: Brian Orelli |