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Premium Pricing: The New Economics of DrugsBy Rob Fannon, editor Phase 1 InvestorThursday, January 25, 2007 A prescription for the top-selling biotech drug Avastin will cost you $5,500 per month.
In contrast, taking the conventional drug Lipitor will cost you approximately $1,100 per year.
Lipitor is Pfizer's blockbuster cholesterol medication – the world's top-selling conventional drug. Avastin is a colorectal cancer drug, produced by leading biotech firm Genentech.
Of course, total Lipitor sales dwarf those of Avastin because so many people have high cholesterol. Nevertheless, the hugely different price tags provide an important insight into the economics of drug development.
They also show why Merck and Pfizer have both set their sights on becoming the largest biotech company in the world within a few years.
Today, genetic tests and other technologies that probe the underlying molecular fingerprint of disease are hallmarks of modern medicine. The biotech industry is using this information to design drugs based on the fundamental biology of the body – also known as "rational design."
Avastin demonstrates the rational design concept perfectly:
In cancer, a series of molecular events results in uncontrolled cell growth and tumor formation. The body forms blood vessels to feed the tumor's high demands. Avastin works by blocking the protein responsible for blood vessel growth around the tumor. The tumor is starved to death.
Of course, this is a simplistic depiction. Avastin is a highly complex protein-based drug that must be infused every two weeks in a hospital setting, unlike Lipitor pills that can be popped at home on a daily basis. But it's so effective that many predict it will become the top-selling cancer drug of all time.
Modern medicine and drug development continue to move toward a more direct biological and molecular interrogation of disease. The result will be more specific and complex drugs. However, such drugs command premium pricing, and biotech drug prices have soared more than 500% in recent years. Check out the price tags on other common biotech drugs:
Only four new biotech drugs were approved in 2006. With prices like these, Big Pharma will continue to troll the biotech sector in search of new products and companies that produce them.
Of course, products with premium prices require premium deals. The biotech sector stands to profit handsomely in the many years to come. Along with Big Pharma, I'm continually trolling the sector in search of higher returns for my Phase 1 Investor subscribers.
I look for companies that are developing new methods and technologies for designing biotech drugs, companies that will offer Big Pharma the chance at not just one blockbuster drug, but a whole series of them.
Last year was great for Phase 1... I'm hopeful 2007 will be even better.
Good investing,
Rob Fannon
Editor, Phase 1 Investor
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