by Adam Hartung | Oct 9, 2013 | Current Affairs, In the Rapids, Innovation, Lifecycle
In 1985 there was universal agreement that investors should
be heavily in pharmaceuticals.
Companies like Merck, Eli Lilly, Pfizer, Sanofi, Roche, Glaxo and Abbott
were touted as the surest route to high portfolio returns.
Today, not so much.
Merck, once a leader in antibiotics, is laying off 20% of
its staff. Half in R&D; the
lifeblood of future products and profits.
Lilly is undertaking
another round of 2013 cost cuts. Over
the last year about 100,000 jobs have been eliminated in big pharma companies,
which have implemented spin-outs and split-ups as well as RIFs.
What happened? In the old days pharma companies had to demonstrate
their drug worked; called product efficacy. It did not have to be better than existing drugs. If the drug worked, without big safety
issues, the company could launch it.
Then the business folks took over with ads, distribution,
salespeople and convention booths, convincing doctors to prescribe and us to
buy.
Big pharma companies grew into large, masterful consumer
products companies. Leadership’s view of the market changed, as it was
perceived safer to invest in Pepsi vs. Coke marketing tactics and sales warfare
to dominate a blockbuster category than product development. Think of the marketing cost in the
Celebrex vs. Vioxx war. Or Viagra
vs. Cialis.
But the market shifted when the FDA decided new drugs had to
be not only efficacious, they had to enhance the standard of care. New drugs actually had to prove better in clinical trials than existing
drugs. And often safer, too.
Hurrumph. Big pharma’s enormous scale advantages in
marketing and communication weren’t enough to assure new product success. It actually took new products. But that meant bigger R&D investments,
perceived as more risky, than the new consumer-oriented pharma companies could
tolerate. Shortly pipelines
thinned, generics emerged and much lower margins ensued.
In some disease areas, this evolution was disastrous for
patients. In antibiotics,
development of new drugs had halted.
Doctors repeatedly prescribed (some say overprescribed) the same antibiotics. As the bacteria evolved, infections
became more difficult to treat.
With no new antibiotics on the market the risk of death from
bacterial infections grew, leading to a national public health crisis. According to the Centers for Disease
Control (CDC) there are over 2 million cases of antibiotic resistant infections
annually. Today just one type of
resistant “staph infection,” known as MRSA, kills more people in the USA than
HIV/AIDs – killing more people every year than polio did at its peak. The most
difficult to treat pathogens (called ESKAPE) are the cause of 66% of hospital
infections.
And that led to an important market shift – via regulation
(Congress?!?!)
With help from the CDC and NIH, the Infectious Diseases
Society of America pushed through the GAIN (Generating Antibiotic Incentives
Now) Act (H.R. 2182.) This gave
creators of new antibiotics the opportunity for new, faster pathways through
clinical trials and review in order to expedite approvals and market launch.
Additionally new product market exclusivity was lengthened an additional 5
years (beyond the normal 5 years) to enhance investor returns.
Which allowed new game changers like Melinta Therapeutics
into the game.
Melinta (formerly Rib-X) was once considered a “biopharma science
company” with Nobel Prize-winning technology, but little hope of commercial
product launch. But now the large
unmet need is far clearer, the playing field has few to no large company
competitors, the commercialization process has been shortened and cheapened,
and the opportunity for extended returns is greater!
Venture firm Vatera Healthcare Partners, with a history of investing in game changers (especially transformational technology,) entered the picture as lead investor. Vatera's founder Michael Jaharis quickly hired Mary Szela, the former head of U.S.
Pharmaceuticals for Abbott (now Abbvie) as CEO. Her resume includes leading the growth of Humira, one of
the world’s largest pharma brands with multi-billion dollar annual sales.
Under her guidance Melinta has taken fast action to work
with the FDA on a much quicker clinical trials pathway of under 18 months for
commercializing delafloxacin. In layman’s
language, early trials of delafloxacin appeared to provide better performance
for a broad spectrum of resistant bacteria in skin infections. And as a one-dose oral (or IV)
application it could be a simpler, high quality solution for gonorrhea.
Melinta continues adding key management resources as it
seeks “breakthrough product” designation under GAIN from the FDA for its RX-04
product. RX-04 is an entirely
different scientific approach to infectious disease control, based on that previously
mentioned proprietary, Nobel-winning ribosome science. It’s a potential product category
game changer that could open the door for a pipeline of follow-on products.
Melinta is using GAIN to do something big pharma, with its
shrinking R&D and commercial staff, is unable to accomplish. Melinta is helping
redefine the rules for approving antibiotics, in order to push through new,
life-saving products.
The best news is that this game change is great for investors.
Those companies who understand the
trend (in this case, the urgent need for new antibiotics) and how the market
has shifted (GAIN,) are putting in place teams to leverage newly invented drugs
working with the FDA. Investment timelines and dollars are looking
far more manageable – and less risky.
Twenty-five years ago pharma looked like a big-company-only
market with little competition and huge returns for a handful of companies. But things changed. Now companies (like Melinta) with new
solutions have the opportunity to move much faster to prove efficacy and safety
– and save lives. They are the
game changers, and the ones more likely to provide not only solutions to the
market but high investor returns.
by Adam Hartung | Jul 26, 2013 | Current Affairs, Food and Drink, In the Swamp, Leadership
Both Coca-Cola and McDonald's have produced good investor returns over the last decade. From stock lows in early 2009, Coke has more than doubled. After shutting many stores and investing heavily in upgrades as well as supply chain efficiencies, over the last decade McDonald's has risen 6-fold!
But recent quarterly returns have not impressed investors as both companies failed to meet expectations. And for traders with a short-term focus both companies are off their 2013 highs. The open question now, for patient investors with a multi-year focus, is whether either, or both, companies are going to go back to long-term valuation growth (meaning they are a buy) or if their value has fizzled (meaning they are a sell)?
This question cannot be answered by looking at historical performance. As all investment documents remind us, past history is no assurance of future gains. Instead investors need to look at trends, and whether each company is positioned to take advantage of major trends as we head toward 2020.
One major trend is obesity. And not in a good way. The USA is fatter than ever, and shows no signs of thinning as one in 3 people are now considered obese. For Coke and McDonald's this is not a good thing, since their products are considered major contributors to what some call a national epidemic.
Over the last few years this trend has led schools to remove fast food and soft drink dispensers. America's first lady has started a national campaign to fight childhood obesity. And the nation's largest city's mayor has tried to make large portion sizes illegal in New York. While all of this might seem like crank activity that isn't making much difference, truth is that soda consumption per capita has been declining since 1998, and 2012 declines now put soda drinking at the lowest level since 1987!
Even if this still seems like much ado about nothing, investors should be aware of the long-term impact when products are seen as unhealthy. Cigarettes were a common consumer staple well into the 1960s, but when that product was determined to have adverse health impacts advertising was banned, consumption was restricted to adults only, dispensing was severely limited as machines were eliminated, taxes shot through the ceiling creating a 20-fold price increase and consumption was banned in buildings and many public places. None of this happened overnight, but eventually these actions caused the sales and profits of tobacco companies to decline — despite their heroic efforts to fight the trend.
If the Centers for Disease Control takse the point of view that soft drinks are a major contributor to diabetes and other obesity-related illnesses, it is not out of the realm of possibility that Coke could find itself in a situation somewhat like Phillip Morris did. If the CDC made the same determination about certain fast food items (such as double-patty burger sandwiches or large french fry orders) the amount of advertising, free toys, discounted product and super-sized packaging available to McDonald's could be severly curtailed. It could become a requirement that Coke and Big Macs have warning labels educating consumers about the possibility of long-term illness from consumption. And product sales could only be limited only to people over 18.
This may seem extreme, even bizarre, and far off into the future. But this is the direction of the trend. There seems no solution for obesity at this time, so public policy is starting to point toward doing something about consumption.
Recall that when alcohol-related deaths showed no sign of decline it didn't take long for much tougher drunk driving laws to be enacted, then for a string of adjustments lowering the level at which people were considered drunk. Public policies that took direct aim at product consumption.
Looking at the tobacco and alcohol analogies, Coke and McDonald's are behaving a lot more like the R.J. Reynolds than Miller-Coors.
Tobacco companies fought the trend, and ended up in a very expensive and long battle they inevitably lost. They denied there was any public health problem, and denied they had anything to do with the nation's, and their customers', health issues. The fight lasted a very long time. Now their customers are often ostracized, and the industry is contracting.
Liquor companies took a different approach. While not admitting anything, they aggressively promoted "responsible" consumption levels. They promoted individual abstinence (non-consumption) in group settings so there could be a "designated driver" while actively promoting product bans for people under age. They did not fight drunk driving laws, but instead worked with organizations to reduce deaths. Though far from angels, the industry players did not fight the trend, and managed to find ways to avoid the kind of bans dealt tobacco.
Coke and McDonald's today are denying the obesity problem and their contribution to it. While they both have healthier products, they remain committed to the least healthy offerings. Watch a Coke ad and you'll always see the traditional, sweetened red label product receive top billing. Likewise, you can purchase a salad at McDonald's, but the ads and promotions always feature the far less healthy burgers and fried foods which characterize the company's history.
Neither company promotes responsible consumption levels, nor does anything to discuss the importance of limiting use of their products. To the contrary, both like to promote larger package sizes and greater consumption – often beyond what almost anyone would consider healthy. Neither works aggressively to improve the quality of healthy products, nor showcases them as preferred products for customers to purchase.
One would not expect Coke or McDonald's to fail any time soon. But the trends which made them huge companies have reached an end, and new trends are headed in a direction which do not support growth. Both companies seem unwilling to recognize the new trends, and find ways to align with them. Future revenue growth is up against a difficult environement, and historical cost reduction activities leave little opportunity to improve future earnings without revenue growth. While the valuation of both companies are unlikely to remain flat, it is hard to identify the bull case for either to provide long-term investors much gain.
