FTSE 350: Is big pharma ready for the dominance of genetics?

Modifying DNA to make human cells able to fight disease is undeniably exciting. These therapies have the potential to help patients with previously untreatable illnesses and may, one day, allow us to meaningfully use the word ‘cure’ when talking about cancer treatments.

But progress is slow. In 2018 no new gene therapies were approved by the Food and Drug Administration (FDA) even though more than 100 clinical studies were conducted by researchers in the US alone. The trial process for genetic medicines is long and expensive and target patient populations are small, which makes it hard for sponsors to make a decent return on their investment. 

Those challenges have created a conundrum for global pharma companies: should they pursue expensive, potentially disappointing genetic drug trials or risk missing out on one of the biggest opportunities in medicine?

Increasingly, the world’s pharma giants are leaning towards the former option and ditching the conglomerate model to pursue more aggressive research or acquisitive strategies. In 2018, AstraZeneca (AZN) continued the selling spree of its older medicines to focus on novel cancer drugs, while Eli Lilly (US:LLY) spun out its veterinary division and has ploughed more money into its pipeline. Even GlaxoSmithKline (GSK) – which under the tenure of its previous chief executive, Andrew Witty, stuck resolutely to the idea that mass-market drugs are better than targeted therapies – has finally heeded the calls of its shareholders and begun the process of spinning out its consumer healthcare division. In 2019, the business will be merged with Pfizer’s (US:PFE) over-the-counter unit with the view to listing the joint venture on the London stock market within three years.

M&A is playing a big role in preparing drugs companies for the dominance of genetics. Japanese giant Takeda snatched Shire out of the FTSE 100 earlier in January as part of its plan to bulk up its drugs pipeline, while Bristol Myers Squibb (US:BMY) has made a bid for biotech-focused peer Celgene. Pharma giants are also turning to smaller, specialised biotechnology groups to help them with the early stages of drug development. For example, beleaguered addiction treatment specialist Indivior (INDV) has teamed up with C4X (C4XD) to create novel, targeted drugs. Expect more collaboration – both mega-deals and innovative partnerships – in 2019.

All the while, the war over pricing continues to rage, with more at stake than ever before. Critics shout against the ethics of charging almost $500,000 for a genetic medicine which has been successful in curing over 80 per cent of young leukaemia patients, while pharma executives argue that they won’t have the funds to make any new drugs if they don’t slap high price tags on their medicines.

It’s an argument in which the regulators are gradually gaining the upper hand. Backed by politicians and patients, they have started clamping down on exorbitant prices and accelerating the approval of cheaper, unbranded drugs. That’s one of the reasons generic drug specialist Hikma (HIK) was far and away the top performing pharma company in the FTSE 350 in 2018. In November, management upgraded guidance for the 2018 financial year after it launched a swathe of new drugs in the US.

The challenges for pharma giants are getting tougher owing to consolidation between pharmacy benefit managers (PBMs) (which link the pharma companies to the doctors that buy their medicines) and insurers (which tell the doctors which medicines to buy). These mergers give the PBMs more power to negotiate lower prices. Pharma companies need to keep innovating to maintain the high margins they have long enjoyed.