Americans are far more frightened of loosing their healthcare than of Al Queada invading their living rooms, and it is a benefit for which they are increasingly willing to fight. So says Andrew Forman, rated by Forbes as the number one pharmaceutical analyst for 2005.
This pressure, along with several other factors, Forman predicts, will topple today’s high drug prices and may take many of the big pharma with them.
Forman was a featured speaker at the Biotechnology Council of New Jersey’s annual conference, which took place on January 30 at Princeton University.
Currently a managing director with a pharmaceutical specialty for the investment firm WR Hambrecht in Berwyn, Pennsylvania, Forman’s experience with pharmaceutical limitations hit home early on. He grew up with a diabetic father in a small west New Jersey town. “By age 45 my father had to sell his dental practice,” says Forman. “The neuropathy was that advanced and the medical knowledge then was limited. Now they have even developed insulin inhalers.”
Forman attended Rutgers University, earning his bachelor’s degree in physiology. He helped tear down the goal post after Rutgers defeated Princeton in the colleges’ final football game in l980. “That goal post now stands in my back yard facing my neighbor, who is a Princeton grad,” says Forman proudly. Following his years at Rutgers, Forman graduated earned an MBA from Columbia, and began work as a sales representative for Bristol-Myers.
Forman later became a pharmaceutical specialty analyst for the investment bank UBS. He was then was recruited by institutional broker Friedman Billings Ramsey to build its healthcare group, and afterwards by Advest brokers to do the same. Today as a senior analyst for WR Hambrecht, Forman travels the globe and finds the trends and best investments in all areas of the international pharmaceutical industry. His best picks increasingly have been coming from emerging companies, generic drug makers, biotech, and drug delivery areas.
Were one to survey average citizens and investors, virtually all of them would predict that drug prices will continue their frightening skyward spiral well into coming decades. But Forman doesn’t agree. “Today we have 588 major publicly traded pharmaceutical companies,” he says, and they are already feeling price pressure. He predicts that there will be drastic price drops within 10 years.
This dramatic fall in drug prices will force belt tightening in the entire industry, and many firms will not be able to endure. Big Pharma could go the way of the American auto industry, which, while not pretty for the companies, would not spell disaster for the consumer, in Forman’s opinion. “If, like the auto industry in the l920s, we lost half the extant companies, the companies that consistently innovate will thrive,” he says. “As with the automobile, pharmaceutical consumers would still benefit.”
This is how Forman reaches his conclusion:
Generic revolution. Generic drugs will totally meet the needs of 95 percent of the people who use prescription drugs, states Forman. Further, because of the Internet, people can inform themselves of their requirements, reducing the need for drug representatives. This leaves the major producers an increasingly slim slice of the market.
Forman calls Bruce Downey, CEO of Barr Pharmaceuticals, as the “Clint Eastwood of the drug industry.” In 2001 Downey sued pharmaceutical giant Eli Lilly to invalidate its patent on the best-selling depression drug Prozac. Downey’s several patent invalidation victories, some say, have saved the nation billions.
Express Scripts’ Generic Drug Usage Report for 2005 estimates that a savings of $50 billion will occur through 2010 as we shift to generic medications. In 2004 alone, the report notes, there were $20 billion in missed savings from underutilizations of generics. Interestingly, New Jersey uses less generics than any state — only 45 percent, lagging way behind the New Mexico, where 60 percent of prescriptions are filled with generics.
But Forman hastens to add that it is not knockoffs, but innovation that will triumph. One of his favorite investment picks has been Summit-based Celgene, worth $100 million about a decade ago. In the l960s the popular drug Thalidomide was hastily removed from the shelves after it was discovered to cause severely deformed babies when taken by pregnant women. Despite this major pharmaceutical black eye, Celgene kept working with the substance. From it, they invented Thalomid, which first worked as a cure for leprosy and is now used to battle many types of cancer. Today the firm is worth $15 billion.
Demographic shifts. People all over the globe are getting older and living longer. One-third to one-half of all prescription drugs are taken by the elderly. Simply put, this means that a greater percentage of people will be taking more drugs in the future. But defying the old economic maxims of supply and demand, Forman insists that this will force prices to drop rather than rise.
Medications are a necessity of life, explains Forman. People, particularly older folks on fixed incomes, will apply whatever pressure it takes, or seek whatever market solutions available, to bring prices within reach. If the industry does not respond, either competition or law will force compliance.
Government aid. On January 7 Arnold Schwarzenegger, governor of California, proposed a plan to extend healthcare coverage to an additional 6.5 million uninsured. This move was seen by many as the first step toward national healthcare.
“This administration’s Medicare D plan, which allows the individual no room to negotiate for prescription drugs, is an anomaly,” says Forman. “It is simply a sop to big pharma, but neither side of the aisle will stand for it in the future.” He points out that veterans hospitals have always negotiated for drug prices, and have saved the nation billions.
If individuals do not have the funds to pay for their prescription medications, can government pick up the slack? “We have spent over $400 billion on Iraq,” Forman points out. “About a quarter of that would more than cover our medication needs. Of course we can afford it. It’s a question of prioritizing.”
Globalization. We have already come to trust prescription drugs from India-based producers. Brazil also has a strong pharmaceutical industry. China, which has spent the last two decades overcoming its quality control problems in all fields, now, by Forman’s estimates, is on the verge of being the next major manufacturer of inexpensive drugs.
“China now has the discipline and the logistical setups to make it work,” says Forman. The world’s pharmaceutical needs will increase, but the flow from all corners is rising to match it.
As to the big Pharma’s ancient argument that if profits are depressed, there would be no incentive to innovate, Forman says “Bull! That is pure propaganda. Humankind will always innovate. We innovate because it is there — like Everest.”
As long as there are companies like Celgene, willing to take a risk, pharma profits will continue to roll in. But from now on, look for the spoils to go to the small, the quick, and the clever.