The Dermatology Industry: A Status Report

Valeant and Allergan headlined dermatology industry news in 2014, as Valeant pursued Allergan in a roller-coaster take-over bid. Late last year, Actavis stepped in to acquire Allergan, adopting its name in the process. Now both companies are again leading the news, months since their paths diverged. Allergan is in the midst of a multi-billion dollar merger deal with Pfizer while Valeant faces tumbling stock prices in the wake of allegations that the company manipulated drug prices through their association with specialty pharmacy Philidor.

Valeant last month warned that its break from Philidor will interrupt its dermatology business. In a conference call for investors, Valeant Chairman and CEO J. Michael Pearson acknowledged that many dermatology prescribers will probably change their prescribing habits until Valeant implements a new specialty pharmacy program, which the company committed to do within the next 90 days. Philidor will cease operations for Valeant by the end of January.

Mr. Pearson said that Philidor’s revenue of $190 million represented only 6.8 percent of Valeant’s overall revenues for the third quarter. He acknowledged, however, that, “In the very short term, disruption in our dermatology business will be significant.” Valeant expects its dermatology business to return to historical performance levels by the second half of 2016.

Noting that recent developments have provided a learning opportunity for the company, Mr. Pearson said the past few weeks were a, “A painful experience for me personally.” In other company news, he also reported that Valeant plans to submit its psoriasis biologic to the FDA by the end of this year.

Meanwhile, Allergan’s proposed merger with Pfizer—estimated at $160 billion, the deal would be the largest-ever pharmaceutical deal—is now official, with the parties signifying their intention to merge, pending regulatory approvals.

During the Ophthalmology Innovation Summit, which preceded the American Academy of Ophthalmology meeting in Las Vegas, Mr. Saunders talked about the shift in the “pharmaceutical innovation ecosystem,” in which the driving force of innovation is now coming from smaller biotechnology and specialty pharma companies, rather than global pharma companies, which had previously driven the majority of new product revenue.

Following the meeting, Mr. Saunders spoke exclusively with DermWire.com’s sister site, EyewireToday.com, about a variety of topics. While he couldn’t discuss details of a potential merger with Pfizer, Mr. Saunders discussed his philosophy on R&D, drug pricing, and his personal and professional goals with Stephen Daily, Executive Editor of News for EyeWire.com. Ahead is an excerpt from that conversation.

Mr. Daily: When it comes to money and resources devoted to research and development, every company has a different philosophy. You have had a reputation as a CEO who is wary of the costs of early-stage drug development and have talked about the importance of partnering with small biotech companies and academia. Yet, other large pharma companies have often relied more on internal research and development. Can you talk about what your philosophy is when it comes to investing in drug discovery and what you believe is the most effective means to get a product from the development phase to commercialization?

Mr. Saunders: Yes, to be clear, I’ve always embraced innovation. I do believe innovation is the lifeline of our industry and certainly is at the heart of what Allergan is today. That being said, I think as a CEO and as a leader of our business, I’ve always been careful about how we spend our money, and so we always want to make sure that we’re spending our money in a productive manner and where we believe we can add value.

When I look at discovery research, I look at it as an area in health care that has struggled, but that doesn’t mean I’m against it; it means I want to do it with caution and with a lot of examination. That being said, when I took over Allergan, I really spent a lot of time looking at our discovery capabilities and our discovery labs, and what I learned was we did have a comparable advantage. We did have a group that was being productive. Therefore, I feel very comfortable investing in that group and in those programs.

Our model is really open science, and so our goal is to find the best ideas for innovation regardless of where they come from. It doesn’t matter to me, to be fair, whether that idea comes from an internal bench scientist working in our labs or whether it comes from a small biotech company and in a different part of the country. The important thing is: Is that idea a good one? Can we invest to bring it to life? And ultimately, will it help patients? If that’s the answer, I’m really antagonistic to where it came from.

Mr. Daily: There has been a lot of focus recently on drug pricing, and a few high-profile cases of price gauging on behalf of pharma companies. The pricing policies of drug companies have caused political scrutiny and, in many cases, a lack of trust from the public and patients who rely on these drugs. As the CEO of a major pharma company, what are your thoughts on the recent public scrutiny over drug pricing? And can you talk about the process of trying to raise drug prices in a responsible manner and grow the business for shareholders?

Inside Rising Drug Costs

2015 appears to be the year of rising drug costs. The issue is affecting specialties beyond dermatology, and regulators are taking notice. Congress has called for hearings, and some brands are under investigation for possible business misdoings. In a recent edition of DermInsider, host Neal Bhatia,MD spoke with guests Jake Levitt, MD and Mark Lebwohl, MD about the issue and the AAD’s response. Watch now.

“The concept is that the [generic] company will price their drug below the brand and the goal of the company is to get 100 percent market share through price competition…that requires that a company sacrifice their profit in order to get market share, and that’s just not rational.”

—Jake Levitt, MD

Mr. Saunders: I think you said it well in the question. There have been a few controversies of late from companies that have, I think irresponsibly and egregiously, raised specific drug prices, and I think most of those companies are really outliers to the mainstream pharmaceutical industry. I think most of the pharmaceutical industry takes the responsibility around drug pricing quite seriously and tries to raise prices in a manner that’s consistent with the value equation that they’re creating, and I think we do that because we have a social contract, an unwritten social contract, with America. Let’s talk about the United States right now. We are committed to investing in R&D. We are committed to investing for unmet medical need, and we are committed to running our businesses responsibly. But we also have to create a return, not only for our shareholders, but to justify the investment in innovation and R&D. And so all those things have to be balanced. And as a result, most mainstream companies—Allergan included—really try to look at how to raise drug prices and how to set drug prices. In particular, the last few years we have really tried to study the pharmacoeconomic benefit of the products in society and justify it. We don’t sell one, but if you look at statins for example, I was reading a study a little bit ago, the statin class has essentially reduced about a trillion dollars of health care burden out of the United States in the form of improved cardiovascular health and, therefore, less cardiovascular disease, and the industry itself has put about less than 25 percent of that value in return for that trillion dollars.

A hard argument for people to understand if you’re the consumer of drugs is—and rightly so—if you’re sick, all you care about is what does it cost you. And so that’s where the big disconnect comes. I think the transparency around drug pricing is important. I think the scrutiny is good. It’s a positive that will hopefully keep companies in check that want to do egregious things but at the end of the day, we need to do this in a very responsible manner.

Mr. Daily: In recent years, we have seen more and more companies moving operations overseas through mergers and acquisitions to take advantage of a more favorable tax jurisdiction. Some CEOs have voiced their concerns about operating in the US’ tax regime, calling it a disadvantage in competing against foreign companies. Do you believe changes need to be made in the US to allow for a more favorable tax rate?

Mr. Saunders: Yes. To be fair, I think that has very little to do with tax rate. I think the United States has to become more competitive around the global versus territorial tax system. I think the real reason why companies have been moving abroad and why American companies have been disadvantaged competitively against foreign companies has almost nothing to do with tax rate in and of itself. It has to do with the double taxation of American companies’ foreign profits. Virtually no other country in the world has a double taxation on foreign profits like the United States does. That is really the main reason why this phenomenon exists, and I do believe the United States should solve it to make America more competitive. n