Monday, October 22, 2007

Schering-Plough's Wake Up Call

Separated at birth? Sugammadex versus Suge Mug Shot

Talk about a real sleeper. Wall Street analysts are starting to buzz about one Phase III project Schering-Plough will be acquiring as a part of its $14 billion acquisition of Organon. But this is definitely not the kind of product that usually merits spotlight coverage in research notes.

The unlikely pipeline star? The neuromuscular blockade reversal agent sugammadex, a product used post-surgery to counter the effects of neuromuscular blocking agents in anesthesia. The buzz started earlier this year with the publication of an article in Anesthesia & Analgesia suggesting that it would revolutionize anesthesia care. And it continued with the release of data at this week’s American Society of Anesthesiologists meeting. (You can bet no one sleeps through the plenary sessions at that one.) [ed. note: hey-o!]

Credit Suisse’s Catherine Arnold, for one, liked what she saw. “Sugammadex continues to impress,” she wrote in an October 16 note reiterating her “outperform” rating on Schering.

“We continue to feel that this is an exciting product that could revolutionize the practice of anesthesia,” Arnold writes.

“It has clinical advantages: providing faster, more consistent reversal of neuromuscular blockade induced by a variety of agents and no anticholinergic side effects as compared to the current reversal agents. Further, it has a pharmacoeconomic advantage: allowing patients to be transferred out of the
operating room or recovery room more quickly post-op… We continue to feel that investors are under-appreciating sugammadex’s potential.”
Sounds like a great opportunity. So how big will it be? Arnold estimates it will reach sales of $700 million in 2015.

Huh? All this buzz over a product that won’t reach a billion dollars in revenues eight years from now? Has Wall Street lost its mind?

We don’t think so. Instead, sugammadex is exactly the type of mini-buster Big Pharma is going to have to rely on in the future as the entire industry adjusts to the post-blockbuster world. There haven’t been a whole lot of products bigger than $700 million at peak coming out of Big Pharma in recent years—and the new FDA drug safety law means there will be even fewer. (Why? Start here.)

Given that reality, submarkets that pharma has bypassed for the past decade are starting to look more attractive. That is a key part of sugammadex’ appeal: it will be sold exclusively to hospitals. That has not been a major focus for most of Big Pharma, but Arnold notes that it has a big virtue—it can be served with a relatively small commercial infrastructure. (For good measure, Arnold observes, Schering isn’t the biggest of Big Pharmas either, so $700 million goes farther. She points out that it takes only $16 million in net income to add a penny to SGP’s EPS.)

During Windhover’s Pharmaceutical Strategic Alliances conference last month, I pointed out another reason it is smart for Schering to move into the hospital market: it relies on a completely different payment system than the primary care market. [This presentation will be available to download as a podcast from IN VIVO Blog shortly.]

For years that has been a big reason most Big Pharma’s stayed out of the hospital sector. Hospital payments are essentially capitated by the Medicare Part A program, making it extremely difficult to launch premium priced products. That’s why sugammadex’ pharmacoeconomic data will be so critical. If Schering can show it saves hospitals money, uptake will be simple. But if sugammadex costs too much upfront, or puts hospitals at risk of losing money on routine surgical procedures, no amount of superior clinical data will help it.

For more than a decade, most companies have preferred pricing flexibility over demonstrating pharmacoeconomic advantages. But now they don’t really have a choice, not now that the government and its private plan surrogates are starting to exert more influence over outpatient drugs through Medicare Part D.

It is no longer a question of whether to operate in a government influenced market, but instead a question of which one: the “old” Medicare, administered directly by the feds; or “new” Medicare, run by private intermediaries. There are plenty of reasons to choose one market over the other, and Big Pharma in particular has lots of reasons to prefer the Part D system which at least fragments the market to ensure there are no make-or-break coverage decisions coming out of Washington.

But why choose? Uncle Sam’s money is paying the bills both ways, so the smart play is to dip into both streams.

1 comment:

Anonymous said...

Wake you need billion dollor block buster from an anesthesia product. Its not a pill for every one to consume and we are not talking about Vytorin or a Nuvaring for heavens sake.