After seeing my favorite “2014 top pick” biotech stock rewarded last week with a 500% rally, I’m scouring the market looking for the next dramatic pipeline catalyst. 
But despite plenty of candidates, a less forgiving reimbursement environment may mean the days of 90% margins on life-saving drugs may be winding down fast.
Take a company like Questcor (QCOR), for example. The company has built an extremely lucrative franchise out of its only drug, a hormone gel marketed under the name Acthar that currently sells for $28,000 per five-injection vial.
Acthar was originally developed to treat rare pediatric seizures and has since been prescribed more widely as a last-ditch treatment for non-cortisone-responsive multiple sclerosis and other immune disorders.
Although expanding the addressable market definitely helped QCOR compound its revenue at a rate above 50% a year over the past decade, raising the price per dose by approximately 70,000% since 2001 has been the real factor that initially made this one-drug operation a Wall Street star.
Unfortunately, charging the equivalent of a middle-class American’s annual salary for a week’s supply of a life-saving drug that once cost $40 may have won investor applause in the past, but it now makes QCOR an easy target for public health advocates, cost-conscious bureaucrats and regulators alike.
And given the complexities of the system through which the company has billed insurance carriers full price while bending copayments to keep Acthar nominally affordable, even the threat of additional scrutiny raises the risk of the entire structure breaking down.
Like other biotech companies, QCOR pays a significant rebate to the states and federal government for every injection that participants in Medicare, Medicaid and other programs receive.
As such, implementation of the Affordable Care Act naturally cuts into the 90% gross profit margins QCOR currently enjoys. Management has estimated that 30% of sales into some of its fastest-growing indications – multiple sclerosis and kidney disease – represent Medicare patients as it is.
Factor in the ongoing expansion of Medicaid, which opens up a 27% effective discount for millions of Americans who would otherwise not have qualified for coverage, and today’s rich margins can only deteriorate from here.
Meanwhile, Obamacare presents a direct challenge to the company’s efforts to ensure that private health insurers have more $28,000 bills to pay.
In many conventional health plans, a specialty drug like Acthar is classified as “Tier 5,” which means patients can pick up 25% of the retail pharmacy cost once they’ve met their annual deductible. The good news is that $7,000 for a one-week course of injections will eventually trigger the out of pocket maximum on every qualified Obamacare individual plan and will take families about 55% to that threshold.
The bad news, of course, is that $7,000 is a lot of cash for many families to come up with. And while the health plans listed on the insurance exchange vary widely, many Bronze and even Silver policies still require patients themselves to pay 30% to 40% of the cost of a Tier 5 drug even afterthe policy starts sharing the load.
No copay, no injection. No injection, no revenue for the drug manufacturer. In the past, the pharmaceutical industry has skirted the dilemma by contributing heavily to medical charities that cover the gap between patient funds and what the insurance company – if any – will pay.
In theory, the system is the best of all possible worlds. But recently, the hint of executive conflicts of interest was enough to force the Chronic Disease Fund, one of the biggest of these charities, to stop writing grants that even give the appearance of directly promoting a particular donor company’s drugs.
Protecting the fund’s operations may cut Acthar out of the picture entirely; given the fact that QCOR has historically written multi-million-dollar checks to support the $250 million entity’s program and alternatives to the drug in its niche indications are virtually unknown.
If a competing generic or proprietary drug was on the market, the fund could continue to cover patient costs and QCOR could keep reaping reimbursements from the insurance companies.
This is where the complex structure that currently gives this company room to keep charging thousands of dollars per dose of a once-humble drug starts to show signs of weakening in the face of federal scrutiny.
Novartis has developed a competing drug that retails in Europe for at most $1,000 per course of treatment. Back in June, QCOR offered $135 million for the therapy in a move that several analysts characterized as an effort to protect the franchise.
The FTC is reviewing the transaction, which would technicallyopen up the U.S. market to competition – with both sides under the QCOR umbrella, of course – and allow the Chronic Disease Fund to start writing copay checks again.
Between the government looking to conserve $200 billion through Obamacare initiatives over the next decade and private insurance carriers equally hungry to cut costs, the risks look balanced against QCOR here.
If the insurers end up absorbing more of the cost of prescribing Acthar, QCOR will face increased pressure to retreat on price on a drug that may cost it at most $7,000 per vial to manufacture.
And in order to get those vials into the hands of Americans who need them, QCOR needs to regain access to the copay charity system or else effectively initiate an across-the-board price decrease on its own. The latter scenario weakens the franchise, while the former requires a second drug on the market.
QCOR’s stated plans to bring the Novartis drug to the United States tip its strategic hand here. But in that event, the risk that the FTC will reverse the acquisition as anticompetitive is simply too high to ignore.
One way or another, the $28,000 golden goose may prove unsustainable, leaving QCOR exposed all the way down to the $36 level these shares traded at before the Novartis deal was announced.
The short-sellers have been extremely vocal on this company’s future. I am less convinced that QCOR is on the verge of disaster, but at this point upside triggers seem to be in vanishingly short supply – and the risk of some press- or budget-hungry government agency forcing its hand is too high to ignore.