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3 Biotechs to Buy and 1 to Sell Now

An industry that holds promise in 2014 and beyond

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Though the biotech sector is rife with promise, and sky high stock prices, based on novel therapies and vaccines, there is also the specter of a tough reimbursement landscape for some drugs.  And for some companies there is also controversy surrounding reimbursement as well.

Given the huge price tags of some of drugs and treatments currently on the market, it makes sense that public health and industry forces have been trying to push drug prices down to benefit patients.  That means revenue and margin pressure, and headline pressures, for some biotechs, including Questcor Pharmaceuticals (QCOR).

Questcor’s drug is the hormone gel known as Acthar, which costs drug companies nearly $30,000 for a five injection vial.  Acthar, which has been around for decades, was originally slated to treat pediatric seizures.  But the drug is now much more prevalent as a treatment for multiple sclerosis and other immune disorders that have proven to be resistant to cortisone.

At the same time the company was able to expand the indications for its drug, so too was Questcor able to raise the price of Acthar – by several thousand percent, from roughly $40 per vial to the current $28,000.

In recent months the company has come under scrutiny as its billing practices have enabled Questcor to charge high levels for Acthar while at the same time “helping” patients afford the therapy.  It works this way:  QCOR pays rebates to state and federal governments for every injection that participants in Medicare, Medicaid and other programs receive.

Certainly the “expanded” treatment uses beyond the original pediatric patients gives QCOR growth, assisted in part by federal health care programs.  It’s estimated that some 30% of QCOR’s sales (especially for treatment of multiple sclerosis) come from patients enrolled in Medicare.

But ongoing shifts in health care spending, especially under the Affordable Care Act, means that QCOR’s high prices and margins are likely temporary.  Even with new legislation in place, thousands of dollars in deductibles need to be paid before patients start to see their drug benefits kick in – and even then they could be on the hook for 30-40% of the Acthar price tag, depending on the plan’s policies under ObamaCare.

QCOR has been a heavy contributor to medical charities that “fund the gap” between the money a patient lays out for a novel drug and what the insurance plan doles out. There’s been recent scrutiny over these charities, funded in part by the very companies they benefit, due to concerns over conflicts of interest.

In fact the Chronic Disease Fund, among the biggest of these charities, has been pulling back on writing grants that might be perceived as favoring a particular company’s drugs.  That could be bad news for QCOR, which has in the past helped fund the Chronic Disease Fund, and which has benefitted from the charity as well.  There are no other “competing drugs” that challenge Acthar in its expanded markets, so it’s possible that the Chronic Disease Fund could pull its beneficial relationship with Acthar precisely because there is nothing out there representing a choice.

But competing therapies are indeed on the horizon, which is a catch 22 of sorts for QCOR.  Novartis is selling a competing drug in Europe, which retails for about $1,000 per treatment course.  QCOR is familiar with the Novartis drug, having offered to pay $135 million last June.  The transaction would be able to bring the Novartis drug to US shores, opening up competition in the market and presumably letting the Chronic Disease Fund point to an “alternative” therapy that would continue to allow spending on Acthar.

Either way, QCOR looks likely to face pricing pressure from the health care systems, or a dwindling “charity” lifeline that has helped keep 50% sales growth and 90% growth margins aloft.  Or it’s possible that the FTC rejects its proposed push with the Novartis drug.  That means shares could come down to the low $30 levels seen before the deal was announced.

Article printed from InvestorPlace Media,

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