Further to the SNUS discussion:
I think one concept that biotech investors have failed to grasp over the past few years is the concept of total value to the healthcare system. That is to say, it doesn't matter so much any more whether a product provides an incremental improvement in efficacy. What does matter, however, is the value equation, which people have taken to expressing as value = quality/cost.
I have a fairly good handle on what is going on in the biotech/pharma industry, if for no other reason than the types of projects that are thrown my way. Over the past two years, there has been a seismic shift in that two years ago, all we cared about was efficacy and safety. For example, Lipitor was the most efficacious statin, so it's the statin of choice. Now, everything focuses on the total value equation.
The quality component consists of not only efficacy and safety, but the ability to meet standards imposed by the Joint Commission and other governing bodies. Taking a first step in this direction, CMS has identified several "never events" that will no longer be reimbursable. My understanding is that they are currently in the process of identifying "never events" related to cancer chemotherapy. Other standards organizations have developed and are implementing measures of quality of care that will also drive reimbursement.
Branded medications can make a stand here if they promise to help healthcare providers meet these quality measures. In addition, use of certain branded medications can help physicians meet pay-for-performance measures.
The cost component consists of total costs to the system, not just the costs of the drug. Branded medications can also make a stand here if they can reduce the total cost burden. I think QALYs are going out the window as a pharmacoeconomic measure because drugs will have to provide real cost reductions system-wide, not just demonstrate "cost efficacy."
The implications for a biotech investor are relatively simple: efficacy is becoming a less important parameter as we already have inexpensive medications that are fairly effective. A marginal increase in efficacy does not guarantee uptake (review the Crestor experience as an example). Instead, we need to evaluate how a new medication addresses each component of the value equation.
The only reason I'm writing this is because we often see people getting excited about more marginally more efficacious drugs in established therapeutic classes. It's not enough any more.
Of course, this presents a major dilemma for biotech investors. It's safer to invest in a company that's developing a drug in an established therapeutic class, but these drugs have little chance of ever making any serious money *unless* they provide value.
