Copyright 2016,

Regeneron's billionaire founder fights for responsible pricing. But look who's talking

Leonard Schleifer condemns greed at other drug firms. But what about the $37,000 price tag on his eczema drug?

g_108835_leonard_schleifer_280x210.jpgLeonard Schleifer believes in making products that make a difference to patients’ lives
Image: Jamel Topin for Forbes

Sipping a lemon-flavoured VitaminWater at a sprawling complex of laboratories and offices in Tarrytown, New York, Leonard Schleifer, the 66-year-old co-founder of Regeneron Pharmaceuticals, is, as usual, criticising the pricing practices of other drug companies. (He once told the chief executive of Pfizer: “You’re not entitled to a fraction of the GDP.”)

“It’s not simply about just growing your earnings per share by raising your price,” Schleifer says. “So, yes, I’m glad I’ve been outspoken, because I think that I am trying to prevent what is still at risk of happening: If the industry does not behave properly, the government is going to step in.”

Look who’s talking. Regeneron, like other biotech firms, spends giant sums to find new cures, and it charges accordingly. Its big seller, the eye drug Eylea, costs $11,000 a year per eye. A newer Regeneron product, Dupixent, treats skin ­rashes; that one can run $37,000 a year. A cholesterol treatment costs $14,000 a year. Even more insane: These eye-catching prices really are cheap by pharma standards.

It took Regeneron 24 years to make back the billions investors poured into it. Now it’s making good money, $1.2 billion last year on sales of $6 billion. Wall Street values the company at $37 billion.

Schleifer and his co-founder, scientist George Yancopoulos, both kids from Queens, have made fortunes for themselves: $1.3 billion for ­Schleifer, mostly in Regeneron shares, and $900 million for Yancopoulos, making him one of the richest research chiefs ever, in any industry.

But Regeneron, whose shares are down by 40 percent from their 2015 peak, isn’t quite living up to expectations. Regeneron has brought to market six drugs, all co-invented by Yancopoulos, but only Eylea is a big hit. Eylea generates $6 billion in annual global sales. Bayer, which markets it outside the US, gets about 20 percent of that. The drug represents 80 percent of Regeneron’s revenue.

g_108837_george_yancopoulos_and_leonard_280x210.jpgRegeneron chief scientific officer George Yancopoulos, wearing a boot because of an injury from a characteristically fierce basketball game, and CEO Len Schleifer stand in front of the Tarrytown, New York, lab where the DNA of 500,000 people is being sequenced
Image: Jamel Topin for Forbes

Four other drugs are rounding errors. Now all eyes are on Dupixent, for eczema and, potentially, asthma. It could be a $5 billion seller, according to Leerink, the investment bank. But sales are disappointing some. “We do think the management team has what we call a credibility issue with investors,” says Dane Leone, an analyst at investment bank BTIG.

Their voting shares mean Schleifer and Yancopoulos will never lose control of Regeneron. But turning Dupixent into a hit will require facing many of the arcane facets of marketing that have hobbled some of Regeneron’s other drugs.

In a complicated ritual, a drug developer sets a steep list price on a novel treatment, then cuts rebate deals with the middlemen called pharmacy benefit managers. The rebates, which go back to insurance companies or the employers that pay insurance companies, mean insurance plans favour one medicine over another for financial reasons. Schleifer says the whole system “needs a reboot”. But in the meantime, he has to play the game.

Regeneron started in 1988. Schleifer, the son of a sweater manufacturer in Rego Park, New York, had become a professor of neurology at Weill Cornell Medical School. He wanted to run a company and, at a Chinese restaurant in Manhattan, hatched a $1 million deal with a venture capitalist to create one. The next year he recruited Yancopoulos, then a 28-year-old assistant professor at Columbia. Yancopoulos’ father, a tough Greek immigrant, sat in on his son’s job interview.

“Many people thought we were bleeding-edge in 1989,” says Yancopoulos, who notes that the first scientific paper Regeneron published was among 1990’s most cited. “Most people, they lose their edge. We just push the edge further forward.”

Regeneron’s first product, targeting Lou Gehrig’s disease, failed, as did another targeting obesity. What paid off were new technologies Yancopoulos developed for using mouse genetics to make drugs for people. The first, Arcalyst, approved in 2008, generated only $17 million in sales last year. But then came Eylea.

Eylea looked like a me-too version of Roche’s Lucentis to treat macular degeneration, which destroys vision. But it could be given less often, a big deal for drugs injected into the eyeball, and it costs $1,850 per injection, or 5 percent less than Lucentis per dose.

[qt]I think it’s the most meaningful breakthrough we’ve ever had in allergic disease,” says George Yancopoulos, Regeneron’s chief scientific officer[/qt]
Challenge Schleifer on the future of Dupixent, and he returns to his triumph in 2011, when Eylea exploded out of the gate. “People had that same question on Eylea,” he says. “How are we going to compete with the great Roche and Genentech with a six-year head start? Now we have 70 percent of the market.”

Sceptics are thinking not about Eylea but about Praluent, a potent injection for high cholesterol. Approved in 2015, the drug seeks to mimic the effects of a genetic mutation that leaves people with extremely low cholesterol levels and little risk of heart attacks. It was supposed to be a multibillion-dollar product, but it generated just $200 million last year. Regeneron splits the money with its partner, the Paris-based drug giant Sanofi.

Schleifer says he saw the flop coming as soon as Praluent went on sale. “I almost knew from day one,” he says. The tell: An executive at the pharmacy benefit manager CVS said Praluent and a rival drug from Amgen could between them cost the US health care system $150 billion. “Once I knew that they were talking about those ridiculous numbers, I knew that they were gearing up. Because they had an existential threat.”

The problem: The big benefit managers (CVS, Express Scripts and United Health Group) were suffering from a PR problem. Gilead’s treatment for hepatitis C, Sovaldi, had shocked insurers by costing $10 billion in its first year. They needed to prove they could control drug costs, and Regeneron was going to be exhibit A.

Doctors and patients who wanted Praluent were rejected multiple times even if they had the worst version of familial hypercholesterolemia, a genetic disease that causes cholesterol levels to be three times normal and leads people to have heart attacks in their 20s. “You’re tucking your kids in at night and you get a letter that we’re not going to cover you because you haven’t had a heart attack yet,” Tommy Mann, a 37-year-old lawyer with the killer cholesterol disorder, told Forbes in March.

Schleifer admits that Praluent’s price may have been too high. In May, after Regeneron released data showing that Praluent may reduce death rates compared to cheap statin drugs in patients at high risk of a heart attack, it negotiated a new deal with Express Scripts in which the drug will cost only $5,000 to $8,000. The difference from the $14,000 list price will be given to Express Scripts and its customers as a rebate. Regeneron hopes that the deal, which takes effect in July, will finally allow Praluent sales to build.

But the experience has left Schleifer bitter about the way drug prices are negotiated in the US. “Patients are getting screwed,” he says. Patients in high-deductible insurance plans often pay the list price; their benefit manager collects the rebate but might pass it back to the employer, not the patient. Schleifer also says this makes it difficult for him to just cut the price of his rheumatoid arthritis drug, Kevzera (annual sales: $13 million), because other companies are paying big rebates for their products.

The difference between a $10,000 drug with a $4,000 rebate and a drug simply priced at $6,000 is that the former lets the benefit manager crow about the savings it delivers and pass money back to the company buying the health plan. “I would like to see the rebate system go away,” Schleifer says.

For now, though, he has to deal with it, especially if Dupixent is going to live up to its potential. Regeneron is not shy about what the medicine might do. “I think it’s the most meaningful breakthrough we’ve ever had in allergic disease,” Yancopoulos says.

The medicine binds to the interleukin-4 receptor, which Yancopoulos, on the strength of genetic studies in mice and humans, believes is a key actor in all sorts of allergic conditions. In March, the Food & Drug Administration okayed Dupixent for atopic dermatitis, a form of eczema, and may follow up with an approval for asthma later this year.

For patients made miserable with chronic itching and rashes, Dupixent can be life changing. New York City lawyer Stephen Orel, 58, could not wear white shirts because the sores on his skin bled through them. His dry cleaner stopped taking his business. After a year on Dupixent, he says his skin looks like it belongs to someone else. “I feel liberated now,” he says. Patients do have to take Dupixent every two weeks, indefinitely, to stay healthy. His doctor, Emma Guttman of the Icahn School of Medicine at Mount Sinai, treats more than 150 patients with Dupixent and says many have results like Orel’s. She is a Regeneron consultant.

Before Dupixent was even approved, ­Schleifer ran its pricing by the Institute for Clinical & Economic Review, a non-profit that generally criticises drug prices as too high. “This is really a great example of how it should work,” said Steven Miller, the chief medical officer at Express Scripts, at the time.

But now investors are worried that Schleifer didn’t go far enough to appease the benefit managers—or maybe couldn’t. Dupixent sales in the first quarter were $131 million, 22 percent below Wall Street’s forecasts. Schleifer says it was a one-time miss. “I think there’s a cloud of uncertainty over whether that’s truly the case,” says Kennen MacKay, an analyst at RBC Capital Markets. He says he’s hearing that benefit managers are adding restrictions to Dupixent’s use, as they did for Praluent.

An even bigger question is whether Dupixent can succeed in asthma. Geoffrey Porges, at the investment bank Leerink, argues that asthma patients with the most pronounced allergic reactions do twice as well on Dupixent as they do with competitors like Glaxo­SmithKline’s Nucala and AstraZeneca’s Fasenra. But Phil Nadeau, an analyst at Cowen, counters that all the products are so similar that money, not medicine, will determine market shares. It’s the old rebate game. But Porges also defends Schleifer and Yancopoulos for daring to be different: “Yeah, they are contrarian and they are abrasive, but they believe in something, and it is so, so hard to find people in the industry who believe in something.”

That means more heady wagers. Last year Regeneron signed a deal with a British charity to sequence the DNA of half a million people in the hope that the resulting discoveries will lead to new drugs. It is also testing a competitor to Merck’s big-selling cancer drug, ­Keytruda. This could be a $12 billion market, but analysts think Merck and its chief rival, Bristol-Myers Squibb, have it sewn up. What investors want are new drugs that work in new ways.

 “I don’t think this is about personalities,” Schlei­fer says. “This is about making products that make a difference in patients’ lives.” A grandiose statement, but one that is to a large degree justified.