We published our first “Strategic Analytics” report “Principled Drug Pricing Centered on Innovation and Choice: Part 1” (link) three weeks ago. As we highlighted at the time, the principal purpose of the report was to act as a forum for debate on this important contemporary societal issue. With this in mind, we will be communicating the top 10 feedback items over the next few weeks post our continued interactions with both investors and corporates.

This first feedback item concerns the question of “Will drug pricing still be as big of an issue going forward with the new administration?”

Bottom line:

1. 1. Our view – It is still as big of a fundamental issue as it was before.

• 2. Investor’s view – Mixed with a ballpark 25/75 split between “less of an issue now” and “it’s still relevant” (Important to note: PM’s/generalists unsurprisingly on the side of the “less of an issue now” whereas specialists continue to be on the side of the “it’s still relevant”).
• 3. Corporate view – almost unanimously “continues to be the most important issue in our sector”.

More color:

Both the election outcome and defeat of California’s Proposition 61 on controlling price rises resulted in a short lived surge of pharma/biotech stocks (with the BTK and DRG indexes peaking at +14% and +6% but retreating to their current positions of +4% and 1% since 8th November). Obviously, the incoming administration has opaque and Brownian motion-like propositions for change on many of the issues in general. Notwithstanding this, a quick glance over the only written documentation (link) on healthcare in general from “He that will rule” highlights a couple of key words and those are “reform”, “free market principals”, and “price transparency”. So whilst staying politically agnostic, and by no means a condemnation, we note that these macro themes are in-line with our view point that the drug pricing debate fundamentally is still as relevant today as it was before the T-day.

As we strongly argued within our report “the (drug pricing) debate is not just near-term (election induced) noise. The US drug pricing ecosystem has evolved (it was not built by design) in a direction that, if left unchecked, will shortly turn into a fundamentally broken system”. The public’s disdain and anger at drug pricing is reflective of the fundamentals of the healthcare ecosystem and the political noise just added fuel to the fire. A Kaiser Health Tracking poll (link) suggested that many people care more about the price increases than any other aspect of proposed health care reform. Almost 75% of survey respondents felt that assuring affordable drug prices for chronic conditions should be a priority for the President-elect and Congress.

So focusing on the conclusions from our work and feedback (and for a moment banishing politics to the naughty unspoken corner), we would flag the following from our report:

1. 1. Exhibit 7 – the most noisy “trip wires” that hit the popular media headlines (and were the political noise targets) were symptoms rather than the cause of the problem – i.e. price rises and bad actors.
2. 2. Exhibit  8, 18, 20, 21 – The key fundamental causes of the drug pricing problems are: (1) drug prices in the US are not fundamentally based on value, (2) there is lack of transparency (and choice) in multiple parts of the system and these both result in, (3) high frictional costs. These are all issues that have resulted from the evolution of the healthcare system and can be (in our view best) solved via “self-help” of the industry. We reiterated our view that legislatively driven changes are unlikely to fully address the fundamental causes and solve the problems in totality.
3. 3. A very interesting view from many industry players is that the change of administration gives the industry an extended period of time for self-help to be introduced – we agree. Moreover, many industry insiders admit that “self – help” is the best route. To this we note leading attempts by certain players to make “self-help” fundamental changes to the drug pricing ecosystem. We note Joseph Jimenez (Novartis CEO) comments focused around value based drug pricing: “I believe that we need a new perspective on drug pricing: As an industry, we must shift to a model that focuses on value and outcomes delivered, both to patients and to health systems” (link) – the need for value-based drug pricing was one of the two major conclusions from our report. In particular we applaud Brent Saunders (Allergan CEO) public stance on the need for the industry to change itself with Allergan’s “Social Contract with Patients” which touched on value pricing, “We will price our products in a way that is commensurate with, or lower than, the value they create”, as well as price rises, “We will not engage in price gouging actions or predatory pricing….We will limit price increases” (link). In a recent post on Allergan’s website CEO blog section and published in Forbes (link). Mr. Saunders furthered his stance with the choice words: “Our industry must not pretend that everything is fine because the cost of medicines may not be priority number one for the Trump Administration. Americans are still dealing with rising healthcare costs. We have the power to do something about the cost of medicines. I hope our industry takes this message to heart. The biopharmaceutical industry does have a social contract with patients. Now is the time to make good on that contract by taking self-regulating action. Take your own stand and implement your form of a social contract. Limit your price increases before we all face the impact of government regulation that stifles innovation and patient care”.
   As a final note on industry leadership commentary, we also highlight one of the most enlightening recent articles written by an industry veteran Jeremy Levin (Ovid CEO and previous CEO of Teva), which focused on the perverse link (or lack thereof) between innovation, price rises and executive compensation (link). Poignant quotes from that article include “we continue to raise prices incorrectly and inappropriately in a fashion that is dislocated from value” and “The innovator world has changed, and if we don’t proactively change along with it, we will be forced to do so. As we tackle the complex problem of drug pricing, among the many things we need to change is how we are incented”.

In conclusion, whilst we have a short term respite in the political focus on drug pricing, the debate is simply not going to go away – because the problems are fundamental and the system is reaching a breaking point. It is people and patients that are being disserved by the flawed drug pricing ecosystem – politicians (should or eventually do) listen to the people. The above examples of industry leaders advocating, as we do, for industry self-driven changes whilst being the most public, are not the only industry players that recognize this preferential pathway. However, we again highlight the two major conclusions from our report: (1) the biopharma industry should move uniformly and in totality (to an innovative value based drug pricing), and (2) there needs to be increased transparency and choice in the Rx element of the insurance system. Whilst individual companies should, and can, make changes to their practices, the key to the success for the whole system will be “all hands on deck” approach, and will require the coordination of biopharma manufacturers and payers. This will not be easy and would be almost unprecedented within any sector. However, the alternative – a system that goes beyond breaking point where innovation is stifled- is far more difficult outcome to live with.

We continue to welcome comments and questions to the coordinating author, Ravi Mehrotra (mehrotra@mtspartners.com) and/or to any of the Partners at MTS.

To view our original 16^th November published report please click here.

For media inquiries please contact Argot Partners:

Andrea Rabney
212.600.1902
andrea@argotpartners.com

Eliza Schleifstein
917.763.8106
eliza@argotpartners.com

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