December 13, 2019
Healthcare remains a key issue for voters ahead of the 2020 elections, with drug pricing reform, patient affordability and the changing role of the consumer major themes for both the U.S. pharmaceutical industry and the 2020 presidential candidates. J.P. Morgan Research explores the outlook for the industry in 2020 ahead of the election and beyond.
The cost of drugs in the U.S. has long been a controversial topic, as out-of-pocket expenses for consumers have risen sharply for patients in recent years. Nearly 8 in 10 Americans say the cost of prescription drugs is unreasonable, with voters from both parties agreeing that reducing the cost of prescription drugs should be one of Congress’ top priorities, according to a recent poll by the Kaiser Family Foundation.
“Patients are increasingly aware and exposed to the cost of medication and I think the industry was a little bit late in embracing this idea of not just developing a drug, but making the drug affordable to patients. We're seeing them really start to address this, with more constructive dialogue as pharma companies engage with payers to ensure drugs are not just approved, but also affordable and accessible for patients,” said U.S. Major and Specialty Pharmaceuticals Senior Analyst at J.P. Morgan, Chris Schott.
The U.S. drug pricing supply chain is complex, with an array of transactions between various different stakeholders. Drug manufacturers produce a prescription drug and set its list price. From there, the drug is purchased by wholesalers and retailers, like pharmacies. Pharmacy benefit managers, known as PBMs, act as intermediaries for prescription drugs, serving as a go-between for healthcare insurers to negotiate drug prices with manufacturers, health plans and pharmacies. But there has been some criticism of PBMs, as while they often decrease the cost of drugs, sometimes those savings are not always passed on to consumers.
“As we think about the political, regulatory backdrop around pharmaceutical pricing, it's really changed in the last 12 months. This time last year there was a proposal on the table around having rebates changed, which would have had a big impact for the PBM industry, but it was pulled in July. Following review, the Congressional Budget Office (CBO) concluded the proposal would actually increase spending for both Medicare and Medicaid,” said Lisa Gill, Senior Analyst for Healthcare Technology and Distribution Research at J.P. Morgan.
“The Pharmaceutical Care Management Association, which represents PBMs, said the CBO report backed up what industry had been saying all along. I think this really showed, one, the PBMs correctly predicted the proposal would not actually result in cost saving or lower the list price of drugs. And second, I think it was a testament to the fact that PBMs do help to drive down overall healthcare costs as well as to drive down pharmaceutical costs through their negotiations,” added Gill.
Healthcare is always a major topic of debate in every election year and 2020 will likely be no exception. All of the remaining Democratic candidates vying to be the party’s 2020 presidential nominee are pushing for further reform to the system, to varying degrees. The direction the eventual nominee takes could determine whether the future White House pushes to completely overhaul the system or just tweak the existing one.
Both Vermont Senator Bernie Sanders and Senator Elizabeth Warren of Massachusetts are pushing for a “Medicare for All” plan with slight differences. Sanders is pushing for a payroll tax model for Medicare for All, while Warren would have employers pay a per-employee fee to the government, but both are pushing for a system that would eliminate private insurance in favor of tax-financed government coverage for every American. More moderate candidates, such as former Vice President Joe Biden, are leaning toward more incremental alternatives.
“There's a lot of different proposals on the table today as we think about the Democratic candidates, one of them being Medicare for All. We'll have to wait and see what happens with the election in 2020. But running up to the election, generally speaking, healthcare does underperform, with certain subsectors within healthcare outperforming – such as labs – where there is less political focus than areas like pharmaceuticals or managed care,” added Gill.
Consumers pay more for their healthcare than they ever have before, with out-of-pocket costs north of $2000 on average. This has led to more discerning generation of consumers, who think a lot more about where they spend those dollars, shopping for their healthcare like they shop for other retail items. Patients are looking for the best service and the best locations, at the lowest cost. This demand for convenience has created an opportunity for traditional drug retailers, such as CVS, to make the most of their existing footprint through telemedicine, using telecommunications and virtual technology to deliver healthcare.
“We've always thought the consumer would be at the forefront of changes in healthcare. We said that last year and we continue to believe it will be the case for 2020, as we drive towards things like telemedicine,” said Gill.
This is especially true for millennials and Generation Xers, who increasingly do not have a primary care doctor, instead using their phone to search for healthcare services or nearest clinic on an ad hoc basis.
“Millennials are used to having everything delivered to them. I think in the future we'll see pharmaceuticals delivered by drones. We'll see more home delivery than we've ever seen before because of the way people want to consume healthcare and where they want to consume that healthcare,” added Gill.
The last few years have been banner years for pharmaceutical innovation, with brand new drugs coming to market at a much faster pace. There has been continued, near-record levels of drug approvals from the U.S. Food and Drug Administration (FDA) this year, with 58 new drug approvals so far, following a record high year in 2018, with 71 approvals. These approvals are spread across a range of indications, including a number of breakthrough therapies such as gene therapy, as well as treatments for cancer and a variety of rare genetic diseases with high unmet need.
“So as I think about biopharma innovation heading into 2020, we see a continuation of some very positive trends that we've seen for the last few years – record numbers of new drugs coming out of FDA and the industry harnessing new technologies, whether that's gene therapy, cell therapy or bispecific antibodies, to meet unmet need in the industry. So we see that combination of factors translating as very robust new product flow across the sector,” said Schott.
Drug patents usually last for around 20 years after invention. In most cases, this time frame is halved to 10 years after testing finally brings the drug to the marketplace. The next major cycle of patent expirations will start in 2025, where firms such as Pfizer will need to address loss of exclusivity (LOE) through pipeline success and internal research and development (R&D).
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“As I think about the sector today, these companies are in a much better position to deal with that patent cycle. If we think about the last patent cycle, we had almost no pipeline. There was very few of the smaller biotech companies you could look to partner with or outright acquire. Today, companies have 5 to 7 years to address this, internal pipelines that are in much better position and a wave of new, smaller companies with interesting science we think are natural candidates either for partnership or for acquisitions over time,” said Schott.
After a year of mega deals in 2019 such as the pending Bristol-Myers Squibb $74 billion takeover of Celgene, major pharma priorities will likely shift towards small- to mid-sized “tuck-in” transactions. Tuck-in deals involve a larger company completely absorbing another usually smaller firm, with complementary product lines, tech or market share, which is then fully integrated into the parent company.
“2019 was the year of the mega deal and we saw several larger companies that needed to reposition taking advantage of depressed large cap valuations. I think 2020 will be a very different year. We're expecting much more focus on tuck-in deals and companies really looking to augment their internal pipeline with smaller companies that are playing the same vertical and can improve their longer-term growth profile. We expect more activity, but the activity is going to be skewed towards smaller transactions,” said Schott.
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