What does Trump’s victory mean for the pharma, biotech and healthcare sectors?
After his first month in office and numerous threats to big pharma, finnCap Life Sciences analysts Alex Pye and Mark Brewer deconstruct what Donald Trump's presidency could mean for the industry.
The victory of Donald Trump in the US presidential election last November sent shockwaves across the world. While we saw market volatility in the immediate aftermath of his surprise win, it remains to be seen what impact his presidency will have in the long-term.
What is certain though is that his influence will be widely felt across every sector and industry. But how will it impact the Pharma, Biotech and Healthcare sectors?
A positive step
On the face of it, the election of Donald Trump to the White House and the Republicans controlling both the House of Representatives and the Senate should be good for the Life Science sector, particularly considering Clinton’s demands upon pharma firms to allocate a predetermined section of their profits on R&D (impossible to enforce), ending tax breaks for advertising within the industry, and allowing the import of cheaper drugs from overseas. (Trump vocally shared the latter view but it is expected to be difficult to implement, given the power of the pharmaceutical lobby group.)
With Trump’s victory, Clinton’s proposed creation of an oversight panel able to enforce control measures for the price-hiking of drugs in the US went up in smoke; this led to a 16% bounce in the NASDAQ Biotech index and an 8% increase in the US Pharma & Biotech index. This stock rally, however, does not seem set to continue, especially since Donald Trump’s recent claim in an interview with TIME magazine that he is going to bring down drug prices.
…But drug pricing pressures will continue
Whether Trump will live up to the promises he made during his campaign to control drug prices remains to be seen; even if he does, it is likely that the pharmaceutical lobby group ($148m in 2015, according to the Center for Responsive Politics) will argue for the status quo to be enforced.
Countering this is the pharma companies’ argument that lowering or imposing drug price controls will not only reduce their ability to invest in research but will lead to fewer new therapies. Typically, the industry spends around 15% of revenues on R&D whilst spending 25-35% on sales & marketing; arguably, the industry would have better served patients by re-allocating some of the S&M costs to R&D.
We would argue that such a shift in cost allocations can and should be achieved, particularly given the recent emergence of precision medicine in which therapies can now be developed to help specific patients with specific problems (rather than providing a therapy to all but which works in perhaps only 30% of patients).
However, senior pharmaceuticals have warned that the issue of drug prices will still continue, irrespective of who is now lined up for the presidential role. Sir Andrew Witty, the outgoing CEO of GlaxoSmithKline, recently highlighted that regardless of who won the election, the direction was already set for the pharma industry, which will be subject to more pricing controls.
What about Obamacare?
Trump has been vocal regarding his desire to repeal the Affordable Care Act, which extended medical insurance to 25 million more people by expanding the Medicaid plan for the poor, creating subsidised coverage for individuals, enabling healthcare access to a total of 40-45 million people.
Obamacare may still be safe however, as it appears Trump is often reluctant to interfere in the drug industry. Instead, he would abolish the individual mandate requiring all US citizens to have an insurance policy, enforcing tax deductible health insurance plans in its place. He has also called for more price transparency from all healthcare providers, allowing individuals to hunt down the best prices for procedures, exams or any other medical related interventions. We consider this to be a challenge to do so in its entirety, although pressure will continue to bear down on healthcare costs.
Nonetheless, this may be easier said than done given that pressure on healthcare costs is likely to continue. US healthcare spending is rising at an unsustainable rate, increasing 5.3% to $3.0tn in 2014 - or $9,253 per capita. As a share of GDP, this was 17.5%, up from 17.3% in 2013. The 2014 growth-spurt can be attributed to major coverage expansions under the Affordable Care Act, particularly for Medicaid and private health insurance, which contributed to an increase in the insured share of the population.
Early stage warning signals industry slow-down
Instem, which has been a good barometer of early-stage clinical development activity, recently issued a trading statement referring to a continued slow-down in the early phase clinical market.
This was likely to occur at some point, given the unprecedented levels of money raised in the biotech IPO window (2013-2015), during which more than 160 biotech IPOs raised approximately $13bn in the US, largely to fund early-stage clinic trails. The surprise is that the slowdown has happened so soon, and without greater access to early-stage equity capital the lack of early-stage programmes to fill the pipeline will create issues for the industry in the future.
R&D productivity is falling
R&D productivity, as measured by the number of new drugs (New Drug Applications – NDAs or Biological License Applications – BLAs) approved by the FDA, is falling. As of the end of November, the output is 20% below the last ten years and nearly half of what we’ve seen in the last two years.
Even if one assumes a year-end rush of approval, as has occurred in the past couple of years, we only expect 23-24 new drugs to be approved during 2016; some c20% below the 10-year average of 29 drug approvals.
Biologics, however, are continuing to increase as a percentage of approvals. In 2016 there were 23 new drug approvals, nine of which were actually protein-based therapeutics. And if you look at the clinical trials that are being undertaken around the world, more than 50% are on BLAs. This potentially has implications for the industry, payors and service providers. Therefore, while R&D productivity is dwindling overall, there are good signs for companies focused on protein-based drug development.
…But M&A is expected to continue
Given the challenges already outlined, the large cap healthcare players will be left with no alternative other than to grow by acquisition. We therefore expect M&A to continue in the sector, with larger drug and healthcare companies buying smaller companies with promising drug, device or diagnostic candidates in their portfolios.
The scarcity of late-stage clinical assets or devices and diagnostics means that pharma/healthcare companies will pay premium prices for those assets. Equally, we would expect large pharma and biotech to look for competitively differentiated early-stage assets or platforms in which they are prepared to invest in higher risk projects.
Trump has proved to be difficult to read regarding his healthcare policies; many share his disdain for Obamacare, but how he will actually act on this remains to be seen – an aggressive move on drug pricing seems unlikely. An unpredictable figure, it is almost impossible to know his real impact on the industry until he assumes the presidency – it is possible his campaign promises never materialise. In the meantime, Pharma, Biotech and Healthcare sectors must wait expectantly along with the rest of the world.
Alex Pye and Mark Brewer, Life Sciences analysts at finnCap