[creativ_pullleft colour=”light-gray” colour_custom=”” text=”Episode 118″]
The threat of Medicare clamping down on drug prices has never loomed larger. Sanford Bernstein’s Ronny Gal and Liav Abraham of Citi gauge the risk and explain how ophthalmology drug companies might be impacted.
Liav Abraham is a Senior Analyst covering the specialty pharmaceuticals sector and Co-Head of Citi’s equity research US healthcare team.
Tom Salemi: Hey, everyone, Tom Salemi here. Welcome back to the OIS Podcast. Happy to have you here on this historic week when we will see President-Elect Donald Trump inaugurated and becoming President Donald Trump. And the impact on pharma will be clear. He made it clear last week during his press conference when he said pharma companies were “getting away with murder,” and suggested the time has come for Medicare to begin negotiating pricing directly with pharma, rather than relying upon private payers. This is something that’s obviously been talked about for over a decade. It was considered back when President Bush passed Medicare Part D in 2003. It obviously came up during the passage of ACA in 2009. Each time, it was the notion of the federal government, the largest purchaser of pharma negotiating directly with pharma companies, each time it was sort of put back on the back burner as something that no one really wanted to touch. And clearly there are reasons for that, political reasons, economic reasons. But we are here at a point where it’s being brought up on the front burner again, and this time with the feeling of this incoming administration and the public feelings toward pharma pricing, there may be some change afoot. So we wanted to get some insights on what is happening. I was able to talk briefly with a couple of great analysts, friends of the Podcast, folks we’ve had on before: Ronny Gal of Sanford Bernstein and Liav Abraham of Citi. And both provided their own insights on where all of this might be headed. So what I’m going to do is I’m going to just play the interviews sequentially. We’ll start with Ronny, and then end with Liav. And I hope you take away some key points, which is there is certainly something happening. They will be tracking this and there may be concerns or I should say there may be other measures that President Trump could take to bring pharma pricing in line with his expectations. So we’ll get into these interviews right away. I did want to take a moment, though, to refer you to our Eye on Innovation Newsletter. Our contributing editor, Rich Kirkner has sort of tackled this issue from a different direction, looking at some of the campaigns that have gone on at the state level to control pricing, including the recent effort in California that failed. So if you’re not getting your Eye on Innovation Newsletter, you should. Go to OIS.net, provide your email, and we’ll send that obviously directly to your inbox. You’ll get great articles like the one by Rich, this Podcast, and our own video content as well. And it’s absolutely free. Just give us your email address and we will be happy to hook you up. Also, I wanted to remind you that registration is now open for OIS@ASCRS. It’s happening on May fourth in Los Angeles at the Sheraton Grand Los Angeles. I’ve never been to this hotel, but I understand it’s undergone a huge, $75 million renovation, and it’s supposed to be beautiful. So it’s going to be a great event. OIS@ASRS is always one of my favorites. And it sounds like it’s a fantastic venue as well. So go to OIS.net and register for OIS@ASCRS. Now let’s get into the podcast, and again, we’ll start with Ronny Gal, analyst at Sanford Bernstein.
TS: Ronny Gal, welcome back to the OIS Podcast.
Ronny Gal: My pleasure.
TS: I feel like I need to get you your own theme music, you’ve been a guest so often. We need a segment just for you.
RG: Can I pick it or do you have an assigned one?
TS: No, you could certainly pick it. Well, pick three and I’ll pick the winner. How’s that sound?
RG: How kind.
TS: So last week, it’s something that had been talked about on the campaign trail for, well, as long as the campaign trail went, and it’s something that’s been talked about for a long time, which is giving Medicare and the federal government the ability to negotiate drug prices directly with pharma. And it came out last week, ironically during JP Morgan, when everyone was in one city and the collective stress of that city probably went up a few degrees, when President-Elect Trump suggested that pharma was “getting away with murder,” and that it was time to introduce some sort of control over pricing and allow Medicare to negotiate directly with drug companies. It’s hard to figure out where this can go. It can go many different directions, and perhaps we can hit upon that Podcast. But what did that comment say to you? Did it reaffirm things that were said on the campaign trail? Or did it come as sort of a surprise?
RG: It didn’t really come as a surprise. It was more an issue of priority. It was clear that there’s a very – kind of the public anger at drug costs in general, out of pocket drug costs particularly. And Trump as well as I think basically every other living candidate said something about this. But they all have other priorities. The priorities for President-Elect Trump appears to be the repeal and replace of the ACA. And it wasn’t clear if drugs will rise to the level of importance that will necessitate an action now, or if that will be left as kind of like in the tail end of the agenda. Since he’s mentioned it twice, once obviously in his first speech since being elected, we now have to take it seriously and assume there is some sort of a plan in the works by his CMS and HHS appointees to do something about drug costs.
TS: So where do we go – where do you go from here as someone who’s watching this industry and trying to forecast what that actually means? I think the first feeling is the sky is falling, this is going to be difficult, this is going to be terrible. But does it actually play out to be that bad a scenario? Or are there ways where this could be something that could maybe make things a little more difficult for pharma, but not be as destructive as some fear?
RG: SO I think about it a little bit differently. I think the question is is there a real plan there, which usually means some sort of an overlay on the existing infrastructure, or is this an attempt to kind of redo the way the US pays for drugs, which is essentially impossible plan will have a low probability of being accepted. So I think the chances that we’ll essentially move to a single payer system where we essentially undo the entire drug industry’s infrastructure within one fell swoop is extremely unlikely. What we’re more likely to see is some sort of a plan to change the way specific federal plans now pay for drugs. And that’s actually more dangerous because that’s probably actionable, and that’s probably something that could pass. Primarily because the Democrats will very much support it, so the need for a wall to wall support for that can actually be achieved given you’ve got a Republican president and a split congress. You know the famous saying about only Nixon can go to China? It might take a Republican president to actually introduce some sort of restriction on drug pricing, but that can happen in this administration.
TS: It took a Republican to get Part D put together in the first place. So you’re probably –
RG: Yes, exactly. That’s a good point.
TS: So this is an area where – I mean it’s easy to say we’re going to make pharma pay; we want to negotiate. The fact is that there is some negotiating going through, at least in the US is negotiating with private payers.
RG: With private payers, yeah.
TS: Right. Which Medicare can – obviously the carry more leverage and they can negotiate even better. But the other part of the equation is patients who want these drugs. I mean it’s not something that Medicare can just walk away necessarily from the table and say, Fine, we’re not going to pay you for your life-saving medicine. They kind of need to get that stuff out in the market as well. And they can’t really worry –
TS: – perhaps as much about the dollars. So is it a scenario, and you’re right, it is more achievable than – clearly more achievable than single payer. But is there a scenario where this does happen, but the impact on pricing and therefore the pharma business isn’t as great as perhaps we think?
RG: Well, yes and no. So the no part is easy. So even if you look at countries that have a single payer system, they typically do pay for life-saving medications. I just – at JPM I actually had a chance to sit next to the CEO of Celgene, and he kind of very proudly mentioned that the European countries, so far, have calculated that his drug is worth more than he was asking them to pay for it. So life-saving medication, breakthrough medication will continue to be paid for. But those are the minority of drugs the drug industry is selling. A lot of the drugs the drug industry is selling are really second generation, third generation, follow on drug in somewhat markets. Now they all have some advantage, but at least hypothetically they can be negotiated against other drugs for bigger discounts. The other half of getting price discounts as you observed is the formulary. Just simply showing up to the drug industry and saying you’ll give us discounts does not work unless you have a formulary tool that you’re willing to apply in case it doesn’t happen, in case they say no. And those formulary tools are used by the commercial payers, currently don’t exist in CMS in general. They just don’t know how to do it. And introducing those tools in CMS appears to be the main thing that will be the main addition here to the mix of tools the government has.
TS: Hm. And you’re right about some drugs having more value than others, or are life-saving versus perhaps life style. Let’s focus on ophthalmology since this is the OIS Podcast. Is this a specialty where perhaps the drugs that are approved and available are more critical than in other spaces? This isn’t – many of these drugs aren’t life style drugs. They’re save your vision sort of drugs, which is, I think everyone can agree, critical to a person’s health. Is there a – perhaps are we more immune than another specialty might be in negotiating prices down the line? Has that played out on the private pay side?
RG: I would actually argue it the other way around. Ophthalmology has relatively few NCE’s that do not have an alternative. If you look at some of the core indications like glaucoma, anti-infractive, there usually are multiple offerings. Or in the inflammatory or a lot of times there are generic drugs which are available. The primary differentiations familiar on convenience and safety, you know, drugs that make you have less red, drugs that are less – drugs that are easier to take or require shorter administration are going to achieve the same results. There are very few drugs in the ophthalmology world that you can basically argue do not have multiple offerings that roughly are the same thing. Even if you take kind of the newest and best, kind of like the wet AMD/DME drugs, even there you’ve got multiple offerings. And obviously some of the physicians believe that even a drug like Avastin used off label is good enough versus the Lucentis, which is the best on the market. So I would actually argue that ophthalmology drugs being heavily dependent on Medicare, primarily used by older people, and having multiple offerings are probably more addressed than most drugs. Yes, cancer will be very hard to manage. Hemophilia might be riskier for the patient. Orphan drugs generally have one or two drugs per category. Glaucoma, you know, you’ve got 12 or 14 of them.
TS: That’s a great point. Yeah, I hadn’t thought about the multiple offerings. So where do we go from – and the fact that, and you mentioned it, that I would guess a higher percentage of ophthalmology patients are receiving Medicare. I’m guessing our population is perhaps older than other specialties.
RG: In general, yeah.
TS: Yeah. So this is something that clearly people need to be tracking. So going forward, what are some things you’ll be watching for as someone who is working to track the ophthalmology sector to see whether things move one way or the other? And what are some things that the CEO’s and the entrepreneurs and the investors out there can sort of keep an eye on so they know which way the wind might be blowing in the coming months?
RG: Yeah. So the point is that the people that were appointed to run HHS and CMS are all kind of practicing professionals with a lot of experience in these issues and how we pay for drugs. The assumption I have is that they have some sort of a draft of a program they have in their back pocket that they are coming into the administration with the plans to implement. Presumably, that these plans will be unveiled within the first 3 months after the administration takes office. And we should see some sort of a working committee, some sort of a trial balloon being floated relatively early by April. So what I’ll be doing a lot is doing the classical watching the regulators, watching the politicians as some of the details of these suggestions begin to appear in the public domain. And currently primarily looking at introduction of plans along kind of 4 lines. I’m interested in kind of the dual eligible going from Medicare to Medicaid. That will obviously be negative for the elderly corps, in terms of where the cost of those drugs is going to go. I’m looking at introduction of Medicaid negotiations to the state, in the state level. I’m looking at some sort of an overlay of negotiations on top of Medicare Part D, maybe on high priced drugs. And last not least, Medicare Part B that something wanted to do for a while, especially for the wet AMD drugs that could be very impactful.
TS: And there was a pilot program within Medicare Part B that sort of tried to present at least some sort of cap or some sort of price control. That didn’t play out very well.
RG: Yeah. Well, the point is that they were trying to use, shall we call it, the regulatory authority to end run Congress as opposed to get something like this through Congress. And my expectation – and that didn’t work. Congress did not want to cede that power. My expectation is that CMS still wants to introduce formulary tools into their organization, and they’ll come back with suggestions how to do that. And certainly if the president is supportive of that, and HHS administration support it, that we could see something of this being reintroduced
TS: So is there anything companies can do now to sort of, I guess, educate themselves or prepare or is it just sit back and wait and see what happens? Obviously the pharma industry will be providing its input via its lobbyists. But what can individuals do?
RG: So the pharma industry is the biggest lobbying industry in the United States. I think it’s kind of like 1.3 billion since the record began to be kept by the Center, Center for Responsive Politics. So they’re a big lobbyer. They have quite a bit of power. They’re quite smart. So I expect that they will try to shift the debate into other channels and try to negotiate some sort of a broader deal with the administration as they did in the last debate that led to the formation of the ACA. The individual companies, to be honest with you, there isn’t that much you can do. I mean if you’re going to think about drug development timelines, it’s 5 to 10 years, even for ophthalmology. And your drug is targeting the population that it does. There’s not much you can do about that. Shifting commercial efforts from US to OUS is tough and will take years. I can’t really see easy tools which will allow a company to kind of run away from the potential pressure at this point.
TS: Is there an opportunity to maybe – and this is already done to a large point, but focusing more on value, not only what your drug does, but how it saves money. Does that become an even bigger part of stories going forward?
RG: I think that’s absolutely true. But I would kind of spin it the other way around, which is I think there’s an increasing focus on first in class to differentiate medications that other people do not have. OK. You can simply not provide enough value to prevent pricing pressure from coming down on older drugs. I mean there’s no price low enough. The price low enough is the price, and the price low enough is the price you walk away from the market. But on differentiated drugs, first in class, unique mechanisms of action, I think there is still obviously some market to do. And what we’re seeing in terms of M&A is primarily a focus on those kind of inventions. So fewer me-too drugs, more unique mechanism of action drugs.
TS: All right. Well, it’s already been an interesting couple of weeks. It’s going to be an interesting year and administration coming up. So I hope we do visit from you time to time to get your insights, and I appreciate you taking a few minutes today.
RG: Pleasure. Thanks.
TS: Well, thanks, Ronny Gal. I appreciate the insights and the checklist of what we should be looking for going forward. It’s an enormous help as we track these very interesting times. Before we get into the interview with Liav Abraham, I did want to invite presenting companies or companies in ophthalmology that want to present at our upcoming OIS@ASCRS to submit your application. Go to OIS.net, scroll down to the bottom. You’ll see the presenting companies tag. Click on that, and there is an application that you should fill out to try to get your time on stage at OIS@ASCRS. The deadline to apply is March 30th. And again, OIS@ASCRS is happening on May fourth in Los Angeles. So we hope to see you there on stage. Now we’ll get into our interview with Liav. She has an interesting point that soon to be president, or perhaps President by the time you’re listening to this Trump will have a very readily available weapon in his arsenal to convince pharma companies to rein in their pricing all on their own. So let’s get into this conversation with Liav Abraham of Citi.
TS: Liav Abraham, welcome back to the Podcast.
Liav Abraham: Thanks, Tom, great to be here.
TS: Great. Well, we may call it the Trumpcast. I don’t know if we’re going to change the name. But that does seem to have an impact on things. We are talking about last week’s comments by President-Elect, soon to be President Trump just about pharma getting away, “with murder,” and he believing that this is an opportunity to introduce negotiations of drug prices. And you had an interesting report that I think you issued this week, where you suggested that another arrow in his quiver, one even more readily available than negotiating prices would be just his Twitter account.
LA: Yes, absolutely, Tom. And this is something that we’ve seen the President-Elect use effectively during his campaign, and also after his election, for example with Carrier and regarding the negotiations of the cost of a new airplane with Boeing. So this is not something new. This is certainly a tool in the President-Elect’s armamentarium. And it’s been effective thus far, and I would anticipate that he’ll continue using it. And he suggested as much in an article with the Washington Post this past weekend.
TS: That is a fascinating aspect of this because when companies is forecasting sales or coming up with a pricing strategy, when you as an analyst are sort of measuring their potential, how do you account for the tweet? Do you just – do these companies just perhaps just hope that they’re going to be the kids in the classroom hoping to not get called on by the teacher? Just do enough to make what they need to make, but not to stand out in the crowd?
LA: Well, I think this started before Trump’s appointment, his election as president. This started even with the Clinton campaign and Bernie Sanders. This has been an issue over the past 18 months. And I think companies have already started to communicate their anticipation for estimates accordingly. We’ve seen some companies take the lead on this quite publicly, such as Allergan, and others have followed suit as well. So I would expect that this is somewhat baked into companies’ expectations to some extent or another, and consequently also in to analysts’ expectations as well.
TS: Do you anticipate, though, that there will be a successful move to bring in some more Medicaid negotiations directly into the Part D drug prices? Or will this be enough? As you pointed in your report, this obviously is negotiations between private insurers and drug companies, and that does have an impact on minimizing costs.
LA: Sure. And I guess there are potentially two avenues that the President-Elect could take. One would be potentially government negotiation of Medicare prices. And as you mentioned, these are already quite successfully negotiated by private plans. I’m unclear whether this would yield additional savings. There’s been a lot of resistance to this in the past. I don’t think there’s a high probability on this actually materializing. The other thing that the administration could target is the dual eligible, so there’s patients that are eligible for both Medicare and Medicaid, and impacting the level of rebating there. So that could –we could see that take place. Difficult to place a probability on it, but I just would note that it’s a pretty small number in terms of overall patients in the US and therefore overall costs. So I still see his most effective mechanism for influencing drug pricing as his Twitter account and the public shaming that he has done in the past and is likely to continue doing.
TS: No doubt. And also in this report, you mentioned something that I hadn’t thought about, but that is his targeting of off-shore manufacturing, which is obviously something that we see a lot of in medtech and in pharma as well. Do you anticipate that that will lead to higher costs one way or the other, either a tariff or some other sort of border protection measure that might be taken? Will they feel the same heat? Will pharma feel the same heat that Ford and others are feeling?
LA: Well, two points here. Firstly, this is something that is being targeted as part of US corporates tax reform. It’s part of the GOP’s blueprint for tax reform, and has been talked about extensively by Speaker Paul Ryan and Congressman Kevin Brady, who is the Chair of the House Ways and Means Committee. Trump has talked not about border adjustments, but he’s talked about placing a tariff on imports. The two are slightly different. Unclear which one will prevail. But we place a high probability on border adjustments just because of the mechanism of getting US corporate tax reform passed. So that’s the first point. The second point would be the impact on drug companies. A lot of them do manufacture products off shore. Different companies to different extents, and it’s unclear exactly who manufactures what where. The generic companies, for example, do the majority of their manufacturing in India and import it into the US. And this would certainly have an impact on their margins if it were to be implemented.
TS: And finally, what will you be looking for going forward as President-Elect Trump becomes President Trump, and as he begins to move from just tweeting to actually initiating legislation or pushing for actual measures? What are you looking to happen? What do you think may happen over the next few months? What sort of telltale signs will you be looking at that will kind of help you give guidance to investors and Wall Street?
LA: So a few things. First, we’ll be looking for legislative action. We know from comments that the President Elect has made, and also from key members of the House such as Speaker Ryan, that repeal and replace of the Affordable Care Act is one of the key things that they’ll be targeting in the first 100 days, as is corporate tax reform. So those are two things that we’ll be looking for from a legislative angle. I think we’ll also be looking at the President-Elect’s Twitter account and what he says and whether he continues to target drug manufacturers on pricing. And then the third thing that I’ll be looking for is incremental commentary and behavior of or adjustment of behaviors by pharma companies vis-à-vis the drug pricing in particular and how they communicate on this going forward.
TS: So do you anticipate – what are you hearing from companies themselves? How are they approaching not only the pricing issues, but any other issues? Are they doing anything differently than they’ve done in the past? Is this uncharted territory for everybody and no one’s really sure of the proper direction yet?
LA: SO I think as it relates to the tax issues, it’s somewhat uncharted territory. These import taxes or border adjustments are part of broader corporate tax reform. No one’s seen the legislation yet. Companies are somewhat hesitant to provide commentary, given that tax reform will include some positive elements for companies as well as a lowering of the US corporate tax rate. As it relates to drug pricing, I think you are seeing companies already start to be more cautious regarding their pricing commentary. And we’ve seen Allergan in particular take the lead on this and comment on mid-single digit net pricing increases for 2017 and beyond. And a couple of other companies have followed suit. I would expect this to continue going forward.
TS: OK, great, well, it’ll be an interesting time ahead for sure. I appreciate you taking a few minutes to explain some things to us.
LA: My pleasure. Thanks for having me.
TS: Well, that is a wrap. Liav Abraham and Ronny Gal, thank you for taking some time out of your schedule to share your insights on what we may see happening in pharma over the next few months. It certainly will be interesting times, and I doubt this will be the last time we’re talking about it on this Podcast. Again, I appreciate you both taking the time to talk to us. Thanks of course to our Podcast listeners for joining us. It’s a true treat to have you here each week, and I hope you’ve found these interviews fruitful. I wanted to ask a few favors of you. If you could recommend the OIS Podcast on iTunes or whatever platform you’re listening to. Just give us a ranking that will help other people find this Podcast. If you have a few seconds and want to offer some comments, I’d love to hear what you think of the Podcast. Finally, if you have a colleague who is as into innovation as you are, please do tell him about the Podcast. The more listeners, the better. And if you’d like to reach me directly, you can shoot me an email. I’d love to hear, again, what you think about the Podcast or what other issues we may be covering or people we should be talking to that we have missed so far. Just send me an email. My email is Tom@healthegy.com. Healthegy is spelled the word health followed by the letters EGY.com. Healthegy is the company that produces the OIS Podcast and the Ophthalmology Innovation Summit. So would love very much to hear from our listeners. And finally, I did want to remind you that OIS@ASCRS is happening on May fourth in Los Angeles. Registration is open. Applications for presenting companies, that is open as well. You can find those applications, rather, on OIS.net. So please do go to OIS.net, register, and we will see you in Los Angeles.