[creativ_pullleft colour=”light-gray” colour_custom=”” text=”Episode 111″]
The election of Donald Trump had an immediate impact on our OIS Index. OIS writers and editors dig deeper, discussing what the long-term impact could be on drug prices, regulation and ophthalmology’s bottom line.
Michael Lachman is President of EyeQ Research, which provides market research, analytics, and strategic advisory to ophthalmic companies and investors.
Tom Salemi: Hey, everybody, welcome back to the OIS Podcast. This is Tom Salemi, your host. We’re going to focus on current events for this Podcast. How can we not? Donald Trump won the election last week, surprised some, didn’t surprise others. But it certainly will change the direction of this country. And we asked two great resources and two folks who I’m very fortunate to be working with on a regular basis: Rich Kirkner, who’s our contributing editor at OIS and Michael Lachman, who’s a principal of IQ Research. Both have done extensive writing about ophthalmology and about medtech and pharma, and they do a lot of work for us here at OIS, too, and we’re very fortunate to have their insights. So today we talked to them about what the impact of a Donald Trump presidency might be. Rich Kirkner actually did a great write-up for the Eye on Innovation Newsletter. If you don’t get it, go to OIS.net, give us your email, and we will send you the newsletter each week, the Eye on Innovation Newsletter each week, which will include our own write-ups by Rich and other very talented folks, podcasts like this one, and video content from our OIS events. It’s really simple. Just go to OIS.net and give us your email address, and we’ll send that out to you. But Rick covered a few different areas that a Trump administration could impact, including pricing and the FDA and repatriation of tax funds. So in this Podcast we hit upon those 3 points that Rich raised in the report, but we also talked to Michael, who in addition to running IQ Research and doing great work for the ophthalmology industry, also manages our OIS Index, which we launched last month. We did a Podcast about that last month, and Michael presented at OIS@AAO, and talked to him about the impact that Donald Trump had on our OIS Index. So we’re going to get into that, into the impact of ACA, into a lot of other issues and questions as to what a Trump administration means for ophthalmology. So I hope you enjoy this little round table discussion.
TS: Well, Mike Lachman and Rich Kirkner, welcome to the Podcast.
Michael Lachman: Thank you, Tom.
Rich Kirkner: Thanks, Tom, for having us.
TS: It’s going to be hard for us, I think, to pinpoint exactly what the impact of Donald Trump’s election to the presidency has on ophthalmology. But clearly it’s going to have broader impacts on healthcare overall. And one of the larger things that’s been talked about, of course, is what may happen to ACA. And I think we had our Digital Healthcare Innovation Summit conference in Boston a couple weeks ago, and we were really grateful to have David Blumenthal, who of course was in charge of healthcare IT or so for the Federal government during the early part of the Obama administration. He’s now with the Commonwealth Fund. And we also had Jonathan Gruber, one of the architects of ACA there as well. And there was a great deal of uncertainty. David Blumenthal was asked about what might happen if either candidate won, because this was prior to the election. And I think everyone in the place had a feeling that Hillary Clinton would be winning. That obviously didn’t happen. But there was a question as to what might happen with either administration taking over. And he had largely said that there weren’t a lot of details of what Donald Trump might do in a Trump administration to ACA. There was stuff on the website. They tried to get some clarity on that, but the Trump campaign never really got back to him, whereas the Clinton campaign was more informative. So they were unable to really build a model as to what the impact of a Trump administration might be on healthcare. So I don’t know if that was a lack of detail that they had for a plan or just a lack of responsiveness to questions about their plan. Jonathan Gruber was more specific. Of course he helped craft ACA. He’s been a defender of it. He insisted it was a success, saying it insured 27 million – 20 million, rather Americans, whereas they were shooting for 27 million and would have gotten there if certain states had accepted the Medicaid provision where the Federal government would have helped pay for healthcare of residence within those states. But he overall said that there wasn’t going to be a grand political solution to this, that it was going to be sort of incremental improvements, and that ACA is not going away. Trump will change some minor things around the edges, he said. He’ll declare it dead, and then say Obamacare is now Trumpcare, but it’s going to essentially be the same thing. I know we’re early on in where we are, and I know we’re all sort of guessing here. But is that sort of the feeling that you folks are getting as well as to where we’re going with healthcare? Do you get a sense from the folks you talk to that there are going to be wholesale changes that we need to prepare for? Or is it just sort of – are we still in the too soon to tell sort of stage? Mike, have you had conversations with people about this?
ML: Not specifically. I would agree that we’re probably in the too soon to tell phase. And my personal impression is that the changes will be more incremental than drastic, even though, as you said, they may be sold as drastic for political purposes, but may end up being more gradual. One example of that is when you talk about focus on drug prices. I think a lot of people were worried before the election that a Clinton administration would have a big focus on drug prices and that’s probably one of the reasons why healthcare stocks have rallied so much since the election. That said, I think anyone that things that drug prices are completely off the radar screen are probably a bit misguided at this point. So I think we’re talking about shades of gray here.
TS: Yeah, for sure. And rich, I want to get into for a second, because you wrote a great piece for the Eye on Innovation Newsletter this week that we’ll sort of recap. But while we’re talking about stock prices, Mike, you’re the manager of our new OIS Index. You’re sort of tracking the performance of the ophthalmology – I forget the total number, but of several ophthalmology companies. How did the Index perform? What is the total number that you’re tracking now, and how did the index perform before – immediately after the election, rather, and how has it performed since?
ML: So there are 29 ophthalmology stocks, both biopharma and device. It’s about two-thirds biopharma at this point, one-third device. And we launched the index on October first with an initial valuation set at 1000. And when we lost updated our readers and listeners on November first, the index was down in one month from 1000 down to 876. SO a pretty significant drop. And then in the following week, leading up to the election, the index was down another two and a half percent to 854 as of election day. But in the week since, the OIS Index has come roaring back, up nearly 13% in the past week to 962. So approaching that initial 1000 valuation that we started on October first. And if you look at what other healthcare stocks have done since the election, the OIS Index has outperformed a couple of the other major indices. The overall US stock market is up about two and a half percent since the election, but the NASDAQ Biotech Index is up a little more than 11%. And interestingly, the medical device index is down a couple of percent since the election. But I wouldn’t read too much into that. If you look at what happened over the year prior to the election, biotech stocks in the year prior were down about 21%. The OIS Index was down about 14%, and during that same period of time, medical devices were actually up 13%. So maybe a little bit of a give back or less of a post-election rally for medical devices.
TS: Interesting. And Rich, in the article I referenced earlier, and people can see it in their Eye on Innovation Newsletter, you hit upon the pricing and transparency pressures, and they seem to be easing up for now. Not only the Trump election, but the failure of Proposition 61 to pass in California. What is your sense? Again, it’s really too soon to say what the outcome might be, but in the conversations you’ve had, and I know you’ve read through several of the analyst reports that came out following the election – there was a whole slew of them sort of giving an idea of what might happen going forward. What was your takeaway in regards to pricing and transparency? And then we can hit upon some of the other issues you raised in the article as well.
RK: Well, I think I go back to what Mike said, that it may be too early to tell, and we are in sort of a gray area here. With the defeat of Proposition 61, obviously pharma breathed a sigh of relief with that. But I think where that – with the election of Trump and the Republicans continuing to keep control of Congress, it seems that any Federal effort on greater price transparency and price controls on pharma is probably off the table. That said, Trump, when he campaigned, did say he thought Medicare should be able to negotiate drug prices. He – yeah. And he also – he said a lot of things in the campaign, including he talked about getting to the ACA having coverage for pre-existing conditions, which he reiterated the other night on 60 Minutes. However, I think where we’re in this gray area is which of these things is he really going to push on, and which are not going to make the agenda in the first hundred days? Giving Medicare the authority to negotiate drug prices is a tough sell on both sides of the aisle in Congress. So I think we can say pretty much on the Federal level, that’s probably off the table. On the state level, Proposition 61, I’ve talked to a number of people about this. They said it was just a bad ballot initiative. It was just worded poorly and Adams Dudley, who is with the University of California at San Francisco, and who followed this closely, said to me that if a year or two from now there hasn’t been any progress made on drug pricing, and we keep getting hit with stories like the Epi-pen and Martin Shkreli and personalities like that, and drug pricing is at the top of mind of the public, say, by the midterm elections in 2018, he said to me a badly worded ballot measure like that could pass. So it’s not – pharma is breathing a sigh of relief, but I think they may have to look at what the states are going to do. Ohio has a ballot proposition in 2017, next November, very similar to California’s, which was that the state would pay no more for drugs for its various programs – drugs for prisoners, drugs for social service programs, drugs for Medicaid – would pay no more for those drugs than the list price of the Department of Veterans Affairs does.
TS: That’s interesting. It would be fascinating if that were to pass in Ohio after having failed in California, given that they’re two completely different types of states.
RK: And the drug company spent $109 million in California to defeat it. And it won – it was defeated by a vote of 54 to 46, which as Adams Dudley said to me, That’s pretty close when you consider that the proponents for the proposition were outspent 5 to 1.
TS: Do you get a sense that ophthalmology – and both of you can kind of chime into this one – is any more or less exposed to this sort of pressure on pricing? I mean so much of what we do, especially with the device side, is private pay and premium channel. But there’s obviously a lot in the reimbursed side as well. Is ophthalmology more or less exposed to this kind of pressure than other specialties?
ML: I don’t know that I have a whole lot to say on that. I think the private pay part of the market does act as a buffer, and when you look at a lot of the sort of bread and butter procedures like cataract surgery, I don’t think there are a lot of big ticket items involved there. You know, where you’re looking at some of the newer medications in the retinal field, there could be some resulting price pressure, so that might be one area. But I don’t know that ophthalmology really stands out as particularly exposed from a drug pricing standpoint.
TS: And Rich, I know this is a focus of yours. What do you think?
RK: Well, the price of anti-VEGF drugs has drawn a lot of attention from Medicare and the press. However, these drugs work. They work really well. They provide a very high quality of life. They provide value is what they provide. So I think because of that, and because ophthalmologists are aware of the costs of these drugs, and they have adopted approaches to using them such as treat and extend for AMD and diabetic macular edema instead of – you know, they are really trying, instead of just using the drugs every 4 weeks per label, they are really trying to extend it out to make the most with the least of drug. So I mean I guess a year or two ago, when Medicare came out with its list of top reimbursed physicians, and there were a lot of ophthalmologists up at the top of the list because of anti-VEGF drugs, that brought some scrutiny. But again, like I said, ophthalmologists, retina specialists specifically have been very good about maximizing the value of those drugs.
TS: And then another – we’re going to work up from the list. This is actually number 2 on your list, and we’ll get to number one in a second. But changes at the FDA could lead to a friendlier regulatory climate for drug and device makers. It’s interesting to hear after the positive summer we’ve had in ophthalmology, but things might get even friendlier. And it hadn’t really occurred to me that Robert Califf, who just went through a very rigorous review before getting appointed, might get replaced sooner rather than later. What’s the feeling regarding the FDA? I mean I think the sentiments of the reviewers, I don’t know if that’ll be impacted directly by the change in commissioner, but certainly the commissioner can set the tone for the agency. But is it likely that Robert Califf would be replaced?
RK: Well, as best as I can tell, that’s what analysts are seeing. And that’s what the media that covers the FDA is seeing. Obviously to my knowledge, he’s an administration appointee, and those people typically get replaced when a new administration comes in. So when I saw that in the days after the election about the FDA becoming friendlier in the review process, that kind of surprised me. That was something I really didn’t think about. And that may be something that pharma outside of ophthalmology is keenly aware of. As you said, it seems like ophthalmology has had a pretty good run in the past few months, anyway. So but that’s – I mean that’s certainly worth watching to see what direction the FDA takes in a new administration.
ML: Yeah, I would say that aside from specifics, and specifics that would relate to actual policy or specifics that relate to ophthalmology, I think there is a broad perception that a Republican administration could lead to a less restrictive FDA, possibly with respect to product approvals. That said, I don’t think there’s a lot of meat on the bone, and I haven’t read anything yet that really goes beyond that perception and starts getting into specifics of how that might play out. So I think we may be seeing, and I would put that on the list of the sort of top 4 or 5 reasons why there was this relief rally in biopharma stocks in particular after the election. It was just this broad perception that Republication equals less regulation, and that could spill over to the FDA.
TS: Yeah. In this case, of course, this Republican win has much more of a populist feel to it, so you don’t know how – it could go either way. But I think the tax policy, and that’s the third point that you hit upon, Rich, and you can both sort of address this. Any changes in tax policy that would encourage repatriation of money to be brought back into the US could be used for M&A and other applications would be huge for the sector. I mean I think all around it would be beneficial for strategics, it would be beneficial for investors. What’s your feeling about that, Rich? Is this really kind of the source of the buoyancy that we might feel in ophthalmology, this money coming back into the sector?
RK: Well, I think it certainly contributes to it. The figures I saw is that something over $30 billion that Amgen has out there overseas, and Gilead has 20 billion. And they’re just two companies. Now they’re not big players in ophthalmology yet. If they’re able to bring all that money back into the United States, who knows, they could be. But certainly, big players like Merck and Abbott and Pfizer have a lot of money stored overseas as well. And they have been considerable players in ophthalmology. So yes, I think that has a good bit to do with the rally in pharma and biotech stocks. In addition to, as Mike mentioned earlier, the general sense that the regulatory environment usually is friendlier under Republican administrations than Democratic administrations.
TS: Yes. And Mike, from the Index point of view, or just from your general point of view, what impact do you see this repatriation of money having in ophthalmology?
ML: Well, I would just echo what Rich said. I think any time you bring that much investable money back into the US, where it can be used to fund M&A activity, which not only helps the big companies but helps the companies down at the earlier stage of development. The other thing from a tax standpoint which hasn’t gotten quite as much discussion and play as the repatriation of foreign profits, is I think there’s a general feeling that under a Republican administration it’s more likely than before that the 2.3% medical device tax will be permanently repealed. And having said that, we haven’t seen a rally in medical device stocks since the election. It’s been flat to maybe even down a couple of percent. But there are a lot of moving parts that affect movements in stock prices, and as I pointed out, medical device stocks weren’t nearly as negatively impacted going into the election as biopharma stocks were. So that would be the other thing to look for from a taxation standpoint.
TS: And I had also – I think one thing in particular that I was curious about was whether this could impact inversion deals, whether the Treasury would repeal the directive that sort of scuttled the Pfizer Allergan deal. But I emailed with Liev Abraham from Citi, who’s been on the Podcast before, and she sent me her report suggesting that the realignment of the taxes will actually make those deals even less attractive to do. So I don’t think it’s like that we’ll see a renewal of those kind of inversion deals or Pfizer Allergan in particular, which is probably no surprise to anybody. But certainly, lots to track going on. Anything in particular you guys are going to paying attention in the near future? Or is this pretty much all we know at this point? It’s certainly an exciting and interesting time. Mike, any thoughts?
ML: Yeah. Well, I think just keeping an eye on some of the things that we’ve talked about to see where the repeal and replace process on Obamacare leads. Any time you talk about making changes to broad healthcare policy like that, one of the things that you look at is if the result is that fewer lives are covered, and fewer people are insured, the question then becomes could that have a negative impact on procedure volumes or on diagnostic volumes, or whatever volume of product or procedure you’re looking at. And I think that’s always a question, but I think that in this repeal and replace process, there’s going to be a lot of focus on making sure that tens of millions of Americans who are insured now, making sure that they don’t lose their insurance. And I know that even covering pre-existing conditions and allowing people up to age 26 to stay on their parents’’ plan, I think the feeling is that in the move to repeal and replace Obamacare, the goal is going to be to try not to drop people off the rolls of the insured. So I don’t expect there to be a negative fallout from that side of it.
TS: The AMA came out pretty forcefully yesterday. Andrew German, President of the AMA, said that while they’re open to revisions to coverage, they said a core principle of the AMA is that any new reform proposal should not cause individuals currently covered to become uninsured. So there’s going to be a lot of pushback, I think, from a lot of different directions. Rich, what are you looking for going forward?
RK: Well, with the ACA repeal and/or replace effort, it will be interesting to see how the various stakeholders that are affected, hospitals and insurance companies specifically, take to Capitol Hill to defend their turf in that legislation. I think, too, that agreeing with Mike here, the prospect of 20 million people losing insurance is something that nobody wants to stomach. And now that the Republicans do have control of both houses of Congress and the White House, anything that goes wrong there is going to come back at them in the 2018 midterm elections. And they are already looking forward to that because typically in the midterm elections, the party that’s in power loses a lot of seats in congressional races. And I think for them to go forward with just a simple repeal, take 20 million people off of the insurance rolls, is going to be something that their members will find very politically difficult to do, especially if they’re keeping an eye on those 2018 midterm elections.
TS: I agree. It’s a great point. All right, well, this has been a great overview. And a lot of questions that will be answered over the coming months and years, and appreciate your taking a few minutes to share your early insights.
RK: Thanks, Tom.
ML: Thank you, Tom.
TS: Well, that’s a wrap. Mike and Rich, thanks for taking the time today. There’s so much to think about. And while we don’t have answers for every question, it certainly was beneficial, for me at least, to understand what we need to be watching for going forward. Lots of great opportunities for ophthalmology, lots of potential pitfalls. But overall, things seem to be headed in an interesting and possibly positive direction. So thanks again, guys, for taking the time today. Thank you, Podcast listeners, for joining us for this conversation. I hope it was as helpful to you as it was for me. And if it was and you want to return the favor, please do go to iTunes or whatever platform you’re listening to this Podcast on, give us a rating. We’d love to know how we’re doing. Offer some comments. Those help us a lot. And again, of course, always keep listening to the OIS Podcast. Subscribe if you’re not a subscriber, and we would be happy to send you great content like this each week. And also, don’t forget to subscribe to the Eye on Innovation Newsletter. Go to OIS.net. Just give us your email and you’ll get all this stuff sent directly to your inbox. So thanks again for tuning in, and tune in next week for another tale of innovation.