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Jean Hynes, global industry analyst with Wellington Management Company.
The question is what is the impact of major pharmaceutical companies in the U.S. and the whole controversy around escalating drug prices. To give some perspective this is a very important topic for investors because 60% of our investible universe is in the biopharmaceutical sector—these are the companies that are public. Drug prices over time have risen, the average treatment has risen, and there are a few reasons for that. First of all, the makeup of the market is much more geared toward specialty drugs that treat cancer or treat specialty diseases than there was in the past.
And secondly, the patent life of drugs is much more finite, meaning that you have 10 or 15 years and there’s really no tail left of enduring revenues once patents expire—a story unlike every other industry. Because of that phenomenon, the drug prices of classes have tended to rise over time. So if they have been out on a year-over-year basis, they stop rising or escalating on a year-over-year basis as this has come under more scrutiny.
Very importantly, there are a number of topics that are taking place in Washington D.C. in terms of new ways of going after high, out-of-pocket co-pays that patients have. So there’s two things we want to think about. One is, what is the absolute drug prices and what is the out-of-pocket payment that consumers have? And that is really what is the issue with consumers. And so there’s a number of proposals underway. President Trump in the middle of 2018 put out a drug pricing blueprint. Over the past year, the secretary of HHS has been seeking feedback and input and we’re getting closer to a point where there are likely to be changes in Medicare part D, which would allow rebates be passed on to consumers. There could possibly be other changes in other parts of Medicare, and the real question then is, how do those changes roll over to other parts of healthcare that are not government funded, such as commercial payments?
When we take a step back, we think that many of these measures that are being considered are positive for the industry in the sense that they increase their transparency, they lower the out-of-pocket pay for consumers. For the major biopharmaceutical companies they will probably be slightly positive to slightly negative, or neutral, they won’t have a major impact. They could have more of an impact on the supply chain, the middle men who make money from these rebates. But overall, we believe it’s a good direction for the country to take.
What is the uncertainty around the Affordable Care Act and what are the implications for the healthcare sector? It’s interesting that this act was enacted in 2010 and, unlike other laws around healthcare, it has been a constant source of political debate between the Democrats and the Republicans. In 2017, you did see that the Republican Congress, the Senate and the House of Representatives were unable to overturn the Affordable Care Act and then it seemed to die away for a period of time. But more recently there was a court case in Texas where a judge in Texas made ruling that would call into question, again, some parts of the Affordable Care Act and the structure. I think when we take a step back and think about how successful the Affordable Care Act is, it’s actually a law that benefits about 20 million Americans and it’s viewed very favourably by the people who benefit from it.
So a couple of things; we don’t think, whatever happens, we don’t think that you can take a benefit away from 20 million people, so there will have to be some alternative. And as of now, in 2019, there are a lot of political alternatives as part of the pre-election, but there’s nothing concrete that would really replace the Affordable Care Act. I do not believe that anything will happen in the next few years, so if we are entering the presidential cycle and healthcare is always a very important part of the presidential debate, because it’s such a large part of the economy and as we move forward into 2019 and into 2020 there’s going to be much debate around this.
What we’ve heard very recently is some presidential candidates talking about Medicare for all, which, again, we believe is a program that is very unlikely to be adopted. It would be extremely disruptive to U.S. healthcare system—to doctors, to hospitals—and would be very unaffordable for the country. But it has captured the imagination of the markets and of the public in the near term. As we move into 2020 and you have more of a debate between Democrats and Republicans, we believe other proposals will likely come into the forefront.