Hillary Clinton’s tweet in September about drug pricing sent some parts of the US health care sector into a bit of a tailspin, contributing to a renewed sell-off in US biotech in particular. As a global industry, this has also affected sentiment towards health care stocks elsewhere in the world. Clearly, there are examples of drug prices being increased significantly and unjustifiably but we do not view this a major problem for truly innovative pharmaceutical and biotechnology companies, such as the ones in which we have invested.
National US health expenditure accounts for just under 20% of US GDP. The rate has been steadily increasing in recent years and is forecast to continue to do so, by virtue of demographics and lifestyles which are causing a significant increase in the prevalence of decadent western diseases such as diabetes, cancer and cardiovascular disease. These are, of course, issues that are not confined to just the US but the entire developed world and, increasingly, emerging economies which aspire to western standards of living.
Prescription drug spending only accounts for approximately 10% of the total healthcare spend in the US but, this too is forecast to increase in the years ahead. Little wonder then that, in an environment of continued public sector budgetary pressure, the subject has become something of a political football.
The decrease in prescription drug spending between 2009 and 2013 reflects the ‘patent cliff’ that many pharmaceutical companies have grappled with in recent years. As patents expired, generic competition entered the market at much lower prices, hence the declining proportion of prescription drug spending as a % of total US national health expenditure. The patent cliff headwind is now dissipating, however, so it seems reasonable to expect prescription drug spending to gradually account for more of health expenditure going forward. Furthermore, improving returns on R&D have resulted in an increase in new drug approvals in the last couple of years, a trend that we expect to continue. These innovative new therapies, typically in conditions where there is high unmet medical need, attract justifiably higher prices after many expensive years in development.
Even with high prices, truly innovative therapies can actually help to combat the inexorable rise in health care costs in the US and elsewhere around the world. Innovation can help, and indeed is helping, to turn health conditions that were previously seen as terminal, into chronic or even curable conditions.
For example, hepatitis C is an infectious disease affecting the liver which causes about half a million deaths worldwide per annum. Patients have historically required intensive treatment involving weekly injections over an extended period of time, which ultimately cured about half of patients but caused life-threatening reactions in others. The overall cost of this lengthy and complicated treatment used to be considerable. More recently, however, the standard of care has evolved rapidly thanks to innovative new therapies developed by Bristol-Myers Squibb, Gilead and AbbVie. As a result we now have safer and more effective treatments for hepatitis C which represent a cure for most patients. Although the price of these therapies is high, the overall cost of treating the disease across the health care system is significantly reduced.
Nevertheless, it is also clear that behaviour from a small minority of companies has cast a dark shadow across the entire industry, amid accusations of dramatic and gratuitous price increases. Turing Pharmaceuticals, for example, which was cited in the New York Times article that attracted Mrs Clinton’s attention, bought an old, off patent drug called daraprim and immediately increased its price from $13.50 per tablet to $750! This is legal but it isn’t the result of recent innovation and it certainly doesn’t appear to represent an advance in patient care.
We can understand the consternation that this type of behaviour has caused policy makers and the desire to tackle this issue is clearly proving politically popular. Nevertheless, there is a massive difference between a strategy that is innovation-led and one that is not.
There is a long-term understanding between the pharmaceutical industry and government, particularly in the US, wherein successful scientific research can be rewarded with attractive long-term returns. Innovation leads productivity and productivity is the key to long-term economic growth, so the benefits of scientific research investment are far-reaching and, in the case of health care, bring additional social benefits by improving the lives of patients.
The long-term relationship between the pharmaceutical industry and government is not under threat, in our view. Targeting pharmaceutical & biotech companies broadly on price would result in lower investment, threatening jobs, patients and whole economy productivity. For this reason, a broad attack on drug pricing is not at all likely, in our view.
The debate is likely to rumble on, however, as the US election looms ever nearer and it does have the capacity to challenge market sentiment. We will follow events closely, but we do not expect them to undermine our confidence in the long-term investment case for health care in the US and elsewhere around the world. Indeed, by selectively targeting inappropriate pricing behaviour within the industry, policy initiatives could be beneficial if they allow true innovation to be more fairly rewarded.
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