Drug pricing remains at the top of investors’ minds, and for good reason. The US spent nearly 17% of GDP1 on healthcare in 2014. At the current trajectory, almost 40% of federal spending would be on healthcare by 2050.2 By comparison, other OECD countries spend only 9% of GDP on healthcare.3 One might find this acceptable if the quality of care in the US was superior; alas, it is not. In fact, the opposite is true – most other OECD countries have better outcomes.4
This is clearly an unsustainable situation, and many aspects of the system contribute to it: the fee-for-service model, asymmetric information about treatment options, quality and price, and a lack of competition, just to name a few. Overutilization, mismanagement and inefficiency are therefore the major culprits, which will have to be addressed to remedy the problem in the long term. Yet the system is so complex, and the culture so embedded among myriad stakeholders, short term fixes are also necessary. Drug prices are an easy target, and one that can have a meaningful impact.
Spending on medicines is estimated to be as much as 14%-22% of various US budgets.5 If US payers implemented policies to lower prices by 30% to bring them in line with Europe, it could immediately reduce total spending by 4%-7%, even before attempting to improve preventive measures, reduce utilization and increase efficiency. The biopharmaceutical sector has underperformed meaningfully as this reality has been recognized and the probability of negative pricing dynamics has risen. Returns for the industry as a whole would decline in such a case, and companies with a relatively large proportion of sales in the US, or with large variances between US and EU prices are at even greater risk, so we take these types of factors into consideration when analyzing the quality and sustainability of companies.
We expect biopharmaceutical companies to acknowledge this situation, and work to build productive relationships with regulators, payers and patients, with the common goal of improving the health of society as a whole. For this reason, we recently participated in the PharmaDiplomacy Dialogue organized by Meteos, a not-for-profit think tank. Pharma Diplomacy is an initiative aimed at overcoming the lack of trust between stakeholders in the healthcare system and the pharmaceutical industry in order to ensure that effective, affordable and innovative medicines get to patients who need them. PharmaDiplomacy brings together senior executives from industry and various other health system stakeholders in Europe and the US. Representatives from GlaxoSmithKline, the International Diabetes Federation, Novo Nordisk, UK National Institute for Health and Care Excellence (NICE), The Medicine Evaluation Committee (MEDEV) and Yale University were among the participants.
As sustainable investors, we believe healthcare can be provided to every individual on the planet. To achieve this goal, companies, governments and civil society must work together to create healthcare systems that invest appropriately, and use every tool at their disposal to maximize the return on those investments. The report Principles for Collaborative, Mutually Acceptable Drug Pricing, which was the outcome of the PharmaDiplomacy Dialogue, is one of these tools. Used appropriately, it will help to ensure companies are incentivized to develop new medicines, that they are rewarded for their efforts, and that society receives the greatest benefits from the same. Companies that embrace such an approach, focus on developing innovative solutions, and demonstrate their value to society are more likely to win in the long term. We have therefore avoided companies with little innovation and aggressive pricing practices, and preferred those investing in R&D that can drastically improve outcomes or bend the cost curve.
1 OECD Health Statistics 2014: How does the United States compare?
2 OECD, CBO and JP Morgan.
3 OECD Health Statistics 2014: How does the United States compare?
5 Bach, Peter B. What to do about drug prices? Memorial Sloan Kettering Cancer Center. 22/2/2016.