Joe Coletti
Hello, and welcome to Pathfinders a podcast series from RBC Capital Markets where we explore the fast moving world of biopharma, and healthcare. I'm your host, Joe Coletti. On today's episode, I'll be talking to our global head of healthcare research and senior biotech analyst Brian Abrahams. He'll provide his perspectives on health care policy, and the drug pricing landscape and 2024. I think we can safely predict this is going to be an eventful year on the political front with the US elections and other elections around the world. So we're going to go beyond the ballot to translate the practical policy implications for the sector. Let's dive into the conversation.
Brian Abrahams
Thanks for having me.
Joe Coletti
Let's start with the Inflation Reduction Act or the IRA as it's better known, you know, Congress has managed to avoid a government shutdown so far despite threats. What does this mean for the IRA, and for federal policy around healthcare in general?
Brian Abrahams
Well, the spending bill passed by Congress in January keeps the government active for now in the short term, but major challenges still lie ahead. Lawmakers now have to try to pass full year spending bills before the March deadlines. If a budget isn't passed by mid April, automatic 1% cuts will trigger which could have a negative impact on federal agencies such as the FDA and IHCMS and others. A government shutdown would also have a negative, albeit modest impact on the biopharma industry, since the industry relies on regulators to accept new drug applications, approved manufacturing, and hold meetings about development and filing paths as well as fun basic research. At the same time, court challenges are continuing against the IRA. several cases are seeking summary judgement. We think change is unlikely, though due to the complexity of the case and broad governmental authority. And when you combine that with congressional gridlock, this makes it likely in our opinion that IRA will be implemented in its current form, though some folks we've talked to have said it's not out of the realm of possibility, with arguments around the eighth and Fifth Amendments still potentially viable.
Joe Coletti
All right, let's stay on the IRA a little bit longer. So you talked about this feeling, it's unlikely that it will be changed. If it's rolled out as it is now, what does it what does it mean for the sector, what might come to pass?
Brian Abrahams
The drug discounting that's embedded in the IRA really has a tangible negative impact for biotech players, particularly in the value ascribed to tail revenues for biotech pharma companies, especially companies that have drugs for diseases of older individuals who have Medicare like cancer. It's essentially like having an artificially created patent Cliff prior to a drugs actual patent expiring. And so we're already starting to see some impact to development strategies. In the past, companies would try to get a drug on the market first in a small late stage indication for the sickest patients as a proving ground, and then tested an earlier line larger populations. But we're seeing less of this because the clock for the IRA starts as soon as a drug is launched. It also has a preferential negative effect on small molecules as compared to biologics. And interestingly, along those lines, over half, the recently announced acquisitions for cancer companies were for companies who had biologics. But IRA could also have some positive implications as well. Big pharmas are going to need to replace this lost revenues caused by the IRA related discounting, which means that they're going to be more incentivized to do M&A. And that benefits mid cap biotechs.
Joe Coletti
So you touched on patent cliffs, and I want to come back to patent policy in just a few minutes. But first, I want to stay on the kind of drug policy drug pricing front for a second, as we sort of look at this year, you know, the way Democrats and Republicans are sort of talking about drug policy and drug pricing. You know, what are you hearing out there? How are you thinking about it? What do you think the narrative is going to look like again this year?
Brian Abrahams
Pharma and biotech are really easy to vilify, and calling for lower drug prices polls very well. And indeed, the rhetoric on drug prices is already ramping up, Democrats are campaigning to expand the IRA, and Trump has accused biopharma of ripping people off. If reelected, the Democrats are proposing strengthening the IRA, which would be a negative for biopharma. And in fact, the Biden administration has reportedly been seeking to put additional measures and policies in place to try and lower drug prices, which could include controls on drugs at launch using price reviews. On the positive side, though, the Democrats have talked about expanding Mental Health Access, which would be a positive for Neuro psych companies, as well as funding community hospitals, which could drive increased treatment volumes. Republican proposals are also mixed. Trump has said he would repeal the Affordable Care Act, which could curb some of the volume benefits of universal health care, but he wouldn't cut Medicare funding so that could continue to drive drug volume to elderly patients. Alex Aser, Trump's ex HHS Secretary has come out against the IRA, which suggests Republicans might try to roll back the bill. But we still think that would be tough.
Joe Coletti
So I think it's fair to say that we're going to need to talk to you again, as this year progresses, Brian, because I feel like we haven't heard the end of new proposals and new positions from either side of the aisle. And this could be a quite a narrative that just continues and evolves over the course of the year. I want to take I want to go back now to patent policy. You talked a little bit about patent cliffs, but let's talk about patent policy. What's behind some of the recent moves on patent policy? And could you talk a little bit more about what it could mean for the sector in particular?
Brian Abrahams
So one of the risks to the group that we've been highlighting more is what's called patent Marchin. rights. And basically what that means is that the government can use their authority to force a company to license their patent, effectively removing patent protection for any drug that ever received federal funding, which most drugs have, if they deem price or access to be too constraining. It's something that's been around for a while conceptually, but it's never been used, but it has gotten attention more recently as the Biden administration just in December published the fact sheet with the first formal framework around it. We see this as pre-election posturing with implementation very unlikely. But if it were to happen, it could be highly disruptive, given the deep reliance on IP to maintain exclusivity for drugs, and the immense threat to long term revenue for any drugs that would lose protection with this approach.
Joe Coletti
Now, I know there's some other patent changes and considerations out there from a policy perspective, could you maybe just briefly touch on some others that you're going to be watching.
Brian Abrahams
We're watching the Para Act, which is a major reform bill that tightens the definition of what types of inventions could be patentable, as well as the Prevail Act, which streamlines the patent challenge process. But we think both of these are unlikely to move this year due to the deadlocked Congress. The FTC has a directive on improper Orange Book patent listings, which could limit company's ability to secure 30 month stays from generic entrants, but the impact of this was unclear. And then the USPTO is working with the FDA to try and reduce patents that are granted for obvious or just incremental advances, which could limit evergreening, and other biopharma IP lifecycle strategies.
Joe Coletti
We could have an entire episode just talking about policy. There is a quarterly report, patent patrol, that you put out that I highly recommend. And I think that there'll be more on this as we go forward, for sure, as this policy area evolves. I want to pivot next into maybe some other broader developments as we think about, you know, what's happening on sort of government policy front that that could hit the sector.
Brian Abrahams
Well, with regards to the Federal Trade Commission, FTC has definitely taken a harder line stance scrutinizing deals of late, but the challenges to deals seem to have slowed, biopharma deals are getting done, and M&A is starting to pick up in spite of the stricter regulation. Additionally, and this is particularly important, smaller companies and deals are probably not going to be as much of a target for the FTC. And these are what really helps drive the biotech sector, not necessarily the mega mergers. We'll see if this continues with a few recently announced acquisitions as potential test cases, including ABI for Sayreville, and Novartis for Morphosys. On the federal court side, there's a class action lawsuit against Gilead that will determine whether companies have a duty to innovate, which could have major implications both for biopharma and other sectors that we think Gilead would likely settle before we got to a final ruling. And then on the Federal Reserve, higher rates probably drove investors out of biotech in the last year, but predicted steady cuts through 2026 could support a return of capital. We've seen historically a clear inverse correlation between the Fed funds rate and the SPI biotech index.
Joe Coletti
What about the state level? What kind of state led regulations are you paying attention to?
Brian Abrahams
We're very closely watching the rollouts of the state drug pricing boards, and we think that's an underappreciated threat to the sector. States are seeking material drug discounts of 30% or more. We think this could be a real risk, but legal challenges are likely to push full implementation out beyond 2026. So it's a much longer term consideration. Currently, there's four states who have active price review boards, 16, others have advisory boards or are considering legislation which would cover almost 100 million Americans. The Colorado Board has been investigating several drugs, we'll likely see a decision there in mid-2024. And that can be an important litmus test. And then Maryland will be voting on broadening their board's authority around the middle of this year. In general, the states have enacted 49 health care laws this year, which is 50% more versus the past two years, but the biggest focus being on PBMs but also with some laws capping insulin and EpiPen costs, and Texas and Florida have a stab was drug import programs from Canada, but we think implementation of that would be uncertain.
Joe Coletti
So there's a lot to unpack both at the federal and state level. There's a lot of global elections going on this year. You know, what other policy changes are you seeing? And are you in the team watching sort of outside in the US that people need to pay attention to?
Brian Abrahams
The one we're much the one we're watching most closely is the European Commission's recent recommendation to overhaul their current system of pharmaceuticals. It proposes incrementally, unfavorable changes such as regulatory exclusivity adjustments, greater potential unification on access and pricing, and a push towards efficient biosimilar or generic entry, although there are some potentially positive changes, such as faster approval timelines. But either way, it's likely to take years before this gets codified into law, which would limit the near term impact to the biotech space. Globally, the 15% minimum tax rate will take effect this year across many countries, and that may limit biotechs abilities to use foreign domiciles as tax havens and could incrementally increase tax rates. The EU is also working to address drug supply through a new Critical Medicines Alliance. And the UK has approved branded drug price increases of 4% through 2028, which is up from 2%. And when you think about some of the other regions of the world, the impacts are likely mixed from Canada. They have an agile licensing proposed which would bring drugs to market six months faster. But they're also working to reform drug pricing using 11 reference countries. And in China and India several recent pro industry patent rulings and proposed initiatives, making patents harder to challenge, could spur more biotech investment there.
Joe Coletti
So we've covered a lot of topics in our discussion today. So maybe we can sort of take people and sort of summarize in a little bit of a different way. How do you think sort of biotech is positioned as a sector to sort of, you know, weather but also sort of, you know, continue to move forward and drive the innovation that has been driving for a number of years now?
Brian Abrahams
So there's a lot of tailwinds for the group. Cooling interest rates may bring investment back and see your return to stock price growth. Historically, biotech does best when government control is split, which is a very possible outcome of this upcoming election season. And governmental regulators, namely the FDA are more permissive than ever. We actually were just on a webcast with FDA commissioner, Dr. Rob Kailis, that really corroborated that flexibility. So when you combine that with the innovation that's so when you combine that with the innovation that's going on, we do think we're turning the corner relative to where we were just a year ago.
Brian Abrahams
But we do think drug pricing policy will be in the spotlight into the US general election, which could create negative optics. And there are some potential disruptors which don't get as much attention like march in rights and state initiatives, which while lower likelihood still do create simmering risk overhangs on the group that we think are worth keeping an eye on. But overall, we're more optimistic on biotech into 2024.
Joe Coletti
This has been a great conversation today. I think we really went beyond the ballot. And we're gonna have you on again, Brian. So thanks for being here.
Brian Abrahams
Thanks for having me.
Joe Coletti
Thanks for listening and thanks for listening to Pathfinders and biopharma brought to you by RBC Capital Markets. Please remember to subscribe to stay up to date on future episodes. This episode was recorded on February 9, 2024. If you'd like to learn more or continue the conversation, please visit RBC cme.com forward slash biopharma. See you all next time.