Summary

• September was dominated by US politics and rising investor appetite in the healthcare sector.
• The US government shut down after Democrats demanded an extension of health insurance marketplace subsidies in the budget negotiations. At the same time, an initial MFN agreement brought greater clarity on drug pricing and tariffs.
• The fund’s biotechnology segment performed particularly strongly, benefiting from the acquisition of Merus. Interest rate cuts and increased political clarity could support continued M&A activity.
• The dark clouds weighing on the sector have cleared somewhat. However, uncertainty remains, not least regarding demonstration programs and the state of the FDA.

Monthly comment

At the end of September, the US government shut down due to Congress failing to agree on new budget appropriations. Large parts of the healthcare sector are considered system-critical, and are therefore not affected by a shutdown. The composition of Congress requires bipartisan negotiations to secure a continuing resolution and reopen the government. The Democrats’ key demand in these discussions is an extension of the enhanced subsidies to the individual exchanges (colloquially known as Obamacare) which Republicans have not been willing to acquiesce to.

First MFN agreement in place, Pfizer in the lead

One day after the deadline, Pfizer and the Trump administration signed the first Most-Favored-Nation (MFN) agreement. MFN is a price-regulation mechanism intended to link US drug prices to a lower price from a basket of reference countries. The agreement covered four main points:

• Drugs within Medicaid adjusted down to MFN price levels.
• Price parity across all channels between the US and other developed countries for newly launched drugs.
• Reinvestment of increased foreign revenues into the US market.
• Drugs offered at discounted prices directly to consumers through a new government website.

In exchange, Pfizer received a three-year exemption from sector-specific tariffs. This was important as President Trump, earlier in the month, had threatened 100-percent sector-specific tariffs for companies that do not relocate production to the US. Negotiations with other pharmaceutical companies are ongoing, with agreements expected shortly.

It is worth noting that Medicaid prices are already heavily discounted and that MFN prices within Medicaid will likely not result in significant reductions. Furthermore, MFN prices will not be made public, reducing the risk of spillover effects to the private insurance market or Medicare.

Another important nuance is that the formula used for MFN calculations takes outlier values into account. This is important since investors have been concerned that very low prices in a few countries could lead to drastic reductions.

The question mark now is whether Pfizer’s agreement will serve as a template for future deals or if other pharmaceutical companies will approach negotiations differently.

What we can say with certainty is that more agreements are on the way. In addition, another drug pricing initiative; GLOBE (Global Benchmark for Efficient Drug Pricing Model), is being prepared by the Trump administration. There is speculation that GLOBE will resemble a proposal Trump introduced during his previous term, which aimed to lower the price of 50 high-cost drugs covered by Medicare Part B (drugs administered in clinical settings). That proposal was ultimately blocked by the courts on procedural grounds.

FDA considered ending advisory committees

During the month, the US Food and Drug Administration (FDA) announced that it was considering ending the use of external advisory committees (AdComs) to review individual drug applications. The administration has a stated ambition to streamline the evaluation process for medicines. A faster process would definitely be positive, provided it did not come at the expense of thorough analysis.

Furthermore, FDA chief, Dr. Martin Makary, announced that companies complying with MFN would have future applications prioritized. These fast-track vouchers, which provide decisions within weeks, are worth around USD 500 million each.

Reflections

September felt like a waiting game, where more information about sector tariffs and international reference pricing, MFN, was eagerly anticipated. And then we got it! The Trump administration claims that sector tariffs could be as high as 100 percent, but these tariffs do not seem to impact Europe or Japan, as the maximum total tariff still appears to be capped at 15 percent for both. There is still some uncertainty about whether this will be the case, but we interpret and report what many actors are saying. Our assessment is that sector tariffs will not have much impact, since most production already takes place in the US, and a significant wave of investments have been initiated with the aim of moving the remaining production there.

MFN in focus

The issue of international reference pricing (MFN) was a bigger question mark. However, it seems that a solution is now gradually emerging. This is largely based on the fact that an agreement between Pfizer and the White House was announced on the last day of the month. The prices Pfizer offers to Medicaid are to be internationally competitive according to the Most-Favored-Nation principle (full details however are not yet visible).

All American patients will be able to buy pharmaceuticals at the low Medicaid like prices through a special marketplace. These prices, however, are only marginally higher than average European prices. It is worth noting, however, that relatively few patients will buy through this marketplace, as most are insured and receive their prescribed drugs at a discount through their respective insurance companies (which in turn pay higher, commercial prices). Future product launches will take place at a common global price level.

Price parity could, in fact, lead to higher prices in the US. Since new pharmaceuticals have not yet been priced, companies could set the price level they wish and naturally choose not to launch in countries that do not accept higher prices. A uniform global pricing system would be a win for the pharmaceutical industry, which would likely compensate for volume losses in markets outside the US with higher prices than in the US. Another likely route could be confidential discounts in markets outside the US.

We have previously argued that these developments were part of a likely and reasonable scenario. The fact that Pfizer is now leading the way by reaching an agreement with the Trump administration, suggests, in our view, that this will likely become the standard for the entire industry. However, other types of agreements with individual larger companies cannot be ruled out.

Signs of increased optimism

We are most likely heading toward a calmer, and hopefully, a more optimistic period. The dark clouds we have had over the healthcare sector seem to be dispersing. Many investors have been cautious towards the healthcare sector. Our assessment is that further agreements are coming regarding, for instance, subsidies to Exchanges, the marketplaces for those who cannot get insurance through their employer (such as freelancers, employees in small and family-owned businesses). This is what the federal government shutdown is primarily about. However, we believe it will be resolved. After 14 shutdowns since 1981, another one has now occurred and, based on experience, it ought to result in a political agreement. As mentioned, many of the healthcare sector’s dark clouds are now much lighter. We sense a budding optimism, even among generalists, and it could become exciting when things pick up. However, we would like to point out that, for various reasons, (such as tax offsetting of gains against losses), the real recovery may not occur until after the New Year. For us, this will hopefully provide the time and the opportunity to explore future winners!