Harry Nelson

JP Morgan Healthcare Takeaways: Good News/Bad News

Takeaways from JP Morgan Healthcare

I made it safely home to Los Angeles after a few days taking in the JP Morgan Healthcare Conference (#JPM2017) and the associated hoopla around San Francisco. So what are my takeaways from JP Morgan Healthcare?

For anyone who thought that the biotech hype from the presenters would be the big story this year, think again. The big story this year was not about internal company issues of sales, product development pipelines,  or acquisitions, but the new political reality. The “bombshell” this year was President-elect Trump’s first press conference on Wednesday, at which President-elect Trump accused the drug industry of “getting away with murder” and talked about his intention to bring down drug prices. Needless to say, the last thing that drug makers want is to hear the incoming Republican  president say things like “Pharma has a lot of lobbies, a lot of lobbyists and a lot of power.” Trump complained about “very little bidding on drugs,” despite the fact that the U.S. is “the largest buyer of drugs in the world, and yet we don’t bid properly.”

Having a populist president who sees high drug prices as a major problem for him to tackle is bad news for Big Pharma and probably portends not just a year of doom and gloom in the public market, but a longer term shift. Even before this, the industry was already struggling to sustain high profit margins and justify high drug prices.  Coming into the conference, 2016 was a down year, with the Nasdaq biotech stock index well off of 2015 highs, a drop in VC investing, and a drop in the number of IPOs . Coming into this week, there was continued worry.

As the very first words out of the incoming administration in the middle of the JP Morgan Healthcare Conference, the populist comments threw cold water on anyone who thought that the next few years would take off the pressure on pricing. Hillary Clinton was supposed to be the one who was going to use the White House as a bully pulpit on drug prices. The industry is used to thinking of pricing pressure as a page in the Democratic playbook. The realization that Donald Trump is a different kind of Republican who is focused on this issue cast a pall over the conference, tanking the biotech index, which normally rises during the conference, over 3%.

Personally, this was no surprise.  In our book, we talk at length about the likelihood of downward pressure on drug pricing under the Trump Administration, something that the industry took for granted under a Clinton presidency but, if the post-election market reaction was any guide, seemed to think that Republicans would protect them from.  The reality is finally becoming apparent that this issue is alive and well in 2017.  And no amount of good news on drugs in the pipeline is going to overcome that bad news.

For me, the good news at the conference was the state of innovation in earlier stage companies. While much of the media around the conference focuses on the big biotechs – Celgene, Gilead, Pfizer, etc. – the more interesting action to watch is in the earlier stage companies, from new applications of precision medication, much of it utilizing genomics and immunotherapy to new medical devices and digital health technologies. To be candid, I sometimes feel irrelevant when I speak to folks from Big Pharma.  For drug companies, the kinds of regulatory and reimbursement compliance and strategy work that we do are a core competency, meaning they need to have internal teams that dwarf our boutique scale. As a result, my real interest in limited to  early-stage drug companies, and even more so medical devices and digital health.

The reality of precision medicine that is unfolding is, in some ways, more bad news for Big Pharma profits, which have benefited from one-size-fits-all blockbuster medications. The future is likely to be dominated by more stratification: more scientifically targeted medicines focus on more specific genetic and disease states, affecting smaller groups of patients. While the drug development costs historically got passed on to healthcare payors, the long-term future is likely to be lower profits. That’s bad news for publicly traded companies, but not necessarily for smaller biotechs that can adapt to higher efficiency in their research and development. From my perspective, the rest of healthcare has already been forced to adopt to lower profit margins, so why should biotech be any different? Like any “business” that is based on meeting integral human needs (the alleviation of suffering and treatment of disease), the tradeoffs are that there is an ocean of demand, but more pressure for affordability and lower profitability.  This is the world of healthcare, and what we’re seeing is that pharmaceuticals are not insulated from the broader structural changes.

I spent my time at the JP Morgan Healthcare Conference meeting with companies that are preparing for that future. While Big Pharma may still be living in a volume-based pricing world, the most promising companies that I met with were focused on value-based solutions. They included groundbreaking applications for earlier diagnosis and intervention to reduce expensive chronic care and hospitalizations. I tried out one of the most impressive virtual reality therapeutics companies I have encountered, which created an immersive experience that makes you forget you are being diagnosed and receiving treatment. I also saw several promising examples of customized monitoring of biomarkers that show evolving patient conditions to drive more evidence-based, efficient treatment and reduce hospitalizations. In coming weeks, I hope to be able to share more specific examples that our investment fund is reviewing.

Bottom line, the downturn in the public market may reduce the acquisition prices and perhaps the number of these companies that get gobbled up by bigger companies looking for innovation to sustain their growth. But my strong sense is that there will be no shortage of investment capital for all of the meaningful innovation going on, particularly when it hits the sweet spots of value-driven products with strong clinical results. The silver lining may be closer alignment of life sciences into the reality that the rest of healthcare is already dealing with.

What’s your take on the outlook for life sciences and digital health? Things to watch until JP Morgan Healthcare Conference 2018? I’d love to hear from you.

 

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