Max Baumann, Co-Founder and Head of Execution of Treehill Partners, discusses what investors, drug developers, and the rest of the life science sector can do to prepare for the Trump/RFK era.

The arrival of a new US administration generates significant industry-wide speculation and anticipation regarding new policies and agendas that may impact not only pharma and biotech sectors, but also healthcare more broadly. The pharmaceutical industry is at the commercial interface between innovation, patients, caregivers and payers – to name a few. So, with the elections now behind us and the US voters’ votes cast, the question is out about how the dynamics may shift in favour of one or another stakeholder.

High stakes, high prices

Looking at the US from abroad, the market has historically been the go-to destination for new pharmaceutical products, for the equity of its developers, the domicile of its ultimate buyers, and also for many aspiring to build a career in the field. Why? Certainly, there is a culture of innovation, entrepreneurship, and general business activity. Specifically, though, drug prices in the US are so high that they almost carry the development cost of the whole industry worldwide. Without the possibility of selling at these prices in the US, in many instances, the entire business case for a new drug development would simply collapse. Now from a US patient’s or institutional payor’s perspective, is that a good thing? However, from the perspective of a country that is keen to attract the world’s elite scientists, drug developers, marketers, investors, … and pharmaceutical assets, it appears kind of a prerequisite, doesn’t it? It would be hugely interesting to read a profound analysis that deciphers the total value generation for the US that comes from that market’s drug price levels – jobs created, patient years saved, drug sales in ex-US markets.

Drug pricing and regulatory reform

Looking at the incoming government, Donald Trump is, on the one hand, very pro-business and in favour of less regulation. This is a positive when it comes to M&A which will be big on the agenda of large pharma players. But he is also a strong supporter of lower drug pricing. We remember the “Most Favoured Nation” attempt for Medicare to look to benchmark US drug prices with reference prices from abroad, as well as evaluations of sourcing from lower-cost countries. In general, the industry is probably well advised to expect further endeavours aimed at reducing drug prices – which may also be indirect rather than direct, bearing in mind the party’s critique of the potential impact of The Inflation Reduction Act (IRA) on innovation. Other approaches may also impact duration of exclusivity and end-of-exclusivity legislation. In 2019, the Trump administration considered reducing the 12-year biologics exclusivity to 10 years (as part of a broader trade agreement). It may well be that the new administration will take aim at legal means that delay generic/ biosimilar entry, and in general may push for their use.

Many have commented on the signalling effect of appointing as secretary of The Department of Health and Human Services (HHS), self-proclaimed vaccine sceptic Robert F Kennedy Jr (RFK), in particular as Trump himself had been a general supporter of vaccines during the Covid-19 crisis. At this point it is difficult to know what to expect – RFK has often appeared fact-focused and inquisitive into detail which, from a scientific/ medical perspective, should always be welcomed. His stance on vaccines may be an issue to some, but it is probably hard to extrapolate from that to general policy-making intentions. He has declared war on the rise of chronic diseases, in that context taking aim at poor nutritional quality in the US; he is a vocal opponent to the level of industry influence at the Food and Drug Administration (FDA), where 50% of revenues come from fees paid by industry via the Prescription Drug User Fee Act (PDUFA); he has been a vocal opponent of what he calls “aggressive suppression” of a range of innovative products, for example psychedelics, even after MDMA failed to be approved earlier this year; and he is a critique of pharmaceutical advertising which may become a target for legislation.

It has been said that Kennedy is looking for a “major reimagining of the entire federal health research and promotion and protection infrastructure. That includes very significant reforms and changes in business practice.” In that context, organisations who are already set up in an agile manner and have a culture of responding to change proactively, maybe even drive change themselves, are probably better positioned to compete successfully than those where change is alien to how they operate.

This applies to corporates, but it also applies to governmental bodies and processes. On the forefront of the agenda we can then expect to find high drug pricing (and other healthcare costs), regulatory red-tape, general bureaucracy, along with seeking significantly greater transparency on process, data and decision making. It is worthwhile remembering that the expectation for upcoming US drug price reductions has been present for more than a decade already, whilst pricing levels have remained very sticky – surprisingly?

For the industry, a dramatic reduction in drug pricing coupled with higher regulatory scrutiny, longer times to market and accelerated generic erosion would obviously be a tremendous headwind, increasing the risk of investing in pharma/ biotech and reducing the anticipated returns and consequently valuations. Large pharma may withstand such headwinds, the strongest biotech as well, but challenges to raise capital for those with weaker programmes would only grow.

Collaborating for the future

To mitigate the downside risk, it becomes imperative that the industry engage in a positive win-win discussion with the administration rather than just lobby. In the context of organised lobbying, it is noteworthy that Astrazeneca, Abbvie and Teva have already left PhRMA and Abbvie, Pfizer, UCB and most recently GSK did not renew their membership of Bio. The question becomes how the industry embarks on such path of engagement if they no longer trust their own industry organisations. Is it time to create a new kind of industry working group with the role of working with the administration to meet their needs while ensuring the sustainability of industry-led innovation and the availability of cutting-edge medicines for US patients?

If we assume pricing pressure will continue in the future, albeit the republicans do not wish to impose price controls directly, an approach in which the industry offers price management and greater transparency in exchange for clearer more streamlined regulatory pathways, restructuring of the PDUFA fees, and working with the administration to clarify its supply chain, may be part of the key to success. Not only can such measures improve the cost efficiency of the US healthcare sector, but they can enhance consumer trust in the pharma/biotech sector, something the industry has not done too well on over many decades.

Biography

Max Baumann is Co-Founder and Head of Execution of Treehill Partners. He is an experienced healthcare investment banker and strategy advisor with expertise across the healthcare value chain. Prior to co-founding Treehill, Baumann worked at The Blackstone Group and UBS Investment Bank.