Pandemic, Democratic Wins Leave Drug Industry at Crossroads

(Bloomberg) -- In 2020, the pharmaceutical industry raced to develop shots against a deadly new virus sweeping the globe -- and succeeded, in record time. They did it while navigating the pandemic themselves, managing operations and supply chains amid profound disruption.

As the J.P. Morgan Healthcare Conference, the sector’s biggest annual gathering, kicks off virtually on Monday, drugmakers are set to revel in those accomplishments. But their enthusiasm is bound to be muffled by the prospect of increased regulation and price pressure.

As the pandemic raged, pharma companies continued to hike prices while their stocks soar. Now that Democrats stand ready to control Congress and the presidency, the industry faces newly empowered critics who don’t see them in the rosy light of altruism.

“Millions of people in America have been changed by the pandemic, but it’s pretty clear the prescription drug corporations have not,” said Margarida Jorge, campaign director for the national coalition Lower Drug Prices Now. “Let’s get real. These companies would not have jumped into the fight for a vaccine if the federal government hadn’t heavily subsidized and funded it.”

Exposed Sector

A spokesman for industry group PhRMA referred Bloomberg to data showing the growth of list prices for brand-name drugs has moderated over the years. In an interview, PhRMA President and Chief Executive Officer Stephen Ubl said the group looks forward to working with the Biden administration, and shares its goals around Covid-19, but remains opposed to government price controls.

“I mean, no one’s done more than our industry to bring the pandemic to an end,” Ubl said. “It’s a remarkable feat.”

Outgoing President Donald Trump’s proposal that threatened to tie U.S. drug prices to the significantly lower ones paid by countries with nationalized health systems never progressed beyond that level. The industry’s powerful lobby continues to argue that such controls stifle innovation.

As pharma CEOs and analysts gather for the meeting known to be a catalyst for deals, there’s sure to be discussion of President-elect Joe Biden’s plans for pharma. His team has announced a slate of pricing-focused proposals that include allowing the Medicare program to bargain directly with drugmakers on price, tying increases to inflation and limiting prices at launch. Biden’s transition team didn’t respond to a request for comment.

Calls for price regulation have long dogged the drug industry, particularly in the U.S., the world’s biggest and most expensive market. Democratic control of the government makes changes such as limits on seniors’ contributions to Medicare drugs costs more likely, said Spencer Perlman, director of health-care research at Veda Partners in Bethesda, Maryland.

Across the health-care industry, “the biopharma sub-sector remains the most exposed due to the salience of the drug-pricing issue, which cuts across political lines,” he said. Yet “the most progressive reforms, such as direct government negotiation in Medicare, likely remain out of reach.”

Profitable Units

While development of Covid-19 vaccines and therapeutics took center stage in 2020, drugmakers continued to make acquisitions in more profitable therapeutic areas. AstraZeneca Plc, partner with the University of Oxford on a low-cost vaccine, bid $39 billion for rare-disease specialist Alexion Pharmaceuticals Inc. Gilead Sciences Inc., which developed the antiviral remdesivir, agreed to pay $21 billion for cancer-drug maker Immunomedics Inc.

Oncology, a disease area that commands some of the industry’s highest prices, accounted for the largest share of partnerships forged last year. There were nearly 400 cancer partnerships last year, representing a value of $86.7 trillion, according to an analysis performed by Informa Pharma Intelligence for Bloomberg. That compares with about 242 collaborations focused on Covid-19, which represented about $4 trillion in deal value.

Companies pursue such deals because “you’ve got to fish where the fish are,” said Geoffrey Porges, director of therapeutics research and a senior research analyst covering biotechnology stocks at SVB Leerink. “And in this case, the fish are meaningful medical advances.”

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Those deals and opportunities have fueled biotech valuations. The SPDR S&P Biotech ETF surged about 50% last year, compared with a 19% surge in the SPDR S&P Pharmaceuticals ETF and a 17.6% rise in the S&P 500.

By the end of 2020 deal activity rose to a “borderline fever pitch,” said Stuart Cable, vice chairman and global chair of mergers and acquisitions at law firm Goodwin Procter. He expects more deals this year, especially in the coming months, given the industry’s continued need for innovative new medications. High valuations could spur more transactions involving stock, especially toward the larger end, he said.

Long-Term Shifts

Pharma companies’ role in the pandemic has broadened investor interest, a change that could be long-lasting. The J.P. Morgan conference, which typically draws health-care companies, investors, bankers and consultants to a cramped hotel in San Francisco each January, has more than 12,000 confirmed attendees to this year’s digital gathering, up from about 10,000 in 2020, a spokeswoman said.

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That the industry has been credited with racing to develop vaccines against the outbreak that’s killed almost 2 million people worldwide comes with some irony. Most big, established pharmaceutical companies spent years getting out of vaccines, because of lengthy development timelines, high manufacturing costs and competitive price tags.

The first two immunizations to receive emergency clearance in the U.S., by contrast, were developed using new mRNA technology that makes cells into vaccine factories. It made instant stars out of biotechs Moderna Inc., which worked with the U.S. National Institutes of Health, and BioNTech SE, which partnered with drug giant Pfizer Inc.

“People had viewed vaccines as an economic backwater,” said Goodwin’s Cable. “I don’t think they’ll view it that way moving forward.”

Those successes are unlikely to shift attention completely away from industry pricing and drug access. Whether the incoming administration has a greater impact on those issues than its predecessor remains to be seen.