Reflections From J.P. Morgan: Challenges As Always And Reasons For Optimism

Biopharma investors were underwhelmed by the deal-making news, but innovation, corporate tax reform and a relatively positive outlook on drug pricing left attendees at the J.P. Morgan Healthcare Conference with the sense that good things are in store for pharma in 2018.

The J.P. Morgan Healthcare meeting wraps up Jan. 11 and as industry executives and investors depart San Francisco, the outlook for pharma appears bright in 2018, despite challenging fundamentals. The energy at the annual meeting, which drew more than 9,000 attendees, was more muted than prior years, perhaps highlighting the transition point pharma has reached.

Industry is trying to balance increasingly innovative science against long-standing drug development, regulatory, reimbursement and management models. Navigating those two paradigms and modernizing to keep pace with the scientific breakthroughs may well be the biggest challenges industry faces as it moves into what feels like a potential new era for medicine.

Overall, drug makers and investors were optimistic about 2018, thanks to the big financial windfall poised to hit from tax reform, a sense that some of the biggest drug pricing threats have moderated and encouraging new breakthroughs in gene therapy and immuno-oncology.

“I wonder whether this marks a moment for the future for many companies, but importantly for the big pharma companies, to have the next generation of leaders,” Novartis Pharmaceuticals CEO Paul Hudson said.

Investors were underwhelmed by the level of deal news that broke in the opening days of the meeting, with Celgene Corp.’s acquisition of Impact Biomedicines for $1.1bn upfront being the big standout. (Also see "Celgene's $1.1bn Impact Buy Is First Of More Deals To Come In 2018 And Beyond" - Scrip, 9 Jan, 2018.) But the meeting also didn’t have the undercurrent of tension it had in 2016, when big drug pricing scandals were in the headlines and executives were concerned a populist President Donald Trump might try to impose new pricing regulations on the industry.

Last year during J.P. Morgan, Trump said pharma was “getting away with murder,” while this year the president’s name was scarcely murmured at all. (Also see "Trump Throws Pharma A Curve Ball On The Third Day Of J.P. Morgan" - Scrip, 12 Jan, 2017.)

With the threat of sweeping policy changes out of the way and industry peer Alex Azar poised to be the next Health and Human Services secretary, some of the industry’s most acute concerns seemed to be triaged.

But the industry is grappling with other challenges, most notably how to harness new scientific advances into medicines and how expensive medicines targeting small subsets of patients will be commercially successful and reimbursed by payers.

New Leadership Lining Up

The feeling of transition was also evident in pharma’s leadership ranks. Even within big pharma, there are two CEOs in the midst of transitions. GlaxoSmithKline PLC’s new CEO Emma Walmsley debuted in the grand ballroom of the Westin St. Francis Jan. 9, while Novartis AG's incoming CEO Vasant Narasimhan stayed offstage ahead of taking over from Joseph Jimenez on Feb. 1.

Those new leaders are poised to bring a refreshing perspective to their respective companies and the broader industry. Walmsley comes from a background in consumer healthcare and is the first woman CEO of a big pharma, while Narasimhan brings a scientific background, having previously served as the chief medical officer at Novartis.

“Vas brings a lot of youth, vitality, progressive innovative thinking,” Novartis Pharmaceutical CEO Paul Hudson said in an interview. “I wonder whether this marks a moment for the future for many companies, but importantly for the big pharma companies, to have the next generation of leaders.”

Walmsley too pushed for pharma to modernize more aggressively during remarks at GSK’s breakout session. She said being a modern leader means working to improve gender and racial diversity in the industry, one of the other big themes that ran through the meeting. Her ability to bring on one of industry’s preeminent R&D leaders, Hal Barron, as president of R&D to revive GSK’s pharmaceutical pipeline has also renewed investor attention in the company.

Tax Reform Pay Off

US corporate tax reform is poised to be a big win for pharma, with some companies benefiting from the lower corporate income tax rate that will fall from 35% to 21%, as well as the opportunity to bring cash held overseas back to the US at a competitive rate. Some big pharmas and big biotechs have billions in cash stockpiled overseas.

For the most part, the industry is still largely digesting the impact of corporate tax reform on their respective bottom lines. Most US-based companies said they expect the impact of the legislation will be beneficial, but anticipate providing more details during their fourth quarter financial updates.

Biogen Inc. forecast a lower tax rate in 2018, and Chief Financial Officer Jeff Capello told investors to expect tax reform to be very positive for investors. “We have quite a bit of cash trapped off shore,” he said.

The question is how drug makers will reinvest the extra cash, with most executives pointing to business development, R&D, share buybacks and dividends. Regeneron Pharmaceuticals Inc. CEO Len Schleifer said the company would reinvest the extra resources coming from a lower corporate tax rate in R&D.

For smaller biotechs, the benefits of tax reform could be big. The blood disease specialist Bioverativ Inc., for example, has been paying the full 35% tax rate and CEO John Cox said in an interview that tax reform could add $50m in cash to the company’s balance sheet.

Time To Shake Up The Rebate?

While industry had success last year pushing some of the drug pricing blame onto third-parties in the supply chain that absorb the discounts and rebates drug manufacturers offer on drugs, one of the issues that has emerged is whether or not those rebates should be given directly to patients at the pharmacy counter. Industry has been thinking about new ways to ensure the savings from rebates are passed onto the consumer, and the topic came up frequently at J.P. Morgan.

Third-party pharmacy benefit managers that currently negotiate the rebates with pharma companies say the savings do reach patients in the form of lower premiums, but patients with high deductible health plans do not get the benefit and pay full price at the pharmacy counter, which is in turn raising consumer frustration over drug costs. Express Scripts Holding Co. CEO Timothy Wentworth reinforced the PBM's talking point during the company’s breakout session. He said all the data point to higher insurance premiums for patients if the rebate structure is changed, but said the company would have no problem administering the rebate at the pharmacy counter if changes to the practice are made.

Some pharma companies voiced support for change. Merck & Co. Inc. CEO Kenneth Frazier seemed open to new ideas on rebating.

“The challenge that patients are facing quite directly is that unlike in network hospital visits or physician visits those rebates don’t get passed onto people at the counter,” he said. “There is a lot of focus now on how do we ensure this robust set of negotiations that go on actually effect the people that need it. I think that is a very important issue on how do we proceed from here.”

Mylan NV CEO Heather Bresch has been an outspoken advocate of changing the rebate structure ever since her company came under fire from consumers and legislators for substantially raising the price of the allergy rescue medicine EpiPen in 2016.

“Good or bad, I will take credit for starting that discussion,” she said in an interview. “I don’t think there was much discussion around that supply chain and that pain point for the consumer.”

“I absolutely believe the first step has got to be that a patient should realize the rebates, or discount, being negotiated, at the point of sale,” she added.

Novartis’ Hudson seemed less convinced, pointing to the issue of insurance premiums. “I think long-term sustainability calls for a high-degree of transparency right through the chain. What is the real price, the net price? We take a lot of comments publicly about the net prices,” he said.

J.P. Morgan In The Time Of Gene Therapy

Despite the high-risk nature of drug development, all the pipeline setbacks and the many challenges commercializing drugs successfully, the FDA approval of the first gene therapy in December, Spark Therapeutics Inc.'s Luxturna for an inherited form of blindness, was heralded by industry as a landmark moment throughout the conference. (Also see "Spark's Luxturna Approval Ushers In A New Gene Therapy Era" - Scrip, 19 Dec, 2017.)

The excitement around Luxturna and other notable breakthroughs like the FDA approval of the first CAR-T therapies from Novartis and Gilead Sciences Inc. /Kite Pharma Inc., and antisense oligonucleotide-based drugs like Biogen’s Spinraza for spinal muscular atrophy (SMA) was palpable, partly because serious medical breakthroughs give the industry a lot to be proud of.

“This is the time for gene therapy,” Biogen’s Chief Medical Officer Alfred Sandrock said in an interview. “We are very interested in gene therapy.” The company said it plans to move its first gene therapy into the clinic this year, a new approach for SMA.

Bioverativ’s Cox noted, “It feels like in biotech we are moving from slowing progression of disease to curing disease.”

Constellation Pharmaceuticals Inc. CEO Jigar Raythatha summed up the industry’s over-arching sentiment well. “It feels like years of hard work are coming to fruition,” he said.

The trick now will be to turn the breakthroughs into commercial successes, and figuring out how health care systems around the world can pay for them. That’s what 2018 is for – and beyond.

[Editor’s note: Thank you for reading this article. Please help us to better help you by taking our Pharma Feedback survey. Not only will your participation help steer our efforts to continually improve the content and delivery of our products – you’ll also have a chance to win one of four Amazon gift cards valued at $100 (US).]