The key challenge for us, and for the industry, is understanding Trump’s semi-scripted remarks, his Twitter comments and, perhaps most importantly, a key phrase during his first press conference since being elected President. For pharma at least, clearly the most resonant element of his speech was his comment that the industry is ‘getting away with murder’ in what they charge the US government for medicines.
The big picture
Last year wasn’t great for biopharma if you assess it on the basis of deal flow or regulatory approvals. Looking to the US, the story for 2016 was emphatic: IPOs declined from 42 in 2015 to 28 in 2016, while M&A activity also declined (22 deals in 2015, 17 in 2016). As for US product approvals, the record of 45 approvals in 2015 was not repeated - only 22 new marketing authorisations were granted last year.
What was behind the downturn? We believe there’s a case to be made that the Food and Drug Administration (FDA) has raised the bar unacceptably high for new products. In fact, the Trump administration has already signaled that it intends to address this, although in what way is not yet clear. In addition, some of the recent US regulatory news has been extremely challenging. For example, the FDA appears to be emphasising the accountability of developers and manufacturers, leading to delayed approvals of new drug applications.
So, how might the FDA balance this new era of conflicting demands? While it is not expected that review criteria and application requirements for medical products will change (in, for example, oncology which has, in effect, been made a ‘special case’), it is hoped that greater coordination of experts will lead to improvements in approvals.
As for sector deal flow, the opportunity for tax reform under a Trump administration is of interest. One proposal suggests that swathes of overseas money could be repatriated, which could herald a new era of M&A.
Going back to Trump’s first press conference as President and his ‘getting away with murder’ comment, he promised that this situation will change. But what does that mean? We are unlikely to see any real detail on the reform of drug pricing in the near future. However, we remind investors that Trump’s campaigning included the proposal to allow Medicare to negotiate with pharmaceutical companies - currently prohibited by US law – and facilitate easier importation of drugs as a route towards lowering prices.
Looking ahead, we believe that the Trump administration – initially, at least – will be broadly net negative for the sector. While the President’s inflammatory tone on pricing makes for eye-catching headlines, the absence of any real detail means we think that the issue will be more sentiment-driven rather than by any practical shifts.
Closer to home, we are encouraged by comments by the UK government on support for technology industries following the vote to leave the European Union. Again, these lack any concrete detail. But we must remember that with so little yet decided regarding the details for Brexit, any certainty is unlikely.
Overall, we expect the healthcare sector to face challenges for the foreseeable future. Nevertheless, we believe that healthcare services in the UK are likely to remain a relatively safe haven. That said, we believe the UK small-mid cap biopharma sector has a plethora of companies which are currently good value and which will significantly outperform the market.