The victory of Rep. Henry A. Waxman over Rep. John Dingell for chairman of the House Energy and Commerce Committee on November 21 has raised anxiety levels among analysts and money managers in the healthcare sector. When certain biotech and medtech stocks underperformed during November’s stock market rally, some attributed it to the ascendancy of Waxman.
Many of the concerns about the appointment focused on Dingell’s long-standing opposition to clean energy and the impact of his demotion on the auto and utility industry. Waxman, a strong and experienced legislator, who is often seen as more liberal and less business-friendly than Dingell, carries the baton of Al Gore in his pursuit of climate-change legislation.
With California’s Nancy Pelosi and Waxman in power it means that “green rules over grime.” In the short term, a broader Waxman agenda would more likely be tempered by a need to immediately deal with the economic crisis, while in the long run, healthcare reform will be his key objective. Two of the immediate issues that will be spearheaded by Waxman are generic biologics and drug pricing.
The high price of prescription drugs, especially for cancer therapy, is creating political pressure to pass a bill for follow-on versions of biologic drugs. Europe has already given a go-ahead for biosimilars. A bill sponsored by Hillary Clinton and a regulatory proposal from Waxman are expected to be the impetus for a bill in 2009 with a potential pathway for generic biologics by 2011. The biologics market is about $50 billion and growing. Henry Grabowski of Duke University has published extensively in this area including a working paper entitled, “Data Exclusivity for New Biologic Entities” that addresses the need for a period of time, as part of a product’s IP, that gives an innovator exclusivity before a competitor can enter the market. Grabowski urges policy makers to consider the adverse effect of not providing longer periods of data exclusivity (likely to be 7–10 years) for innovators—discouraged investment in new drugs. Biosimilars are coming, but it will be at least five years before any competitive impact will be seen due to an extensive patent landscape, manufacturing investment, regulatory timeframe, product quality issues, and brand loyalty. Biologicals are much more complicated to develop and manufacture so it is not analogous to the generic small molecule drug business model.
As chairman of the Oversight and Government Reform Committee, Waxman has requested information from five companies on research and marketing practices. Recently, the Committee released a GAO report entitled, “Medicare Part D Prescription Drug Coverage.” The report finds that only half of the CMS audits of drug pricing were completed. Thus far, the Part D plans were unable to obtain cost reductions for prescription drugs. The costs to taxpayers and seniors are estimated in the $15 billion range. Waxman has targeted drug pricing for savings, and we will likely see a ramping up of activity. Leerink Swann (LS) has published an extensive healthcare strategy report with a view that if Waxman seeks more affordable healthcare he can find some of the money in drug company profits. LS analysts John Sullivan and Alice Avanian are cautious on large-cap pharmas. Many of these large-cap stocks are at ten-year lows (with dividends of 6–8%) due to threat of generics with patent expiration. The dividends are presumed safe because the companies have large cash flows and multibillion dollar cash positions. The low productivity of R&D in the drug industry should become a driver for increasing M&A as smaller biotech companies have extensive pipelines, but more difficulty raising capital. The valuations of many small- and midcap biotechs are at venture capital levels and very attractive depending on cash runways. The LS report also mentions that Waxman feels the current FDA is too close to industry, but if you tell industry CEOs that the relationship is too cozy they might be surprised. New drug approvals are significantly lagging under the Bush administration. Over the first seven years of Bush there was an average of 80.7 NDAs compared to 92.1 NDAs annual average during the Clinton era. 2007 was the bleakest year on record with only 18 NMEs, but it is expected that 2008 will be the best year since 2004 with about 28 applications approved. The FDA has been lacking leadership and drug safety has been a big concern, so the appointment of a new FDA head could actually help matters and spur drug approvals. Overall, the Democrats are likely to pursue a centrist course in healthcare reform given the magnitude of general economic issues that need to be addressed. The Administration will immediately pursue the State Children’s Health Insurance Program, which would enroll six million children that are uninsured. The bill passed the House but was vetoed by President Bush last year. Next year, expect industry PAC’s and conservative journalists to revive the memory of Hillarycare, a policy where the government was to take over healthcare. During the 1992–95 period, as a result of the Hillarycare impasse, healthcare stocks entered a bear market, but when the policy was abandoned stocks began a huge bull market from 1995–2000. A PriceWaterhouseCoopers report released early in mid-November estimates that a national health insurance plan would cost $75 billion in year one, growing to $130 billion by 2018. An interesting comment in this report is that the Massachusetts universal healthcare model provides access insuring 97% of the population, the highest in the nation. Several issues, however, have surfaced. One is a budget shortfall, some of which is being made up from FED Medicaid funding, and the second is a critical shortage of physicians in Family Practice and Internal Medicine (2008 Workforce Study). Another issue is “excess” profits by Blue Cross. As we currently throw on a trillion dollars or so to fix the economy the resulting deficit may make universal health insurance more difficult without dismantling the current private insurance-based system completely. Expect a lot of healthcare media attention on this subject, but in the short term there shouldn’t be any major new impact on the biotechnology industry overall as we transition from Dingell to Waxman. As we get midway into the term of the Obama administration, look for an aggressive push for healthcare legislation and reform.