Healthcare stocks have been in the sickbed this year for a host of reasons, ranging from rising interest rates and regulatory pressures to the launch of revolutionary weight-loss treatments whose uptake could reduce demand for other drugs and medical procedures.
Debra Netschert: At Jennison, we have been following the GLP-1 [glucagon-like peptide-1] space for diabetes and obesity for the past two decades. It has been an exciting time to invest in this space. There have been multiple positive clinical trials for treatment of diabetes and obesity, the most recent being Novo’s Select trial, which demonstrated that obese patients taking the company’s drug, Wegovy, had a 20% reduction in their risk of cardiovascular events.
One of our mantras is that stocks follow earnings revisions. If you track these stocks’ performance against analysts’ forward-earnings revisions, the relationship is almost one to one. As long as earnings revisions keep rising, the stocks will head higher. Maybe Lilly’s market cap of close to $600 billion is discounting a lot of optimism, but these stocks aren’t trading on the next 12 months’ earnings. They are trading on the longer-term opportunity, a five-year view.
Haider: We can all acknowledge that the field is in its infancy, both commercially and scientifically, and we can debate whether the two approved drugs—Novo’s Saxenda, an earlier-generation GLP-1, and Wegovy—are going to dominate the market long term. But if you take a step back, at least a dozen diseases are a consequence of obesity. It is hard to argue that managed care wouldn’t want to pay for these drugs, given the magnitude of the savings that ultimately could be generated.
We could talk about obesity drugs all day, but let’s move on to the other big healthcare story this year: Medicare drug-price negotiation, which the pharma industry has been trying to derail through lobbying and litigation. What are your thoughts? Complicating matters, as Debra said, are several unknowns about how the current situation will play out. We don’t know the extent of the industry’s negotiations with the government, and we won’t know the magnitude of the discounts until next year. They could vary by drug.
Circling back to next year’s presidential election, what is at stake for the healthcare sector? And what would change if a Republican were elected president? Holz: The FTC has heightened its scrutiny of most industries, not just pharma, but the fact that the Horizon deal seems closer to happening is positive. It also seems like Pfizer’s [PFE] deal to buy Seagen [SGEN] will close. If these two large transactions take place, that could open the floodgates to more M&A activity. Large-cap pharma companies are in need of revenue generators, either near or long term. Next year could be a productive year for deals. Ziad, you’re focused on biotech.
Netschert: M&A is important to the pharma ecosystem and drug pricing. We can’t have hundreds of small biotech companies building commercial infrastructures to sell one product. How many biotech companies reach profitability? How long does it take? How many baby biotechs have become full-grown commercial companies? Not many. That requires a lot of capital. From that perspective, M&A keeps drug prices down.
Netschert: When I think about a drug launch, I always think about the three Ps: patients, providers, and payers. You need to understand the incentives that drive each of those buckets, and they need to be aligned to achieve strong uptake of a drug. Finally, we have some drugs that can help Alzheimer’s patients. There is a lot more room to innovate here, to figure out how to develop drugs that allow these incentives to be aligned.
Depression is another promising market. Many people understand it personally, and many interesting companies are working in this space. Then, broadly, gene therapy could be big, if we can get it to patients in a way that builds markets and generates revenue, which has been difficult to do. Merck has designed its clinical-development strategy around Keytruda, its lead drug, for resilience and durability. It is working on a subcutaneous form of Keytruda, which is not likely to be selected for drug-pricing negotiation. The company has some interesting drugs in its oncology pipeline, including a personalized cancer vaccine with Keytruda that it is working on with Moderna [MRNA]. Those are the highlights.
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