AXA Investment Managers’ Linden Thomson has called the elevated cost of drugs in the US “unjustifiable” – even though as manager of the group’s Biotech fund she is a direct beneficiary of pharmaceutical companies’ pricing power.
Biotech has been one of the best-performing areas of the market over the past 10 years, with the Nasdaq Biotechnology index up by 381.94 per cent over this time.
Performance of index over 10yrs
Source: FE Analytics
However, greater regulation on drug pricing has been cited as one of the biggest threats to the sector, with branded medicines typically 40 per cent cheaper in other developed markets compared with the US.
For example, close to $25bn was wiped off the value of the S&P 500’s top pharmaceutical companies in January 2017 after Donald Trump accused them of “getting away with murder” just a week before his inauguration as US president.
Last year Carl Harald Janson, manager of the International Biotechnology Trust, played down the threat, likening Trump to “the boy who cried wolf” and saying his social media outbursts on this issue were subject to the law of diminishing returns.
However, Thomson said she is not underestimating this risk.
“The companies are hugely profitable, we are talking about 50 to 60 per cent operating margins in large-cap biotech,” she said.
“And they have been able to put through 10 to 20 per cent price increases annually. They would justify this on the [cost of developing drugs].”
She added: “I find the prices hard to justify, to be honest, in a lot of places. They do it because they can.
“They are in monopoly markets and they have patent protection. There was an article out the other day actually saying that even when you have competition in the market, they tend to put prices up in lockstep.”
This is a view backed up by Artemis’s Cormac Weldon. The manager of the Artemis US Equity and US Select funds said that while “the world’s largest economy and stock market is unfortunately run by the world’s largest man-child”, one subject on which he agrees with the president is drug pricing.
“One area where Trump is very un-Republican is with regard to pharmaceuticals,” he explained.
“He has Tweeted repeatedly about how the pharmaceutical industry is ripping off the US citizens, and he is right. And the Democrats feel the same way. So, we might see some policy there to limit pricing increases.
“Frankly, that would be something that we favour.”
Thomson pointed out that while there has been a great deal of rhetoric around drug pricing over the past 15 years, there has not been a lot of action.
With the Democrats gaining more power in the mid-term elections, she expects to hear more on the issue – senator Bernie Sanders released a bill last November that would require drug companies to lower prices to match those in other countries or lose their market exclusivity. Pharmaceutical companies have called the plans self-defeating, with Thomson adding that while she expects this sort of pressure to lead to more volatility in the sector, she is sceptical it is anything more than rhetoric at this stage.
However, the manager said that Trump has been successful at shaming companies through Twitter into doing what he wants them to do and this may hint at the shape of things to come.
“Pfizer got through a load of price increases and then reversed them a couple of weeks later after a Tweet,” she continued.
“I certainly think we are travelling in a direction where these companies are going to have to start self-policing themselves about the prices that they put through.”
To protect her fund from action on drug pricing, whether it is compulsory or voluntary, Thomson said she aims to invest in companies that address unmet medical needs, where there is nothing else to treat conditions which have a significant impact on people’s lives.
“Those are the ones we think will be protected from any type of price decline, they will still be able to put their products on the market and nothing will prevent them putting their prices out at the level they want.”
“One thing I would add about the biotech sector specifically is that innovation will always have to be paid for in the US,” she finished.
Data from FE Analytics shows AXA Framlington Biotech has made 163.76 per cent since Thomson took charge in July 2012, compared with 173.16 per cent from the Nasdaq Biotechnology index.
Performance of fund vs index over manager tenure
Source: FE Analytics
The fund is £473.4m in size and has ongoing charges of 0.82 per cent.