Why Wheb AM has increased exposure to big pharma

Previously a no-go area, the firm has developed a drug pricing checklist


Ben Kluftinger, senior investment analyst, Wheb Asset Management

There’s been a marked increase in our exposure to so-called “big pharma” stocks such as CSL, AstraZeneca, and Genmab and Novo Nordisk in our strategies recently. Just a few years ago, we had only minimal exposure for good reasons, so what has changed?

Big pharma used to be a dirty word. Scandals around Turing Pharma (CEO Michael Shkreli’s decision to hike HIV medication Daraprim’s price by 5,455% overnight in 2015), Purdue Pharma (the Sackler family fuelling the opioid epidemic with OxyContin from 1996-2019), and Mylan Pharma (price gouging of the EpiPen drug delivery system by ~400% from 2009-2016) are well-known but formed only the tip of the iceberg.

Until the later mid-2010s, big pharma used to be characterised by its aggressive promotion of drugs to doctors via visiting sales reps handing out free samples and gifts. Their remuneration largely depended on the number of prescriptions those drugs recorded within their assigned territory.

See also: – Healthcare scores poorly for ESG but is a vital sector

Looming patent cliffs for blockbuster drugs, ie the end of patent protection and opening up for substantially cheaper generic equivalents, pushed pharma companies to prioritise drug development to create mild variations of their existing drugs. These were typically small variations in drug composition or modest changes to delivery mechanisms.

On top of all this, hefty annual price increases were commonplace resulting in some cases of outright price gouging thanks to the lengthy exclusivity and a flawed price negotiation mechanism. We stayed well clear of this space during those years.

Big pharma today is different

Big pharma is different today though. No, they have not become angels working for the greater good of all, although AstraZeneca did commit to sell its Covid vaccine at cost for the first year. The change was driven by a combination of greater public and political scrutiny on drug pricing in the US and a fundamental shift in technological focus from “me-too” small molecule drug development to innovative new biologic (or large molecule) research.

The political and regulatory focus on drug pricing has not stopped since the famous tweet by Hillary Clinton in 2016, which sent biotech and pharma stocks tumbling. Even though very little concrete changes happened thereafter, the Damocles sword was firmly in place instilling a new-found discipline into the pharma industry to limit annual price increases to below 10% in order to avoid greater scrutiny.

The recent Inflation Reduction Act legislation from 2022 is the first concrete step in the US to empower the government’s national health insurance programme Medicare to “negotiate” (or rather dictate) prices for 10 of the 50 drugs that represent the highest cost to the programme from 2026 onwards.

The other important development was in terms of a change of focus in therapeutic areas and underlying science towards typical biotech specialities: oncology, immunology, rare diseases. This was triggered partially by the regulatory changes.

A different approach

While most of “big pharma” had been a no-go area for us in the past, we have recognised the substantial improvement in the drug pipeline to much more impactful therapies, many from large molecules.

In order to evaluate the company’s approach to pricing, we developed a drug pricing checklist that we run by the company to establish their pricing transparency and internal processes, people in charge, patient assistance schemes, affordability assessments by independent parties, annual price increases etc.      

Quite often, the willingness of the company to engage with us on these points is quite telling in itself.

In addition, we extensively use our access to expert networks to further our understanding on the efficacy and prospects of therapies and the market approach of their owners. This has led to the addition of the following new holdings to our strategies:

  • Astra Zeneca: A leader in oncology, respiratory, inflammation and autoimmunity, cardiovascular and metabolic disease, and infection and neuroscience with a rich pipeline for new indications.
  • CSL: A leader in plasma-based therapies often addressing rare diseases in immunology, haematology or respiratory.
  • Genmab: A leading-edge primarily oncology antibody development powerhouse partnering up with big pharma for commercialisation with key successes in multiple myeloma (blood cancer) treatment, DLBCL (cancer of the lymphatic system), thyroid eye disease, and others.
  • Novo Nordisk (in European Strategy): Market leader in diabetes and obesity treatment with a new ground-breaking type of GLP-1 (a gut hormone) variation.

Our search for strongly impactful big pharma is certainly not over yet, but neither is our scrutiny of the pricing of new drugs as Novo’s Wegovy is teaching us.

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