Pharmaceutical Companies Navigate U.S. Government Demand Pulls as COVID-19 Accelerates Regulatory Easing
Posted on 08/12/2020
Major news is coming out of the pharmaceutical industry on several fronts. First, things are looking up for the company immortalized in Paul Simon’s 1973 hit “Kodachrome.” Eastman Kodak Company has been feeling its age in recent years as digital and cell phone cameras have dominated the world of photography, but a new opportunity arising from the coronavirus could breathe new life into it, The Wall Street Journal found. Kodak “secured a US$ 765 million loan from the U.S. government, to create a business that will manufacture ingredients for use in key generic drugs (including hydroxychloroquine).” Soon after the deal was announced, there was critique on Kodak’s lack of experience in the pharma space. The U.S. International Development Finance Corporation (DFC) quickly put the US$ 765 million loan on hold after “allegations of wrongdoing.” The proposed DFC loan would cover the costs of repurposing two facilities in Rochester, New York, and St. Paul, Minnesota.
Hydroxychloroquine has been controversial as a treatment for COVID-19. The U.S. Food and Drug Administration “cautions against use of hydroxychloroquine or chloroquine for COVID-19 outside of the hospital setting or a clinical trial,” according to the FDA’s July 1, 2020 statement. DFC and the U.S. Department of Defense are holding the purse strings. DFC is a development bank that provides financing to projects in healthcare, energy, infrastructure, and technology. The DFC’s CEO, Adam Boehler, is a government appointee. He was previously running the Center for Medicare and Medicaid Innovation (CMMI).
Unrigging the Market for Pharmaceuticals
Other factors have also been shaking up big pharma in recent days. On July 24, 2020, U.S. President Donald Trump set to work “unrigging” the prices in prescription drugs with an executive order that will allow for U.S. purchasing of drugs from abroad. “Previous administrations did nothing,” he said.
Therapies such as epinephrine, sold as EpiPen, became front-page news as prices soared to over US$ 600 for a two-pack by 2016, which Mylan CEO Heather Bresch had to defend as a “fair price” in her testimony as she was questioned by Rep. Scott DeJarlais of Tennessee at the time. “Did you have a plan to raise the price every year for six years?” DeJarlais prodded. “We have raised the price,” said Bresch, saying that US$ 274 per pack was the profit for Mylan. Mylan announced a generic version for US$ 300 was coming, which was approved in August 2018. DeJarlais, unsatisfied with the pledge to allow a generic into the market, asked “Generally, when a drug goes to generic, doesn’t the price go down?” Bresch replied, “Which is why we dropped it to three hundred dollars.” “Only after you jacked it up to six hundred,” DeJarlais shot back. Bresch has been reporting that drug shortages were likely in 2020 due to supply chain problems. She has been reluctant to raise prices this year, possibly to avoid further grilling from DeJarlais and others.
Such tense scenes as the one Bresch experienced and a critical press caused an outcry to rein in drug costs. Another high-profile case involved the “pharma bro” Martin Shkreli who raised the price of Daraprim by over 5000% at Turning Pharmaceuticals, now Phoenixius AG. Shkreli was sentenced to prison for 7 years for unrelated charges of defrauding and misleading investors, and at one point was found to be running his pharmaceutical empire from behind bars through his cell phone.
Even though Bresch survived the attacks and remained the public face of Mylan, she is expected to step down imminently. She “will begin a new chapter that will continue to be focused on serving people, patients and public health,” according to Mylan. Mylan announced plans last year to merge with Upjohn, of Pfizer. Unrigging the drug market didn’t go over well at Pfizer. Pfizer’s CEO Albert Bourla is “disappointed” with President Trump’s new plan to reduce drug costs, “in a time when the industry needs to be completely focused on developing a potential Covid-19 vaccine or treatment.” Pfizer will be working with the German BioNTech to test their coronavirus vaccine on 30,000 at over 120 locations, including in the U.S. They expect 100 million doses to be ready before the year is out if they are successful.
Operation Warp Speed
The Department of Health and Human Services (HHS) has announced “Operation Warp Speed.” It has a US$ 10 billion budget to “deliver 300 million doses of a safe, effective vaccine for COVID-19 by January 2021.” Operation Warp Speed includes a number of federal agencies including the Centers for Disease Control and Prevention (CDC), the Food and Drug Administration (FDA), the National Institutes of Health (NIH), and the Biomedical Advanced Research and Development Authority (BARDA), and the Department of Defense (DoD), as well as private companies that have relevant expertise or products to add. Operation Warp Speed has already allocated US$ 456 million to Johnson & Johnson’s vaccine, US$ 483 million for Moderna’s vaccine, and US$ 1.2 billion for AstraZeneca’s vaccine which is being developed with the University of Oxford.
Some see the program as a subsidizing rainmaker for the pharmaceutical industry. Alex Azar, head of HHS, is overseeing the operation with Defense Secretary Mark Esper. Azar was a President at Eli Lilly’s Lilly USA. Eli Lilly is also working on a vaccine. Dr. Moncef Slaoui, formerly of GlaxoSmithKline, will be Chief Advisor. There are potential conflicts of interest in the international search for vaccines. GlaxoSmithKline announced that Operation Warp Speed would fund it and Sanofi with “up to $2.1 billion for development including clinical trials, manufacturing, scale-up and delivery of an initial 100 million doses.” Roger Connor, of GlaxoSmithKline put out a statement that read in part, “We thank the U.S. government.” GlaxoSmithKline would likely receive government money even if Dr. Slaoui wasn’t involved, but the optics of the arrangement leave room for skepticism.
The aforementioned companies are purchased in popular index funds, as well as individually. An example is Fidelity’s Select Pharmaceutical Portfolio, which counts AstraZeneca, Sanofi, Johnson & Johnson, and Eli Lilly in its top ten holdings. As of June 30, 2020 the fund had returned 14.82% annually (averaged) over the last ten years. SWFI’s quarterly survey from June 2020 indicated that 37.5% of fund managers planned to be overweight pharmaceuticals. 6.25% planned to be significantly overweight. GlaxoSmithKline is headquartered in Brentford, U.K. and is a favorite of TIAA’s Nuveen Asset Management, which holds 4,167,565 shares. Norway’s Government Pension Fund Global (GPFG) has 59,498,437 shares of Pfizer, which is a full 1.07% of the company. Pfizer is also a major holding of Vanguard’s Institutional Investor Index Fund, which holds 48,487,138 shares for a 0.87% stake. GPFG is a believer in Johnson & Johnson, with 28,375,314 shares. Nuveen owns 15,793,571 shares of J&J.
Headquartered in Cambridge, U.K., AstraZeneca has been operating in China since 1993 and recently formed a new investment fund with China International Capital Corporation (CICC) to invest US$ 1 billion into China’s healthcare sector. AstraZeneca has a minority equity position in the fund. The fund will select investment targets and mentor chosen companies.