Letter from America part II – the key players and their goals
For healthcare investors, Robert F Kennedy Jr (RFK) and his outré historical positions on various topics certainly seem to be a major overhang for investors. This, in combination with the risk of Musk gutting the FDA for cost reasons, and RFK doing similar for ideological reasons, was much mentioned by investor peers as a risk for the pharma/biotech sectors, even if the extent to which mass firings are actually happening is also widely debated. Then there is the lingering issue of action to reduce drug prices…
Against this backdrop, one of the major surprises for us then was the apparent lack of concern around the FDA topic, and impact of RFK in general, amongst those closest to Washington. There were several threads to this thinking, but these can be summarised thus: there are still adults in the room and they are being listened to around appointment decisions and the direction of policy toward the FDA specifically and pharma/biotech more generally.
On Wednesday 13th March, the White House withdrew the nomination of longtime RFK ally Dave Weldon to lead the Centers for Disease Control (CDC) due to his controversial views on vaccines, which seemed to have alarmed enough key Republican senators for them to deny support his nomination. This took one risk off of the board, and does suggest a red line on the vaccine safety topic, which should assuage some concerns.
Scrutiny over certain contentious topics (e.g. vaccine safety) actually should be welcomed if it is conducted in a transparent manner, for the data is overwhelmingly conclusive. The ongoing measles outbreak in Texas, whilst tragic, is a timely reminder to Americans about the concept of ‘herd immunity’, something that is so well established that it is no longer talked about, and thus probably lost on many members of the public who are not in the weeds of medical science.
There is a reason for scheduled paediatric vaccinations and this is an ample demonstration of that logic. If governments globally had treated vaccine safety concerns more sympathetically instead of mocking those who raised them, we might be in a very different position today. Paranoia thrives in the darkness. A series of public advisory committee meetings on these topics could prove very helpful in both arresting this worrisome narrative that an anti-science agenda is in the ascendance and also shoring up public confidence in preventative health.
The proposal for FDA Commissioner is Dr Marty Makary, who has an excellent record of public service, is widely-liked by industry insiders and is expected to shake things up in a positive way (one leading biotech investor described him as an ‘iconoclast’). Makary has successfully passed the committee stage and is awaiting a Senate confirmation vote. Peter Marks, who heads the Center for Biologics Evaluation and Research (CBER) and has spearheaded efforts to get gene therapy and cell therapies approved, has said that he is staying on.
At the industry level, there is growing recognition for urgent FDA reform; we will cover this in a separate letter since we were very surprised by the level of discussion around the topic and the uniformity of opinions around it. RFK himself, who will be Makary’s boss, said in his Congressional testimony that he would support efforts to “make [clinical] research faster, cheaper, safer”.
It is worth reiterating (and lobbyists are doing so), that the costs of the FDA’s drug and device review efforts are half-funded by industry via user fees, and thus review activities are not that much of a burden on the American people via tax dollars. It was interesting to note that FDA reviewers were exempted from DOGE’s HHS ‘contract buyout’ announced last week (this strategy is being used across the government by Musk; essentially offering redundancy to anyone who would like it). Some junior review staff were let go in late February, through a policy of terminating probationary staff across government, but this was rescinded for FDA employees within a week, and the affected staff (<100 people) were “re-hired”.
Although staff turnover at the FDA and mass-firings have hit the headlines, most people we spoke to who were in a late cycle review meetings for products close to approval described the situation as ‘business as usual’, with FDA senior staff continuity and no obvious negative morale. As of today, it is unclear how many review staff in the drug and medical device divisions have left the agency, or how many are potentially at risk of being asked to leave.
The FDA historically has a high staff turnover in any event, owing to industry poaching staff to help prepare review documentation. Another general theme seemed to be waning enthusiasm for Musk’s DOGE project, which seems to be ham-fisted in its approach (never mind potentially unlawful, as repeated injunctions attest) and cutting costs in areas where the second-order consequences are potentially quite serious.
As we have noted before, RFK’s passion project is chronic disease prevention, aka “Make America Healthy Again”. He believes (and we agree) that improving diet and food quality standards are key to this and we expect this to be his ultimate focus. He is not so naïve though as to recognise that, once you become ill you need treatment. Wishing people didn’t get obese in the first place is not the same as disagreeing with the prescription of anti-obesity drugs, for example.
And what of drug prices? It is a matter of record that Trump spoke frequently about US drug prices being too high in his first term, and also that US prices were unfair when compared to the rest of the world (where governments typically negotiate prices directly).
Whilst he has previously talked about direct price negotiations and ‘most favoured nation’ status for the US, he took little action in that first term. Moreover, the rhetoric around drug pricing does seem to have changed a little in his second. For instance, it is notable that Trump did not talk about drug prices when he addressed Congress recently.
Furthermore, the narrative around the differential in drug prices between the US and other OECD countries has morphed from ‘America pays too much’ to ‘other countries are not paying their fare share’, which chimes well with Trump’s wider view of geopolitical realities and attests to the success of having the correct framing perspective, as discussed in Part 1.
From what we have heard on both the provider side and the pharma lobby side, the latter has been doing an excellent job in arguing that a group of nameless and faceless middlemen are more responsible for high drug prices in the US than the drug makers themselves, to the point where this has become line that Trump himself has repeated: "The horrible middleman that makes more money, frankly, than the drug companies, and they don't do anything except they're a middleman”.
We do not subscribe to this view; the profit margins of the drug wholesalers and pharmacy benefit managers do not suggest they are taking a huge cut of the budget and the administrative side of tracking who gets what put into them is vitally important. However, it is a convenient straw man that may help to protect the drug industry and its profits.
The industry also seems to be winning the argument on addressing “problems” with the Inflation Reduction Act (claiming a Biden landmark legislative achievement is flawed is another easy win) and we expect the “9 vs. 13” differences between small molecule and biologic drugs regarding IRA inclusion to be standardised at 13 years.
And what of Medicare and Medicaid? Generally speaking, health insurers are not popular with the American public and their prior authorisation procedures delay often care access and frustrate beneficiaries with burdensome bureaucracy. Dr Oz, Trump’s pick to run CMS has made some comments on how he would like to see the programmes reformed, and we will consider this in a separate missive.
In conclusion, we see more scope for positive changes at the FDA than for negative consequences from Musk and others and the rhetoric around drug pricing has cooled. RFK has consistently signalled that his priorities are away from the “drug” bit of the FDA and that he supports the current science-led approach. Given Biden introduced the IRA, it seems reasonable to ask how this administration could be considered less friendly to pharma/biotechnology than the last one.
Taking all of this together, the recent biotech beat-down feels overdone. If only there were a potential catalyst in the near-term to re-ignite broader generalist investor interest… (see Part 3).