Andy Acker: At Janus we focus on deep fundamental research that involves understanding the science as well as the business, and in some cases really understanding the regulatory and legislative picture can be extremely important, especially in an election year where we've just had a significant change in the political climate. In order to understand that picture better, five members of our team recently went down to Washington, D.C. to meet with members of Congress and their advisors to better understand that picture and how it can impact the health care investing landscape.
Andy Acker: I'm Andy Acker.
Ethan Lovell: And I'm Ethan Lovell and together we manage the Janus Global Life Sciences Strategy.
Andy Acker: From our recent trip to Washington, we really didn't get a sense that there is a big legislative focus on addressing drug prices in the United States. That being said, we do expect continued political rhetoric including the occasional tweet related to aggressive pricing behavior and, of course, the competitive pressures that we've seen, especially in certain very competitive categories like diabetes and respiratory disease, we do expect those to continue selectively in the industry.
Ethan Lovell: We've already seen some of the large pharmaceutical companies make overtures intended to allay the fears of the public around drug pricing so we have companies that have agreed not to raise prices.
Andy Acker: The focus is really more on out-of-pocket expenses for individuals. Companies want to make sure that drugs are affordable to individuals that have to purchase them, but not necessarily focus on the overall price of drugs, and so we think that's really more of the focus going forward for individual companies.
Ethan Lovell: I would add to that that we are also going to see relief coming in the form of, you know market-based relief in that I mean we have the first two biosimilars approved, we are going to see several more, and these are in categories where patients are experiencing some of the highest out-of-pocket costs that exist in the industry.
One of the things that we learned when we were in Washington, D.C., is that the staffers are working overnight, night and day, trying to get legislation put forward to be able to be signed into law as soon as Trump takes office, so one of the things that we're going to see is a reconciliation package designed to repeal Obamacare. That will be at Congress in the early part of January and available for Trump to sign probably by the end of the month.
What we see happening over the course of the first seven to eight months of 2017 is the Senate Finance Committee and their advisors are going to be working on what the replacement strategy looks like. What we envision the Republicans putting forth is something that's very market-based. They want the consumers to be able to shop for their health care on a very personal level, so there will be more flexibility if you want a richer benefit, or if you want a less rich benefit, something that fits your needs and you will be empowered to go out and obtain that, and we think that that’s a very healthy environment for companies like managed care, certain elements of the provider networks. I think that’s going to be viewed to be an unencumbering effect throughout the health care continuum.
Andy Acker: I think there is a common misperception that if we get a repeal immediately, that all of a sudden the 20 million people that have coverage now through the Affordable Care Act will suddenly lose coverage and we think that's very unlikely to take place. As Ethan mentioned, I think it's, what we're likely to see early on is a repeal of the industry taxes, in some cases which hasn't really been incorporated in Wall Street models yet, and taking away the individual and the employer mandate. Some of the replace, which will be debated, that is going to try to incorporate more market mechanisms. The Republicans would like to give states more control over how they design their Medicaid programs. For example, they would like to give individuals more decisions in terms of which benefits they actually want to pay for as opposed to the ten essential benefits that are required right now, which in part have driven up the price of coverage under the individual exchanges.
Ethan Lovell: The repeal of the mandates puts a little bit of pressure on what insurance companies can expect in terms of participation by some of the younger and healthier individuals that now would take insurance in the exchanges, but it's not material, and so we finally reached a point where the managed care companies that have decided to stay in the exchanges and participate longer term are reaching breakeven, so it's the moment at which they could cross over and actually earn some returns for the investments that they've made, so we think it's very unlikely that they would withdraw now, for fear that the Republicans are unable to put something in place in 2019 or 2020.
Andy Acker: I think it's fair to say there will be some uncertainty that will cause volatility in the sector, especially as what exactly the replaced plan will look like begins to take shape over the course of 2017
A big question is going to be can we ultimately get to a compromise that 60 senators will vote for, and that's probably the least certain element that we're anxiously looking to see what happens. But I think even in a worse-case scenario, if we go back to the status quo, I think sometimes investors look at, "Oh no, now we have the Affordable Care Act, what if it goes away?" Then we go back to the situation we had before 2009 which was not really such a bad situation for health care companies. So I think, regardless of the environment, I think health care companies, especially those bringing innovative products and services to market will be positioned to do well and it's our job as a research team to identify those companies that we think are materially undervalued by the market, ultimately for the benefit of our clients.