Anonymous analyst Crémieux: MFN drug pricing will cause 10% US price drop but 90% increase in Canada, threatens pharma R&D

What's new? Oh, I think I'm using voice changer clearly. We can't hear you at all with that thing. Uh, is there any way we could turn this off? Yeah, let me let me just check if I can use a pitch change effect. It's It's strong. It's It's a little too powerful. It's a little too powerful. Overpowered by the AI. Yeah.

Uh, we wanted to read through some of your posts, see if there's anything that we could uh break down. That sounded a bit better. Let's hear it. Gotcha. Uh, can you hear me? This is amazing. This is way bettering. Thank you so much. Tremendous. Okay, great. Uh, so yes, uh, what has been your take? Yes.

Absolutely shocking there. Anyway, thanks so much for joining. Can you break down the news, the Trump executive order? Uh, how are you interpreting the news? How would you explain it to a lay person?

So the idea behind the executive order is that we are getting ripped off because other countries are paying far far less for the same drugs that we buy in the US for huge amounts. We pay $1,000 for Zimpic and Denmark pays $40 and that's just not fair.

So the idea behind this is that we're banning geographic price discrimination. We're making it so you can only sell at, you know, the lowest rate that another developed country is willing to pay for a drug. Mhm. And how how real is that? Like and and what what drives that?

Like with the Ompic example, uh that's developed by Novo, a Denmark company. Are they just doing their friends a solid by discounting in their home country, or does this apply to American companies selling abroad?

And is it just like trying to capture any possible market at at whatever price the local market will bear or is there something else going on with the the dynamics of like insurance companies? Bladder is exactly right.

It is a group of largely American companies that are maximizing profits by selling at prices that allow them to as I said maximize profits. Yeah.

uh they're just selling at whatever the market will bear and if a country will not bear American level prices then they aren't going to be selling at those prices there just for the simple reason of supply and demand. Why does America like why can America bear such high prices?

We were looking at the Wall Street Journal article and they were saying that uh for a particular drug for diabetes Americans were paying $611. In Switzerland it was 60 bucks and in Japan it was 35. But Japan has a similar co uh similar, you know, economy to America on a GDP per capita basis.

They should be able to pay $600 in theory. What's going on there? So the thing is that GDP per capita is actually not a very great way of getting at consumption. The Japanese save more. They actually are quite unproductive in the service industry.

Um other countries tend to have far far lower levels of consumption relative to GDP.

And this is especially true if they are a country like Ireland or Singapore for which a lot of their GDP, their exceptionally high GDP seems to be driven by profit shifting where companies bring money over and doesn't actually affect the incomes much of the people who live there.

So you'll see that Ireland for example has very uh relatively low gross national product relative to their GDP. They are able to consume considerably less than their GDP might indicate.

But the US on the other hand consumes a lot more than you might expect because everybody else's GDP is kind of out of whack compared to ours.

We are the world's consumers and as such we consume a lot more and we are actually our the prices we pay are actually quite in line with what you would predict given our consumption which is to say that prices grow a little slower than household income growth and the US has exceptionally high household income.

The high prices and the fact that they are relatively low uh both are facts that stem from America just being really really rich. Can you Why do you think the market uh the NASDAQ biotech index is up uh over 4% today? Why do you think that is?

I was actually just about to do a differencing exercise with that to see if the biotechs were um up more or less than the rest of the market because they are benefiting from the fact that the tariff barriers are actually going down as well today which is uh wonderful news for them.

Yeah, they however might not be benefiting as much as the rest of the market. So I'll have to go check that afterwards. Um, another thing is there is a considerable expectation that this will fail.

This was attempted, there's actually a CFR entry for this from 2020 and it was uh shot down by courts and then the Biden admin came in and they uh ended the whole thing and there are a lot of people who believe that this will not be able to go anywhere because it'll run into some sort of issue.

I'm sure going to tell them no, the opposite. It will actually succeed and it will have pernicious effects because this is totally legal. Yeah. Interesting. Uh can you talk a little bit about the US as an early adopter and how that shapes drug pricing? Oh yes.

So a large portion of the reason that the US pays so much for drugs is because our launch lag the lag between you know getting the drug developed and getting the drug to market is so so much smaller than elsewhere.

To take an extreme example, the US's launch lag for new drugs is about 6 months versus the UK's which is about 6 years. Uh which means that if you're if there's some new therapeutic that you really need, they'll probably approve that one pretty soon.

But if there's a thing that's like an improvement on insulin, it'll probably take them many, many years to actually get that drug to market because they're just not willing to pay for it. They have considerable cost controls because they are a more managed care system.

Um, they provide a lot less care and if there's something new that like rules, but it's like a slight improvement on something else, they're going to go for the thing that is uh less expensive.

they're just gonna we are uh aiming to maximize their tech adoption whereas they are aiming to maxim to you know constrain their prices and do as well as they can under a certain set of a certain budget. You talked about uh potential pernitious effects if this goes through.

Are you using what happens when uh rent control is implemented in cities as a comp here? or do you think there's just going to be less R&D spend, less investment? What what does that look like to you? So, two things. We actually have wonderful models of this now and we know how this played out in 1991.

Um, I'll talk about the models first. The models suggest that this naive expectation that we're going to lower our drug spending by 50 to 80% just cannot happen.

And because we're going to dynamically adjust prices, prices are determined in equilibrium and we're probably going to get about a 10% reduction in the US, but we're going to see a very very large increase in a bunch of our allied countries.

So, for example, Canada should be expected to see something like a 90% increase. They're a small market and they're going to be facing a lot higher prices. Um, that's not going to be very good for them at all.

the total farmer revenues as a result of this will fall considerably uh because the for this it forces them in order to comply with the regulation to price above the profit maximizing level in most other countries. This is bad for their returns and it's bad for the health of those countries.

Now, when this was attempted in 1991 with the most favorite consumer model for firms, uh the prices didn't change for drugs that were under patent with no generic competition because everybody's already paying those.

And it's just that the reason that we pay more for those is because we're the ones actually buying them and the other countries aren't really buying them very much at all. They don't do new drugs as quickly as we do. We do it way way faster. Like sometimes it's an order of magnitude faster.

Uh there also was no change for just generic drugs in general, but there was a backfiring effect and prices rose about 4% which is not huge, but it's something for drugs facing generic competition with because of the uniform pricing under MFN.

The compliance costs were really bad and there was an M there was an IR shock such that the returns for the firms went down as a result. It was just not good for anybody. No winners. There okay, some winners. I should say that back. There are some people who do win from this. They're a minority and yeah, who wins?

the future loses out because the returns to R&D go down and they're already very low and we're if you get less R&D then you get less improvement in the future. Uh can you can you dive deeper into R&D?

Uh as I understand it there's basic science research that's done at universities kind of the foundational research on DNA might come out of a academic lab that's uh funded as a nonprofit. Maybe there's NAH grants that go in there.

Then at a certain point, a biotech company raises essentially venture capital uh maybe gets acquired or IPOs and rolled into one of the big pharmaceutical companies.

There's losses and losses and losses for years and years and years and then at the last second there's a blockbuster drug that makes a billion dollars and the math works out but on a 10y year, 20-year time horizon. Uh is that in a good place? Should that change over time?

Like what is your view on on how we as like humanity are paying for drug development right now? We are paying way too much for drug development.

We are paying out the nose for something that is not nearly as efficient as it could be and we know it could be a lot more efficient and a lot better targeted and everything else because we know that other countries are doing it well.

Um for example, China in 2016 introduced wonderful trial reforms that we should have had. I don't know why we never even had this where you can recruit people from across the country to participate in your trial. In the US, if you want to do that, you're going to be constrained to one center.

And if you are constrained to like one hospital, uh you are probably going to be flying people in. That adds a lot of extra cost. You are going to probably be constraining your sample as much as you can. Yeah. That adds a lot of uncertainty. That makes your trials less reliable.

So, you're more likely to have a trial that produces a false positive or a false negative. We have these reforms have been implemented in China and they've worked wonders. China's actually ahead of us as of this year in terms of the number of trials they have going and the not beyond that.

They have a higher number and they have a higher number of people in each individual trial. They are beating uh the hell out of the US because of some simple reforms that the FDA could actually implement right now.

They could go in, they could have a direct final rule on a bunch of these things and change this overnight to make stuff less expensive.

They could also reform GMP, the good manufacturing practices, in ways that take off a lot of the costs from, for example, gene therapies, like having to produce tons of placebo ahead of time is a very silly rule.

We could actually mimic countries like Australia, or we could do follow the who's g the World Health Organization's GMP guidelines and cut costs right away. Um, the wonderful thing about the US though when it comes to R&D is that we have a good way of directing R&D funding.

We have lots of connections between the public sector and well I should say uh the sort of quasi public private uh R&D drives like we have universities with a lot of industry directive a lot of industry grants a lot of uh knowledge of where they should be focusing and whatnot and this leads to a situation where even our publicly public funds are able to uh be allocated to things that have good returns.

Uh that's why it's going to be very difficult to replace whatever happens here with public funds because it's you're going to have to figure out how are you going to uh distribute that money?

How are you going to uh do what the industry does which is to find areas with pretty good returns uh pretty reliably when we the elasticity of uh research funding to the returns is very very high. It is very considerable.

So, we're going to see a very stark reduction in R&D and that's going to have pretty major effects in the future. It's also going to lead to R&D outsourcing. It's going to move to other countries because of the cost angle.

It'll very likely move to China because they have the best R&D environment right now for pharmaceuticals and because the US uh is doing this and additionally the manufacturing is likely moved there too. Yeah. A as you work through the the effects of this executive order, if it goes through, uh is that good for America?

Is it good for humanity? Are we closer to a cure for cancer? Does this like accelerate or decelerate uh overall biotechnology progress in one way or another in your your opinion? Unfortunately, this is very likely to massively decelerate things.

This is likely to be something that causes a lot of harm to research for many years to come. The IRRa for biotech is or for pharma is already below the average cost of capital and we've recently have a little bit of rebounding but people were expecting it for many years to go basically to zero.

Um a little bit of rebounding due to co there was a blip and that was uh that was okay.

There's a lot of funding going into biotech for co reasons and then there's been a GLP le boom in returns as well and that's been tremendous but that has an expiration date because we know what's going to happen with the patents and we know that people are very likely going to go for cheap generic Ozimpic when it comes out in 2033 or whatever um rather than the better tepatide or reach based products just because it's going to be so cheap um and at that point the GLP boom will be over and we'll have to return to the state of what's going on with pharma.

Uh and what's going on is very very low irr that are going to go even lower due to this regulation. So it's unclear if uh pharmaceutical research can actually survive in the US given this because we're already teetering on the brink and moving even lower is well it imperils the whole thing. Brutal.

How much did you read into the timing of all of this?

It felt uh initially it felt a little bit random because so much conversation had been on on trade issues, but then uh once I sat with it a little bit, it felt conveniently timed given uh where where you know Trump has and polling and and um things happening you know in Congress that that you know they would like to get through.

Yeah, I actually don't know when I expected this to come out, but I did expect it to come out because it was an old thing and they are trying to introduce a lot of the things that they tried to run near the end of the uh the previous admin. And this was just up there. Um they're basically going to redo the same thing.

They're going to fight the legal battles and then implement this. And uh I don't know if there's anything in particular that prompted this right now, but I knew that it was coming and I didn't know exactly when, but I expected it like within a few months of the admin actually coming in. Anything else, Tori? Brutal.

Uh, I was hoping for a white pill in there somewhere, but uh, didn't get it. I do have a white pill, please. Please, just one, sir. Yes, I I'll give you a few actually.

So, there are a lot of efforts going on right now at the FDA and at HHS more generally to promote price transparency, which will help with the PBM based uh, delta and price. Uh, they are looking to accelerate manufacturing and approvals for nearly genericable drugs.

They're going to be participating in generic drug user fee amendment reform, which is massive. I can go into that. The GM there's GMP reform happening.

And there are people looking to actually lower the costs of some of our most expensive drugs in a way that is not bad for innovation by implementing Louisiana's purchasing model across the whole country. There are a lot of really great things happening, and it's likely the situation will be better in the long run.

Uh not because of this, but because of everything else that's going on. What would the Louisiana plan look like? I'm not familiar with that. Ah, so Louisiana did an amazing thing a few years ago. They basically went to every manufacturer of EPLUSA, this wonderful drug for hepatitis C that uh is a cure.

And it's it was super high cost. I think the cost is actually around $27,000 right now for 28 days. Uh so it's not able to be done for Medicaid at a like meaningfully. So what they did is they negotiated with a producer of it and they said, "You're going to be the exclusive provider for as much as we want.

We're going to give you $30 million and you just give us as much as we want. " And they they looked for people and they said, "Okay, you look like you're going to produce it all. " They agreed. Um, and they just produced as much as they want, they could wanted. If the state demanded more, they would get more.

That was part of the deal. So they started screening prisons. They started screening Medicaid patients. They started screening everyone in order to get as many people as possible this prescription for a formerly very high-cost drug that had to them zero marginal cost because of the deal.

Yeah, lots of pharma companies are actually willing to engage in this deal. They're willing to provide zero marginal cost drugs if you give them just one big contract in exclusivity. Uh and this seems to be amazing. Um it worked really really well.

They reduced the uh rate of heepsi in the state the heepsi death rate actually by about a sixth uh in about a year which is incredible. They actually saved a ton of money on it. They reduced the number of organ transplants people needed. They did just lots of really, really wonderful things.

And all they had to do was ask a manufacturer, "Hey, will you provide as much as we want if we pay you a set amount, give you exclusive rights in our state? " And yeah. Yeah. Businesses predictability, right? What's that? Yeah. Businesses love predictability. Like it's predictable revenue.

And so even if it's at a lower margin, it's more guaranteed and higher volume. And so all the all the math works out and the IRRa increases. Yeah. And when that model goes national, it's going to basically make our high price drug problem a thing of the past if there's a generic. That's fantastic.

Well, that's a great white pill. Thank you. Thank you for that. This is great. We'd love to have you back. This was a fantastic uh I'm I'm so glad you were able to join really quickly. Yeah. Thank you for making the time. Learned a lot. Thanks so much. Well, and we'll talk to you soon. All right. Have a good one, guys.

Bye. Cheers. Bye. Uh we have our next guest hopping in the studio. But quickly let me tell you about Vanta. Automate compliance, manage risk, improve trust continuously.

Vanta's trust management platform makes the manual work takes the manual work out of your security and compliance process and replaces it with continuous automation whether you're using your first framework or managing a complex program. Go to vanta. com. Anyway, thank you so much and welcome to the stream, Tess.

We'd love to chat with you. If you're here, let's bring you in. Can you hear us? I sure can. Can you guys hear me? Okay. Yeah, you sound great. Welcome to the show. Great to meet you. Thanks so much for hopping on on short notice. Uh we're trying to make heads or tails out of the news. Um we were just talking to one