RESISTANCE MODE Big Pharma in Trump's Crosshairs

U.S. President Donald Trump has attacked drug companies for allegedly inflating drug prices. But the boss of German pharma group Merck argues that it's not as simple as that.
Merck is just one of Germany's pharma groups that would take a hit if U.S. drug pricing policies were to be changed.

When Donald Trump gave his first official press conference in mid-January ahead of his inauguration as president last week, he reserved particularly harsh words for the pharma industry.

“Our drug industry has been disastrous. They're leaving left and right,” Mr. Trump said. “And the other thing we have to do is create new bidding procedures for the drug industry, because they're getting away with murder,” the president added.

After railing against carmakers and aircraft manufacturers, Mr. Trump has set his sight on drug makers, vowing to threaten years of steady profits by pharma companies in the U.S., the world’s largest market for prescription drugs – and also its most expensive.

If Mr. Trump’s announcements should truly herald a change, the industry’s players are likely to take a hit. Even immediately after Mr. Trump’s remarks, U.S. listed pharma shares overall shed some 2.6 percent and ended the day in the red.

But the president’s comments also sparked concerns on the European side of the pond, with the chief executive of German drug maker Merck on a recent trip to the U.S. calling higher drug prices justified in light of the costs for research and development.

I am surprised that 99 percent of the discussion over affordability evolves around drugs. Stefan Oschmann, CEO of Merck

“We’ll have to wait,” Stefan Oschmann, who has been at the helm of Merck since April last year, told journalists in California. “I am surprised that 99 percent of the discussion over affordability evolves around drugs,” he added, criticizing the narrow focus of the debate on prices of medication.

In the United States, no supervisory authority keeps watch to make sure drugs are affordable and government insurance companies are not allowed to negotiate prices.

The corporations have taken advantage of this. Over the last seven years, the price of medicine on average has skyrocketed by more than 150 percent, according to analysts at Morgan Stanley.

"Pharma has a lot of lobbies, a lot of lobbyists, a lot of power," Mr. Trump said in his address. "We're going to start bidding. We're going to save billions of dollars over a period of time."

However, prescription drugs only account for 17 percent of the country’s total healthcare spending, according to the U.S. Department of Health. Mr. Oschmann likes to point out that fact whenever he is asked about the impact a crackdown on drug prices by Mr. Trump might have.

Merck, the world’s oldest operating chemical and pharmaceutical company with a 349-year history, is not as dependent on the U.S. market as some of its German competitors.

But the Darmstadt-based group, controlled by the Merck family which holds a majority of 70.3 percent in company shares, employs some 10,000 people in the United States, where it generates a quarter of its €13 billion ($14 billion) in sales.

Throughout the presidential campaign, it was mainly Mr. Trump’s opponent, Hillary Clinton, who made drug prices an issue, causing pressure on pharma stocks. Following Mr. Trump’s election, shares in pharmaceutical companies initially gained.

If anybody is leaving this conference with the idea that everything is as it was, they’re making a mistake. Heather Bresch, CEO of Dutch biotech company Mylan

But 59-year-old Mr. Oschmann is used to the volatility of the stock markets. Just the day before Mr. Trump’s speech this month, Merck shares gained on the news that the pharma group had signed a long-term, profit-sharing partnership agreement with Palantir Technologies, an American software company that is expected to help Merck in its push to digitalize labs and modernize its drug business.

“Well,” the Merck boss said in response to questions over share price changes, “the markets reacted very strongly. That is probably somewhat of an overreaction.”

But the writing is on the wall for pharma giants. As impetuous as Mr. Trump’s attacks may appear, his timing was perfect. Global pharma’s top people had gathered together in California for the industry’s largest meeting in the world, the JP Morgan Health Conference.

“If anybody is leaving this conference with the idea that everything is as it was, they’re making a mistake,” warned Heather Bresch, head of the Dutch biotech company, Mylan.

Other German chemical groups will also have to brace themselves. Fresenius Medical Care, a Fresenius subsidiary and the world leader in rental dialysis, generates around 70 percent of its sales in the United States. It recently came under pressure when doubts emerged over whether a charity organization will continue to be allowed to contribute to the payment of dialysis treatments for American patients. If such a provision is scrapped, a number of dialysis patients will have to cut back their care, resulting in a sharp income loss for FMC. The company thus decided to fight the decision in court.

The case shows just how dependent German pharma companies are on U.S. policies. That also applies to drug behemoth Bayer and pharma group Boehringer Ingelheim. The U.S. business is even more important to both groups than to Merck, as both have greatly increased the prices of their products in recent years.

But it will be small consolation for Mr. Oschmann that Mr. Trump’s attacks will most likely hit the competition harder than him.

After all, Mr. Oschmann’s pet project, the joint development of cancer drug Avelumab with U.S. drug maker Pfizer, is in the crosshairs of Trump’s policy proposals. Cancer drugs are particularly expensive, with new therapies easily surpassing the $100,000 a year price tag.

It is still unclear how much Merck will actually be able to charge for the human antibody medication once the drug receives approval. While Mr. Trump is not likely to pass a cap on prices, he suggested giving more power to state insurers to bid and negotiate. This would curb drug producers’ freedom in setting prices and eat away at profits.

The first drug companies are already committing to moderation. Abbvie, Allergan and Danish Novo Nordisk have publicly promised not to raise their prices more than 10 percent this year. German companies are still holding back with such announcements.

 

This article originally appeared in the business magazine WirtschaftsWoche. To contact the authors: [email protected] and [email protected]