Specialty pharmaceutical-generic companies that expanded pipelines through M&A and revenue through price increases are now facing scrutiny on the sustainability of the traditional model and looking toward more investment in R&D.

1. Global healthcare 2017 outlook
Elizabeth Krutoholow, Curt Wanek, Brian Rye, Jason McGorman,
Ian Person, Sam Fazeli, Michael Shah
Bloomberg Intelligence analysts

2. Large pharmaceutical 2017 outlook

3. The rapid pace of innovation among drugmakers may continue
to be overshadowed by broader investment themes, such as the
switch away from defensive stocks into more cyclical industries,
during 2017.
Though Donald Trump’s election victory means government
price controls are much less likely, payor pressure on drug
pricing continues. With cash remaining cheap, particularly if U.S.
companies can repatriate their hoards at a low tax rate, smaller
drugmakers may find themselves targeted by pipeline-hungry
large pharma.

4. Cheap and repatriated U.S. cash may boost drug M&A

5. Large pharma may remain mostly focused on smaller deals in
2017, according to company management teams. Bids for Anacor
(Pfizer), Stemcentrx (AbbVie), Medivation (Sanofi) and Actelion
(Johnson & Johnson) underscore the fact that biotech valuations,
which are significantly below previous highs, are opening the door
to discussions.
Access to cheap cash is a significant driver, as will be repatriated
cash for U.S. large pharma. The U.K.’s decision to leave the EU may
prolong the period of relaxed monetary policy.

6. Obamacare, California-type ballots key for pharma

7. With the Republicans taking all key political power positions in the
U.S., drug companies may have escaped the brunt of potential
government drug-pricing control, while their tax burden could
ease as parts of Obamacare are repealed.
One risk of negative headline news in 2017 is other states, notably
Ohio, having a measure like that defeated in California on the
ballot in 2017. California’s Proposition 61 was aimed at preventing
state agencies from paying more than the U.S. Department of
Veterans Affairs for drugs.

8. Specialty pharmaceutical 2017 outlook

9. Specialty pharmaceutical-generic companies that expanded
pipelines through M&A and revenue through price increases are
now facing scrutiny on the sustainability of the traditional model
and looking toward more investment in R&D. Price pressures
that contributed to the 36% sector decline in 2016 may abate
somewhat in 2017 under President-elect Donald Trump. While
price probes are likely to continue, limited action by Congress
may not hinder moderate price increases on the magnitude of
10% a year.
Companies that continue to reinvest in their pipelines and show
organic growth in addition to expansion through M&A are likely to
continue to succeed.

10. Specialty drug prices rise, generics pressured

11. Prices of specialty pharmaceuticals are still likely to rise about
9-10% a year, despite payer pressure and congressional probes on
specialty pharma tactics, which are only likely to deter aggressive
increases such as those historically employed by Valeant.
Methods for the government to regulate cost remain
prohibited but rebating may be a viable way to temper high list
prices. Generic-drug prices are in a deflationary period after
consolidation among distributors and a boost in FDA approvals.

12. Specialty pharma attracts suitors, consolidates

13. Specialty pharmaceutical suitors have been attracted by the rich drug
pipelines with relatively limited competition and quick avenues to
regulatory approval. Medicines targeting chronic diseases provide
valuable long-term growth, but a wave of mergers has left fewer
targets available.
Still, specialty pharma’s potentially lucrative model will likely lead to
further consolidation in the sector. Allergan, itself a possible target
since the Pfizer deal is off the table, will make bolt-on acquisitions

14. North America managed care 2017 outlook

15. Health insurers may be poised for stronger revenue and EPS
growth if Republicans strengthen Medicare Advantage and repeal
some of the Obamacare taxes, but Medicaid providers risk losing
some earnings. The public exchanges may still be a headwind
for remaining insurers such as Anthem in 2017 as few additional
enrollees are expected to sign up.
Court rulings for the major M&A deals for Aetna and Anthem may
be released in early 1Q, which could cause a domino effect as peers
deploy capital to respond.

16. Obamacare repeal a risk, tax holiday boosts payers

17. President-elect Donald Trump and Republicans may repeal parts of
Obamacare, which could ease losses for health insurers near-term
but cut earnings in the long run. The insurer tax delay may boost
EPS for payers in 2017, mostly for Humana, and would be a positive if
repealed entirely.
Public exchange premiums are set to rise 25% on average, which
should help stem losses. Anthem may be the most exposed payer to
Obamacare plans in 2017 and could pick up costly members as peers
scale back.

18. Aetna, United may lead Medicare Advantage market

19. UnitedHealth and Aetna may lead Medicare Advantage growth
among publicly traded health insurers, given they have the highest-
rated plan offerings. Enrollment growth may slow for Humana and
Cigna as plan ratings were cut.
Cigna isn’t allowed to market plans, given the government levied
sanctions because Cigna denied patients access to care and certain
drugs. Medicare Advantage enrollment may grow at a high-single-
digit pace through 2019 due to an aging population, among the
fastest-growing in health insurance.

20. Payer M&A may give pricing power, decisions 1Q

21. Aetna and Anthem could gain significant scale and pricing power
if they were able to close pending acquisitions in 1H. Aetna may
have a clearer path to a settlement with the Justice Department
because Medicare Advantage is a local product rather than
national, but its divestiture plan may not yet be satisfactory.
Anthem’s purchase of Cigna is more challenging, given the
Justice Department is alleging harm to competition for the
national account market.

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