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Sustainable Investing

Health Care Monthly Monitor

A review of health care sector performance, innovation and impact

By Michael Li, Ph.D., Henry He, CFA, Kevin Lewis, CFA, CAIA

Market Highlights

Stocks declined in August amid profit-taking sparked by rising bond yields. Large-cap stocks held up better than small-caps while growth outperformed value among large- and mid-cap stocks, as measured by the Russell indices.

Health care stocks declined modestly and held up better than the broader market amid the month’s volatility.

Within the Russell 3000® Health Care Industry Index, Health Care Technology and Health Care Equipment & Supplies declined the most. Pharmaceuticals gained the most, powered by innovation among a handful of companies. Life Science Tools & Services and Biotechnology stocks also rose.

U.S. Drug Price Negotiation Update

Under the Inflation Reduction Act (IRA) of 2022, the U.S. government will negotiate pricing on 10 of the highest-cost drugs covered under Medicare starting in 2026. Over three years, pricing will be negotiated on 20 medications. The Biden administration announced the first 10 drugs subject to price negotiation in August. They tended to be older and established medications late in their lifecycles.

How did we get here?

A RAND Corp. study released during the pandemic estimated that U.S. drug prices were, on average, 190% higher than those of other OECD economies. Drug prices in the U.S. are much higher than in other developed economies because medical insurance reimbursement schemes operate in a fragmented market of participants with competing interests and incentives.

In contrast, other OECD countries have long used the strong position of their national health care systems to negotiate and regulate prices. In Japan, for example, drug prices are reduced over time after an introductory period. Similarly, many European countries limit costs by regulating prices, encouraging lower-cost alternatives and seeking cost-sharing arrangements.

Net Effect on U.S. Patients and Companies

The law also caps out-of-pocket costs for Medicare recipients at $2,000 annually. Combined with lowering costs for a handful of widely used drugs, these changes should help increase access to care and reduce the financial burden on poor and elderly Americans.

The West Health-Gallup 2021 Healthcare in America Report suggests that more than a quarter of Americans have “delayed or avoided care and put off purchasing prescriptions” in the last six months due to high costs. The report shows that cost burdens and access issues disproportionately affect lower-income Americans and women.

The law hurts companies with legacy drugs that have been on the market for many years and don’t face generic competition. These tend to be large-cap pharmaceutical companies interested in protecting their legacy businesses rather than creating new medicines. For example, drug companies sometimes file patent applications late in a drug’s life to preserve its exclusivity.

Ultimately, we believe the law should benefit society because it improves drug access and affordability. It also likely favors innovative drug companies, which we believe are more productive and efficient than the large pharma stocks.

Argenx Exemplifies Innovation and Impact

We believe the firm argenx demonstrates a clear alignment between its fundamental business and societal impact, reflecting its focus on new or innovative treatments for disease. It’s a clinical-stage biopharmaceutical company that develops antibody-based therapies for treating autoimmune diseases and cancer. Two lead drugs are in registrational trials or will start registrational trials soon.

We believe argenx’s robust product suite and overall research pipeline mean that the company has the potential to grow sustainably for an extended period. The result is that we see a company with the potential to do well financially while also doing great social good.

Michael Li, Ph.D.
Michael Li, Ph.D.

Vice President

Senior Portfolio Manager

Henry He, CFA
Henry He, CFA

Vice President

Portfolio Manager

Kevin Lewis, CFA, CAIA

Kevin Lewis, CFA, CAIA

Senior Client Portfolio Manager

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