Roche Holding AG (ROG) Earnings Call Transcript & Summary

Welcome to the Roche presentation at the JPMorgan Healthcare Conference. I'm Richard Vosser, European pharma analyst with JPMorgan, and it's my great pleasure to introduce from Roche, Bill Anderson, the CEO of Roche Pharmaceuticals. Before I hand over to Bill, I'd just point out that the breakout session after his presentation is in the Borgia Room, which is at the back of the hall. Bill, welcome.

Thanks, Richard. Welcome, everyone. Thanks for being here. I have the duty now to tell you everything that's going on in Roche in 25 minutes. I won't try that. I do want to -- I want to focus really on 3 themes, really, one is the strategy, which I think everyone is interested in and how we pull this all together, the many diverse parts of what Roche brings in pharmaceuticals, in diagnostics and in the insights businesses. But also I'm going to talk a little bit about culture and the cultural transformation that we've embarked on and what that means. And the net sum of the strategy and the cultural transformation is a rejuvenation, both in the spirit of the company, but also very importantly, in the portfolio of the company. And I think we've made tremendous progress, and I'm pleased to talk more about the outlook for the future. So just maybe a starting place is innovation. And we hope at Roche, and I hope you see this of us from the outside, that that's really what we're passionate about. It's what makes us tick. It's why our people get out of bed in the morning. We've never been one that's focused on other metrics other than are we using cutting-edge science to change the lives of patients. And it's something that we don't take lightly. It's not reserved for the corporate web page, but it's something that's a part of every team and every person at Roche. This is I think a great time to start off a new decade, to reflect a bit on what's happened in the past. In the last decade, we launched 16 transformative medicines. 13 of those were first-in-class, and many remain only-in-class. And I think that's a real testament to our scientific endeavor and just our relentless pushing ourselves to be doing something different, doing something beyond. And that has meaningful benefits. For example, we have 31 breakthrough designations now from the FDA. It's a tremendous set of breakthroughs. And I think what makes me very proud is behind each of these is not only tremendous science, but a real change in life for patients and their families. It also matters from a business standpoint. If you look at the chart on the right, you see over a period in the last decade where we look at the average market share of breakthrough drugs in oncology after 3 years is about 45%. The average market share of me-too products in oncology was 5%. So it makes all the difference, not only for patients, but also to the trajectory of our business. And that innovation is paying off for our portfolio. If you look at this slide, you can see by the third quarter of 2019, we had 31% of sales from the new products that we've launched. And we've been able to do that with a remarkable level of margin. And I think that's a real testament to the transformation work we're doing as well because if you think, we're launching in new products, in new therapy areas. And everyone thought, well, surely, our margins would come down or come under pressure. And they would have, except for the transformation work, and I'll share a little more about that in the slides to come. So I think you can categorize our efforts into 4 priority areas, how we stay at the forefront of innovation and how we stay at the forefront of scientific progress. And these are the areas: cultural transformation, bringing new medicines to market and effective launches, advancing our pipeline beyond and then leading the personalized health care revolution. And I'll talk a little bit about each of those. Let me start with cultural transformation. I think transformation is probably an overused word in this day and age. And I would say one way to put that to the test, if you hear someone talking about transformation, if they say, we're doing a transformation next quarter, that's not transformation. If they give you their 18-month plan for transformation, that's not a transformation. Part -- when you're transforming something, you don't actually know where you're going exactly, and you don't know how long it's going to take you to get there. If you have a formula for it, if you have a plan and a Gantt chart, it's not a transformation. That's called restructuring. Companies have been doing restructuring forever, okay? Transformation implies a deep searching for answers to doing things differently, to questioning the status quo, to challenging the same old, boring, mediocre practices that large companies are typically engaged in. So I'll say a little more about it. But the industry, if you think about the overall world of health care, you can think about this in many different ways. This chart looks at it in 2 different dimensions. One is sort of the care modality. There's prevention. There's diagnosis. There's treatment on the horizontal axis. On the vertical axis, we have different segments, medical products, technology and data and analytics, things like lifestyle and wellness, moving kind of further away. At the far end, you have care provision, hospitals, doctors, and you have the channel in between. And if you look at the position of the Roche Group, for 20 years now, we've had an exquisite focus on 2 things: innovative medicines and innovative diagnostics. For the last decade, in particular, we've had a focus on bringing those together, really finding the place for harmony and synergy and the power of bringing those together. And I think that's really starting to hum. It gives us a really good base from which to move into those adjacent areas, moving further into things like prevention into data and analytics. And what it's all about is this notion in health care that pharma companies, device companies, providers can just sort of throw stuff at patients and patients going to have to navigate this tortuous path to care. That's not good enough. Patients deserve a better experience and better outcomes. And our real focus is how do we play a leadership role in achieving that for patients. So I'll talk a little more about it, but that's -- at the root of it, that's what we're about. What we found a few years ago when we started our transformation work is if we're going to actually do that, what I just talked about, there's no way we can achieve that with our command and control, highly structured, hierarchical processes. We have to find a way to unleash the whole power of our people, of the talent, and that's what got us motivated to change. We started in 2016. As I said, it's been a multiyear path. It's really, again, moving away from a hierarchical form of management to a leadership that's influenced by vision, by architecture, by catalyzing change and by coaching leaders in new ways of working. And I just want to share a few of the examples of it. So for example, in product development, what this has meant is a much higher degree of authority and responsibility placed at the team level. For example, used to be that most large investment decisions had to come to a portfolio committee. And by the way, they had to work their way through 3 or 4 other committees on their way, kind of run the gauntlet and with lots of iterations and edits and changes. And we basically pushed 80% of spending decisions back to the teams. Basically, hey, you're the team, you're the experts in the therapy area, you decide. We'll talk about the results later. Similarly, in the commercial area, this idea of multiple layers of management kind of touching everything, we've replaced that with the power of accountability on a team. That accountability can be held between different functions, sales and marketing and medical, for example. And the folks working with payers, they hold each other accountable instead of each going up through their silos. And the power that that's unleashed is really incredible. We've eliminated budgets around the world in every country in our commercial operations. But we've not eliminated accountability. We've actually increased accountability. There's no safe zone. It's like, "Oh, you achieve 100% of budget, you're great." We've replaced that with -- yes, there's not a target. It's go and drive medical progress, thrill customers and take best care of company resources. And again, we'll talk about how you did later. But every day is the first day of the next planning, okay? Or the first day of the next goal. It's not like, "Oh, I can just game my great target, and then I'm home free." That's gone. What are some of the results? In the last 3 years, these are a few of the areas where we started the transformation earliest, and I want to share. So in product development, we've increased the number of molecules in late-stage development by 50%, and we've done that with 4% more people. We never would have thought that was possible. In the technical organization, which is manufacturing and quality worldwide, we've increased volume 38%, and we've done that while reducing head count by 18%. And we never would have thought that was possible. And by the way, we never started with targets. We started with how do we do things better? How do we do things faster? How do we put the customer at the center? And we let the spending, the head count, we let it fall out where it falls out based on those things. In the U.S., perhaps the most dramatic change, 40% increase in sales growth. And by the way, that was launching in new therapy areas, in MS, in hemophilia, expansion in cancer. But we've done that with a 6% reduction in head count. And again, these are things that we never would have thought was possible. Let me move on now to the topic of new medicines. I mean this is a huge area. It's something we're really passionate about. And again, we're relentlessly focused on improving the outcomes for patients. You've seen this chart if you've been following us over time. This idea, they have the products in the gray that are the older products. These are the ones that will be exposed to biosimilar competition. And then the answer was like, how do we replace those and extend into new areas? And every year, the list of products in the blue and the sort of peach color has grown, and I think we've continually surpassed our expectations. By the way, the erosion of our older products by biosimilars has pretty much happened according to the plan we had a few years ago. So in other words, our success in continuing to grow has been pretty much entirely based on our new product success, whereas the biosimilars have kind of fallen where they would and -- but the goal over time is to grow beyond that. And I think we're well on track to do that. Here's some examples. In breast cancer, you can see breast cancer has multiple parts. But I shared a chart that we published at San Antonio Breast Cancer in December that showed the 6-year follow-up on the APHINITY study. This is the intention to treat population, the whole population. There was only a 1% delta at 3 years, but it's 6 years that it expanded to 3 out of 100, a greater yet effect for the high-risk population. This is the example of the kinds of data that are fueling additional growth in breast cancer. Ipatasertib, a product I'll talk about later, being studied in triple-negative and HR-positive breast cancer; Kadcyla, now in adjuvant disease. So some really good progress in breast cancer. In hematology, likewise, really a wealth of products ranging from Gazyva, which is a more potent anti-CD20 antibody; VENCLEXTA, which has made inroads in CLL and is being studied in multiple myeloma and other diseases; and then a number of data from bispecific antibodies. I shared a couple up here. Mosunetuzumab, which was in the plenary at ASH because this is in CAR T-treated patients, so patients who've had CAR T therapy and then relapsed. And we were able to show a 39% ORR in those patients. So a pretty remarkable result from a well-tolerated sort of off-the-shelf therapy. And we also showed at ASH results from another bispecific antibody, the CD20, with a 2:1 format allows it to be dosed along with Gazyva and pretty -- again, pretty remarkable results, complete responses in over half the patients. So this is, I mean I think a foretaste of some of what we have to come in hematology. Tecentriq has had a remarkable expansion, tremendous growth in 2019. Tecentriq is the first product, first cancer immunotherapy approved for triple-negative breast cancer, first cancer immunotherapy approved for small cell lung cancer. In Q4, we showed data, and you can see it in the bottom-right corner of the slide. This is the data for Tecentriq plus Avastin in liver cancer. There's over 900 patients per day diagnosed with liver cancer in China alone. So it's a remarkable opportunity to do great things for patients. And that's going to be an important driver for things to come. Let me just mention briefly some of what we have going on in immunology and ophthalmology. There's a very high unmet need in autoimmune diseases. An example of that would be inflammatory bowel disease, where there's a number of products available, but the remission rates and particularly the long-term remission rates are very low unfortunately. And we have 6 Phase III studies and 2 large open-label studies that'll be reading out in 2020 and 2021 in ulcerative colitis and Crohn's disease. That includes head-to-heads with Humira and Remicade. And I think we've got amazing opportunity to advance things with etrolizumab. It's a dual integrin inhibitor. It's a novel mechanism of action that hits anti-alpha, alpha 4 beta 7 and alpha 4 beta E (sic) [ alpha E beta 7 ]. So look out for that, starting in mid-year. And then in ophthalmology, we have 2 Phase III programs, one with the port delivery system for LUCENTIS, which will afford the ability to treat patients twice a year instead of monthly or bimonthly injections. And we think both of these could be really meaningful additions to the ophthalmology portfolio, fight against diseases like macular degeneration and diabetic macular edema. Neuroscience has been a huge new area for us. OCREVUS, now in the market for almost 3 years. We're really pleased with the ongoing progression of OCREVUS, its ability to benefit patients with both primary progressive and relapsing disease. There's a lot more coming behind it. Satralizumab for neuromyelitis optica and risdiplam for spinal muscular atrophy, those are products that we plan to launch, both of them this year. And then we also have important programs in Huntington's disease. We hope to have the first treatment ever for Huntington's disease, which is a large population and a terrible disease and a very high unmet need. Also promising programs in Parkinson's, Alzheimer's and autism. So quite a rich pipeline in neuroscience. We think that neuroscience has the potential to be, in the '20s, what oncology has been in the last decade, and we have a very strong scientific and development effort there. All right. Let me just mention briefly. I mean one of the things that makes working at Roche a lot of fun actually is just all the cool science and the many different modalities that we have. I list a few. In the small molecule category, I don't know if you saw it, but we now have 2 new molecules going into Phase III in hormone-positive breast cancer. That's a PI3 kinase inhibitor. It's got a very clean profile, and we're excited about its prospects for combinability with other therapies. And also a selective estrogen receptor degrader, a SERD, which likewise, it has -- so far has a very clean profile, and we're really excited about the combinability of that one. And so those are both going into Phase III, in combination studies. We have the bispecific antibodies. I mentioned a number of those, fusion proteins, monoclonal antibodies, antibody drug conjugates, and I mentioned, Kadcyla with an additional launch, but we launched Polivy last year in relapsed/refractory DLBCL. And we're also working with personalized RNA vaccines and personalized T cells. So quite a wide range. In addition, we're very pleased now to have the ability to work with Spark. We closed on the acquisition in December. The partnership discussions are progressing at a very fast pace. I say partnership because we plan to have Spark to remain in Philadelphia and to be our global hub for gene therapy. They have tremendous expertise in the viral vectors, in process development, in manufacturing of gene therapies, also some specialized commercial skills there in terms of alternative reimbursement models that they've put forward and now have in place with a number of insurers. And so we're really excited about the ability to bring their expertise in gene therapy with our global therapeutic area expertise and global reach. And I think you can expect to see some really great things from that collaboration in the future. Let me just close with a few words about the personalized health care revolution. This is a journey. I remember 7 or 8 years ago, when we were talking about the strategy, we conceived these things. What if you had every cancer patient with a molecular profile? I mean what if you had real-world evidence that can be used in place of registries, expensive and not very productive registries, or even in the place of control arms in clinical trials? It was all hypothetical then. And it's pretty amazing to be standing here in 2020, and all that is a reality today. We're using in research and development, in getting to market and getting access and then for patients' decisions. For example, real-world evidence is becoming almost a standard part of regulatory filings in oncology. In some cases, sort of as a contextual control arm. In other cases, it's for payers. I mean this is an example of alectinib, ceritinib. There was a mix of clinical data and real-world data. And these are the kinds of questions that payers have. And the ability to go to a 2 million-person database at Flatiron Health and extract the patients that look like the patients in a clinical trial and to provide that additional context to regulators, to payers is a tremendously powerful thing. We have a number of registries, post-marketing commitments that were requested from regulators that we were able to take real-world data and go back into the regulator and say, "Hey, you know that post-marketing commitment you asked us that was going to cost $10 million? Well, here's the real-world evidence that answers your question. Are we good?" And they say, "Yes, take that one off the list." So there's a tremendous power here and also for patients with now well over 100,000 patients getting the benefit of foundation medicine testing to have the best shot at the right therapy for them. All right. Let me just summarize with the sort of near-term outlook in terms of important readouts. So I mentioned the launches in neuroscience. I mentioned etrolizumab, these are on the left side, and the Phase III readouts in ophthalmology. These are all coming in 2020 and in areas that I think will be immediately into launch mode and moving forward. So really exciting stuff there. On the oncology side, it's a long list. I won't even try to get through it all, but let me highlight a few. The liver cancer data, very exciting. We've already shared it with regulators on at least 3 continents. They're as excited as we are because the unmet need is so great. And so we are rushing forward with that with all speed to make sure that patients have access as soon as possible, including in China. In Tecentriq, we also have neoadjuvant data coming in triple-negative breast cancer. And very exciting, we're going to have some of the first really solid adjuvant data for a cancer immunotherapy in the form of bladder cancer adjuvant data this year for Tecentriq. I think another one I'd point out on Tecentriq that's an exciting new frontier for cancer immunotherapy is a combination of Tecentriq plus Avastin plus chemo in first-line ovarian cancer. Again, high unmet need remains, and we're really excited for the potential. Particularly with Tecentriq and Avastin, we've seen really great things in some other tumor settings. A couple others I would highlight. Ipatasertib, which is a new molecule. We showed it at -- some Phase II data or Phase Ib data last year at AACR with, I think, it was a 73% response rate in triple-negative breast cancer. I mean you don't see that. And this was a combination of ipatasertib with chemo. And now we've got actually Phase III data because we had already commenced those studies. We have 3 Phase III or pivotal studies reading out with ipatasertib. And that one I think has been a bit of a sleeper, but now we're going to be hopefully bringing that to market very soon. And then finally, I would highlight Tecentriq adjuvant data coming in '21 and '22 in lung cancer. And Polivy, a readout in first-line relapsed/refrac -- or sorry, first-line DLBCL, which could be a new standard of care for aggressive lymphoma. So a very exciting set of products. I mean all of this makes us increasingly confident that we will grow through the period of biosimilar erosion. And it's very exciting I guess in 2020 to begin a new decade with this outlook, and we look forward to continuing to bring great things to patients. And thanks for your support through investment. Look forward to talking to you at the breakout.

Good afternoon, everybody. I'm Chris Schott from JPMorgan, and I'm joined by my colleague, Richard Vosser, and I want to thank you for joining us for our annual drug pricing panel. This is becoming even more controversial topic over the years. And today, we're pleased to have Giovanni Caforio, the Chairman and CEO of Bristol; Bill Anderson, CEO of Roche Pharma; and Steve Ubl, the CEO of the PhRMA trade association, to discuss some of the key controversies, misconceptions and initiatives to address this very important issue. So I thought, Steve, maybe you could kick off with some comments on your priorities, what you're focused on, and we'll kind of jump into the broader discussion from there.

Great. Thanks. And I'll just keep my comments brief and high level, and we can jump in, in the Q&A. It's obviously very exciting to be -- for us to be at a conference like this and to hear from the companies. We're obviously living in a very exciting era, where the industry is really delivering enormous advances in the science and improvements in public health, whether it's immunotherapies, CAR T cell and gene therapies, for SMA, sickle cell, hemophilia, the innovation cycle in the companies is incredible. And yet, all of those innovations are meaningless if patients don't have access to them, which is why the industry really is in a posture of not supporting the status quo. We believe the system needs to change in important ways. And hopefully, in the course of discussion, we can talk about some of the concrete solutions that we would like Congress and other policymakers to adopt. At the same time that we're seeing this incredible innovation, drug spending and drug prices are actually rapidly decelerating, both of which are growing under the rate of inflation. But for a variety of reasons, patients aren't feeling the fruits of the competitive marketplace. I mean as you know, we have a very consolidated marketplace where 3 PBMs control 90% of the market. They use that leverage very effectively. It's a big reason why cost growth has been constrained. But over the same period of time, the last few years, our companies' revenues have been growing under the rate of inflation, about 2.6%. Out-of-pocket costs for patients have grown substantially, 50% over the last few years. So in our view, we need to continue to focus on rationalizing the supply chain and other discrete reforms that would actually lower what patients pay at the pharmacy counter, because unless we do that, we're going to be still in this vicious cycle where even if Congress passes drug pricing legislation, patients aren't going to feel the benefits of it, and we're going to be right back at it. So we want to make sure that Congress acts in a balanced way. We understand there's going to likely be pain involved in any drug pricing legislation, but we want to make sure that any offsets involved really go to other reforms that lower patient out-of-pocket obligation. So maybe I'll stop there. We can talk more specifically about those ideas in the course of conversation.

Excellent. I mean you referenced that the rise in out-of-pocket costs going up substantially, and that being a barrier for patients getting access to the drugs. If we think about the latest proposed solutions that have come out of Congress come out of the lawmakers, it doesn't seem to address the issue head-on or at all. So I mean Bill, from your side, thoughts on solutions for this from your point of view?

Yes. I think agree with what's been said in terms of the importance of getting access to these life-changing therapies for patients. I mean that's really such an important part of it. I mean we think there are market-based approaches that can work. Most of the situations we have that result in these strange outcomes, where the pharmaceutical inflation is 2.6% in terms of the revenues to innovative pharmaceutical companies, but patient out-of-pocket costs are going up 50% over the last 5 years. These are places where the healthy market mechanisms are not being allowed to act. So for example, rebate reform is something that it has to be a good idea that we don't have middlemen, institutions, hospitals ending up with almost half of the revenue of pharmaceuticals goes to the channel, hospitals, pharmacy benefit managers. And so we think rebate reform is a no-brainer. It's good for patients. Just say if rebates are negotiated, the patient has to at least participate proportionately in that, but better yet, clear it out in a more substantial way. In Part B and hospital-acquired medicines, we think this is an area where there's not much market action allowed to happen, because of the ASP mechanism, it actually -- it creates a sort of a perverse situation where discounts are not easily provided because the discount that's given to a payer automatically comes out of the providers, and then the providers are not able to afford the medicines. So we've proposed something called market-based pricing mechanism in Part B that basically splits out those sorts of discounts and allows the market to behave in a healthy way so that we can have more market-based competition in Part B. So I think it's really important to note that the industry and companies are coming forward with concrete solutions and proposals that have the effect of lowering the cost for insurance companies, lowering the cost for government, lowering the cost for patients and increasing competition. But unfortunately, the solutions that are being proposed in Congress right now, something like IPI, those are not addressing any of those things.

And Giovanni, from your side, your thoughts on this issue?

Well, I must say I agree with what has been said. I -- from my perspective, what's important is I see a clear willingness from the industry to move forward, as Steve and Bill said, with the reforms that are going to be helpful for patients and willing to play a role in enacting those reforms. We agree that there is a significant issue. When you look at the speed at which out-of-pocket exposure for patients, for seniors has increased, it is not sustainable at a time in which our companies are bringing forward very innovative medicines that can prolong lives and change the course of serious disease. So there is a real need for reform, and there is a real need to realign the incentives in a way that the market works for patients because that's not happening today. So I think it is about reducing out-of-pocket caps, reducing -- introducing out-of-pocket caps, reducing the contribution of patients to the cost of medicines overall. In some cases, we see patients paying disproportionate amounts at the beginning of the year. I think there is a real opportunity to spread that cost throughout the year to make it more manageable for patients. But I think I want to just go back to what Bill said. I think this is the only country where we see that 46% of the cost of medicines goes to the distribution chain and does not go to the innovators. So I think it's important to use that 46% to make medicines affordable for patients. And there are real solutions that can be implemented today. I must say there are some policies among the policies that are being proposed, specifically in the Senate, some of those policies go in the right direction, and the industry supports them. But there is clearly an opportunity to do more.

Right. And I guess this topic of something has to happen because I just want -- the debates we have I think in the investment community is, is there's just a lot of noise, and we're going to not see a lot of actual action come out of this, given that there seems to be many different views to how to address this problem, but no consensus view of how to fix everything. So do you think we've reached a point in terms of the amount of noise and frustration with out-of-pocket that, one way or the other, that there's going to be some sort of change in the system as we think about the next, let's say, 1 to 2, maybe 3 years?

Maybe I'll jump in. I -- like Giovanni said, I'm sort of optimistic. If you look at the course of the debate on drug pricing, there is now broad bipartisan support for focusing on lowering patient out-of-pocket costs, whether it's capping out-of-pocket costs, as Giovanni said, or spreading those costs across the calendar year, if a patient has high out-of-pocket obligations, say, in January before they meet their deductible, lowering cost-sharing outright from 25% to something lower, whether it's 20% or 15%, rebate reform, as Bill mentioned, a lot of these ideas have bipartisan support. And it wasn't always the case. I mean there is a bit of a philosophical view that more skin in the game is a good thing. So the fact that we now have both parties sort of aligned around some of these affordability reforms I think is quite significant. If you look at the work of the Congress on drug pricing, there's a number of bipartisan bills that have been worked through the committees of jurisdiction on things like modernizing the Part D benefit, the Part B benefit, IP and patent reforms, transparency. To be honest, we don't love every aspect of every one of these bills. But if Congress wants to act on drug pricing, they're -- the contours of an agreement are there in terms of broad bipartisan legislation that could be enacted. The real question is whether there's -- politics will supersede those discussions. We've unfortunately seen some bad sort of bumper sticker policies, whether it's Medicare setting the price or letting the French Health Minister set the price or other artificial caps in the Medicare program. So the big question is really will policymakers pursue this pragmatic path where there are bipartisan reforms that would lower out-of-pocket costs, hopefully rationalize the supply chain at the same time or move in the direction that's more political, frankly, we think would slow the advances in science that we're seeing and move in the wrong direction. And so we'll be working in both directions to try to dissuade policymakers from price controls and advance a more proactive patient-centered set of solutions.

And maybe the coverage gap proposals, it's specifically proposed by Senator Grassley. I mean just your thoughts there in terms of the impacts. Or that doesn't really solve the out-of-pocket costs, but just your thoughts.

I think the sentiments are in the right direction. And I mean I think that's the ground where we can start to have that discussion and say, "How do we really address this patient out-of-pocket requirement?" Because you asked the question, Chris, about whether something really must be done or is this just noise. And I think what's different, I mean I think some of the debates are similar to debates that happen even back in the '90s. But what's really changed is the patient burden. I saw a study recently that showed that patients pay for about 3% of the cost of doctors and hospitals, and other sources, mostly insurance, pays for the other 97%. But on medicines, it's 16%. It just doesn't make any sense. There is no rationale why you should put this high burden on medicines. And I think we could talk for a long time about, like, how did it come to be that way and why is it that way. But the fact is that's how it's set up right now. The system is really punishing the use of medicines. And it doesn't make sense when you have medicines that can radically change a disease or even provide a cure but there's this affordability crisis. So absolutely, we have to address it. I think the bipartisan approach is going to be the only way it's going to work. Because if it's sort of an ideological-driven approach, where there's -- where it's about scoring political points, that's not necessarily tackling the real need, which is to solve the patient out-of-pocket costs but in a way that supports innovation for the future.

Yes. And just a question for Steve. Do you think that we're going to see a Grassley-type bill passed that kind of address this all at once? Or is this going to be solved in like maybe small incremental steps, where we'll kind of pick up a piece of it here and there and maybe we'll hit the right place in a few years, but it's -- I guess especially coming back to that issue of -- with such a polarized kind of environment, can you actually get a bill forward in this setting, I guess?

Yes. My own view is that legislation tends not to pass in the sort of one big bill sort of in a schoolhouse rock fashion, where it starts in the house. It's modified, sent over to the Senate. There's a conference committee, et cetera, et cetera. It just doesn't work that way anymore. So it's much more likely that it would be a part of a broader must-pass fiscal bill that the Congress is considering. And in this case, this year, you have what are called health care extenders, a whole set of programs that were extended at the end of last year on a short-term basis till the end of May. And they'll have to be acted upon then. So that's a logical point at which you could see drug pricing enter into the mix, and it remains to be seen what the scope of that would be. So for example, when they extend it until May, they included the CREATES Act to help pay for the other health care programs to be extended. You could see it be done like that, in an isolated sort of more modest basis to extend those programs further or it could become a much larger vehicle. But again, I would point people to look at the House Republican alternative on drug pricing, even H.R. 3, the Grassley-Wyden bill for the areas of overlap, where there is bipartisan support. And again, we think some of those provisions need important changes on the margins. But again, there is a pathway to legislation coming together.

Maybe a question for Giovanni. There is a perception I think that kind of injectable drugs prescribed in hospitals are highly priced, and there's not really a mechanism for price control in Medicare Part B. I guess it clearly seems like IPI has been proposed solution here. Maybe just walk through the problems you see with IPI and what maybe alternatives we could consider to kind of -- I think, Bill touched on this earlier, but just kind of address some of the kind of the -- this perception issue. It's not a -- there's not a relief valve I guess in terms of negotiation.

Yes. I think that from my perspective, you can look at this issue from multiple points of view. So first of all, I would start by agreeing with Bill, that there is an opportunity to have more competition in Part B for hospital products if you use market-based solutions, and there are concrete proposals on the table that would accomplish that objective. The second thing that I would say is that looking at foreign countries is really not the right thing to do because when you look at what is happening outside of the U.S., particularly for specialty care medicines, there is a real gap in terms of availability of new medicines in the specialty sector outside of the United States. And there are multiple different statistics. It depends on what therapeutic areas you look at, what time frame you look at. But there is up to 50% of the medicines that were approved over the last few years in the U.S. that are not available to patients outside of the U.S. There are countries where 5 years after YERVOY and Opdivo were approved as the standard of care in first-line melanoma, patients still don't have access to the combination of YERVOY and Opdivo. And so I think that looking at the policies of those countries to bring them into the U.S., I think it's the right -- wrong thing to do. I would say that we should be thinking about how do we do the opposite. And we should be thinking about how the U.S. government helps an industry which has become primarily a U.S. industry, quite frankly, be more successful in defending the value of its innovation as part of trade deals and the overall industrial policy of the government. I think that would be much more important for us. The other thing that is really important is that across multiple segments, including the hospital sector, the markup on drugs is extraordinary, and it is used by hospitals to maybe compensate parts of their businesses, where they may not have the right margin. But that's not what our system should be rewarding. So there are studies that have demonstrated that for specialty care medicines in the hospital, the average markup is in the range of 500%. And that's not healthy. And so I think that's a really good example of how you have to look at the entire system and find a way to realign incentives because right now, I think, over time, they become really misaligned, and that includes the hospital as well.

And just, if I might, to build on Giovanni's comments, because we released a study on this in the last few days, Bill alluded to this as well, that we work with the Berkeley Research Group to look at the supply chain 3 years ago and have found that our companies were retaining $0.60 on the dollar over price of a medicine. 3 years later, it's 50%. But another key aspect of the study, looked at hospitals and actually other providers, their share of what they're absorbing has doubled in the last 3 years. And a big part of that is because of the markups that Giovanni mentioned, but also hospitals are marking the product up by 500% to 1,000%, they are oftentimes acquiring it at a 340B discount at 50% of the list price. And so that delta is growing over time. And it's not unlike the rebate issue that has been discussed earlier, where those rebates, if you will, are not flowing to the benefit of patients. Hospitals have very little obligation to not only report in a transparent way where those are going, but they're certainly not going to lower their patients' drug costs for drugs that they're consuming in the hospital. And one last stat on the hospital side that was really -- has really stuck with me, even though hospital spending is nearly $1 trillion more than drug spending, it's about $850 million, out-of-pocket spending for medicine is greater than out-of-pocket spending for hospitals. Think about that for a moment. Almost $1 trillion more in spending, but there's greater out-of-pocket obligations for medicines. We have to get to more equilibrium where insurance is insurance again if we're going to ensure patient access to these new transformative medicines.

Yes. I mean just you touched on 340B. And there is -- is there any sort of linkage with reform? You've touched on market-based mechanisms, where the government or the lawmakers are thinking, "We'll reform 340B at the same time." Is that an element that we could see?

Well, I think -- first off, I think everyone agrees that hospitals that care for a high proportion of indigent patients deserve financial support. In fact, I was just in one of the local county hospitals last week, just in -- and seen 90% of their patients are indigent patients. And the things they're dealing with, sexually transmitted diseases, abuse, I mean drug addiction and in addition to many other illnesses. So the work they do is amazing, and the 340B program has all the right intent, but unfortunately, with some of the changes that were introduced as part of ACA, the program has expanded beyond, I think, the original intent in multiple ways, including with all these sort of acquisition of satellite practices, and there's become sort of a cottage industry, in how to sort of maximize 340B revenue. And so I think it needs a serious look to make sure that we preserve the program for its original intention and that we don't -- that it's not jeopardized. But I think there is something about this idea of putting the additional subsidy for hospitals on the price of medicines that's a bit tricky. Again, the intent was good. But if what it does is it creates these inflated bills of medicines, it sends a distorted view of what the real health -- the health care economics are. So I think it would be good to reform it. I don't know if it all can be done in one go or whether there needs to be separate approaches, one for 340B and others for drug pricing.

I think it's more likely to occur administratively than it is legislatively, candidly. At one point, we looked at how many members of Congress don't have a 340B hospital in their district, and the number is you can count on one hand. There's now 50% of the hospitals in the country that access the 340B program. And just to build briefly on Bill's comments, I think there are much larger system issues, not only is it a distortion, obviously impacts pricing when 50% of the market gets a 50% discount, but there are much larger issues. It's fueling consolidation. It's fueling site of service changes from community settings to hospital settings. It's fueling the prescription of higher-priced medicines because the delta is greater. So it's pernicious. And we're hopeful that whether it's in the legislative context or more likely in the administrative context that it gets addressed.

Let me go back to a point about the out-of-pocket dynamic. Do you feel the consolidation we've seen of the PBMs with the insurers that we saw the past few years can maybe change the dialogue at all? Because it seems like some of the challenges around these topics are becoming more and more complex and require solutions beyond just increasing rebates. And conceptually, it seems maybe like an end-to-end provider might be more focused on that type of discussion than with the structure we had going back a few years. Is that something you should think about? Or is it just wishful thinking, I guess?

I mean in theory, vertically integrated PBMs and plans should be more focused on total cost of care. And I think about just what we're talking about in terms of the 340B program. It's entirely possible. But their shared interest, right, I mean it's not in the payer's best interest to not address the issues that I raised before. So I think we do need to look for opportunities to work together. However, I do think the business model, the PBM business model has -- is flawed in certain ways that end up driving price higher and out-of-pocket costs higher. And if you look at the PCSK9 example or Lilly launching an authorized generic of insulin, plans are not picking up, it just shows the misaligned incentives that the PBMs and plans are still preferring higher-priced, higher-rebated medicine. So we absolutely have to address those incentives. We have to get the whirlpool kind of spinning in the other direction where you have incentives to lower price.

Yes. The one thing I would add is, in theory, you would want a more integrated system because in theory, you would want somebody to be able to look at the totality of health care costs and make decisions that are in the interest of patients. Because when you look at the totality of the cost, then drugs are cost-effective, and they reduce costs of hospitalization, the cost of managing side effects, et cetera, et cetera. So I don't think the issue of consolidation is necessarily the core issue here. I think when I look at the role of the PBMs and when I look at the rebates of $170 billion of rebates in the U.S. every year, the real issue is not the competitive marketplace where the rebates are extracted. The real issue is that the rebates are not used to lower the exposure of patients to the cost of care. The rebates are using -- are used primarily to actually reduce the monthly cost of healthy individuals, the premium for healthier individuals. So I think that we have a system here where incentives have turned 180 degrees from what insurance should be, which is to actually pay your premium to ensure that when you are sick you are covered to a model where now when you have a chronic disease, you have a very high economic burden, and the justification that is provided is that it's keeping premiums lower for healthier individuals, which is really not the way insurance should work. So for me, the issue is not really consolidation versus nonconsolidation or even the ability of PBMs to manage formularies. To me, the issue is do we use that rebate and that negotiating power to benefit patients with chronic diseases or do we actually penalize patients with chronic diseases to keep premiums lower for the total population. So that, to me, is a really big issue. And I think it's fundamental to the business model of that part of the supply chain, and it's one of the policy issues that we need to deal with.

Okay. Absolutely. Maybe shifting gears a little bit here, kind of moving to responsible pricing and value-based pricing, I think some of the big topic across the industry. So I guess how does the industry address the debate of pricing new drugs to address both concerns over high cost but also ensure a strong uptake of the drug and access to those medications as it seems like that's going to becoming a more and more kind of central topic with all the innovations across the space?

Do you want to start, Bill?

Yes. I think the innovator companies have an obligation to think -- when they're pricing to think about a variety of factors, including paying for the next innovation, recouping investment but also making sure that patients have access. And I think we've taken that responsibility very seriously. I think there's a number of examples, and we have some of them where drugs that represent a big breakthrough in terms of advancing treatment are also priced at a very reasonable level. I mean we saw this -- we launched an MS therapy, OCREVUS, several years ago. That's the first MS therapy to be approved to treat primary progressive MS, a very severe form, and we priced it actually lower than the other MS therapies because we looked at value, and we thought the price level was too high. And also we noted that some of those drugs had large rebates, and we were trying to kind of cut through that and make sure that the savings were passed on to patients. And so we did that. I wish I could say that everything worked out happily ever after, because what we saw was because some providers, hospitals attach large markups on the price of the medicine that, in some cases, it could still end up being at a much higher price. And so this is -- again, this is why we're talking about reform and -- but it's back to -- you say, "Well, how could they do that?" And it comes down to market power. If a hospital has a high level of market power in a locality or a hospital chain, they have the ability to sort of dictate price. And that's I think one of the reasons why, as an industry, we're talking -- we have a something -- we say, "Let's talk about costs. Let's get into it." We're not afraid of transparency because the -- when you get the facts out on the table and you see a medicine that cost $1,000, but the bill from a hospital is $8,000, we need to talk about that, and we need to lay that out. So I do think that as an organization, the pharma is really kind of insisting on high standards on this, but we need to make this a wider discussion. It can't just be about medicine manufacturers. It needs to be about the whole health care system.

Yes. I would add, we obviously all spend a lot of time really thinking about what is the right price for a new medicine. And we look at the value it delivers to patients, the value -- the impact it has on total health care costs before we price a new medicine because ultimately, unless it reaches a patient that can afford it, we don't, first of all, do our job. And second, we don't generate value. I think there are other areas we should be working on. The U.S. is one of the markets where it's the most difficult, for example, to really think about pricing combination of 2 drugs differently than the sum of the 2 drugs. That's possible in other parts of the world. And the future of specialty care medicine is combination therapy. There is no flexibility in the U.S. market for pricing 2 drugs that are part of the combination regimen differently than the sum of the 2 individual drugs. I think we want to have more flexibility there. We would like to be able to have easier access to value-based arrangements, where we are rewarded based on the outcomes that our medicines generate for patients. There are some pilots in the U.S. market. But there are some real barriers to adopting value-based agreements in the U.S. It's very difficult. In fact, it's not possible to price the same medicine for 2 different indications differently. And sometimes, we actually develop medicines for 2 -- the same medicine for 2 indications that are diseases that are fundamentally different economic considerations. And so there is so much we could do if we started really thinking about what is a model that makes sense and what is a model that works for patients and that also continues to support innovation. But I think that's why I believe that if we move the dialogue from being a political dialogue to be a policy dialogue, I believe it won't be very difficult to find solutions that actually work for all of the different stakeholders.

I participated in a panel discussion this morning on cell and gene therapies that was -- I think this is an area where collaboration with payers and PBMs will be quite fruitful. The discussion focused on a variety of different novel approaches, whether it's prevalence-based approaches, installment, subscription models, other value-based approaches. But as Giovanni said, there are some public policy barriers to moving in that direction. There's 3, 1 of which has already been addressed by the FDA. It used to be difficult for our companies to even engage payers before a product was approved. FDA has addressed that through guidance. The 2 other barriers are, one, Medicaid best price, where if you have a value-based arrangement or if the patient doesn't respond and the reimbursement rate is 0, you obviously don't want that to factor into your best price calculation. And then there's the anti-kickback issues, where typically you have wraparound services that go along with a value-based approach to encourage adherence, for example. And heretofore, the government views that as an inducement to use the product. It was really -- those laws were really built for a fee-for-service world that doesn't exist anymore. And the administration has been focused on overhauling them. So hopefully, all 3 of those barriers can be addressed in a way that makes it less of a gray area for companies to engage in those discussions because obviously a more granular discussion around performance of the product is better for everyone. It's better for plans because they get information about a product outside of the clinical trial. So when they get that information, they tend to lower the patients' out-of-pocket burden. It's better for patients because they pay less, and it's better for our companies, I think too because we're not disintermediated by other stakeholders in the discussion. Our companies know more than anyone about their products. So it's much better to be involved in a performance-based discussion with a plan than have ICER or other third parties determining value.

Do you think there's enough data out there to be able to implement these value-based pricing? So you know -- following the patient, do the pharma companies have enough data to sort of prosecute a value-based approach with the PBMs?

Well, I know -- speaking of innovative pricing models to start. I mean we have -- I think in about 20 countries in the world, we have indication-based pricing arrangements. Similar to what Giovanni mentioned, the idea that you're going to have one medicine that has a very different level of value in one disease than another, and it's very difficult because what do you do? Do you price it in between, and sort of no one is happy. But actually, that we're able to track how is the medicine being used, which indication is it, and then we have an ability to pay or receive payment based on that. That also comes into use in this combination pricing that if you have one medicine, you'd add it to another, that the sum doesn't have to be -- the total doesn't have to be the sum of the parts, but it could be a substantial discount. And we have those systems in place, and we have the data, and we're able to collect it. I don't see any reason why we couldn't also achieve that in the U.S. And I think -- I don't think the primary obstacles in this day and age are technological. They're more policy and the kinds of barriers that Steve mentioned.

Yes. I could mention one of our products. We have over 2 million patients that we follow longitudinally, real-world data around the world, and we are able to discuss with payers what happens in terms of total utilization of health care resources when a patient uses our medicine as opposed to other medicines or how does it impact the total cost of care for each one of those payers. So the data is available, in fact, and I agree with Bill. I don't think technology is the barrier. In oncology, there are many companies that have larger and larger data sets that enable us to look at the real-world utilization of oncology medicines, the effect on survival and the overall utilization of health care resources across multiple lines of therapy with a lot of data, including genomic data. And so there is no shortage of data that could support. And in fact, if those agreements were possible, they would be beneficial. They would accelerate the integration of data at the health plan level because they would be useful tools.

Just going back to some of the novel pricing models with -- as we've seen some rapid advancements in science. I think we mentioned gene therapy, things like CAR T. We have agents with a very high onetime cost associated with them. Where do you think we end up in terms of pricing models for agents like that? Is it going to be the systems we're seeing today? Or do you think we end up at a different place looking down the road a few years?

So I'll start briefly. But from my perspective, I think we have to evolve to different models, where -- and you mentioned particularly for onetime administrations of high-cost therapies, there is a clear opportunity to really think about different models, whether that's paying for an outcome or whether there is -- there are installments over time. It is clear that when you have a CAR T intervention, for example, the onetime cost of administration is high, but it actually should be compared with the prolonged administration of a chronic therapy and potentially multiple lines of therapy used over time. And so I think there is real opportunity for thinking about different models. All of those models, though, require more flexibility.

Yes. I think for gene therapy, in particular, is now -- I mean it's one thing in an oncology setting, in a chronic care setting, where you have a therapy that could provide a benefit for, I don't know, 20, 30, 50 years. And so the cost of that all upfront could seem really prohibitive, and yet the savings can be enormous. And I think it's encouraging to me. I know I heard recently from Spark that they had said for their LUXTURNA, the eye treatment gene therapy, that they believe in the U.S. Now, virtually all privately insured patients are covered under various, in one way or another. But they've been flexible. They've been able to craft some innovative arrangements. So I mean I think it's positive progress. We're really in early days on gene therapy. But I think it's important that we progress that discussion.

Maybe moving topics and turning to Steve and the topic of the FDA. Just the agency has made a lot of progress there with the industry in terms of faster approvals, et cetera, under Scott Gottlieb. So what are you focused on as the new leadership comes onboard at the FDA? What can they still do better interacting with the industry?

We are approaching another PDUFA cycle, so we'll be engaged with the agency in that regard. But I must say, I've been impressed with the agencies. There's 2 things happening. One is the science is changing in a way where patients are having more pronounced effect. They're seeing things earlier. It gives them more confidence to act more expeditiously, and they have more tools to measure performance, pre market and post market. So I think frankly a lot of the criticisms of late have been misplaced in the sense that more products are being approved, and they're being approved more quickly. So on balance, I think there are larger issues candidly and working through some of the issues we talked about earlier in terms of the course of public policy. But of course, there are always opportunities to ensure that the agency is able to recruit and retain talent. That tends to be its largest issue, making sure that things like real-world data are being incorporated into reviews, not just on the post-market side, but increasingly on the pre-market side. So there are incremental steps we can take that we look forward to working with the agency on.

A couple of areas that I would mention in our interactions with the agency as an association. First of all, there is a real desire to invest in technology and upgrade the capabilities and infrastructure of the agency from a technology perspective. I think we see that very positively. The second one is consistency across divisions. We, personally as a company, have had more opportunities to interact with the oncology units. And I would echo what Chris -- what Steve said in terms of the openness to really look at the value of new medicines and the flexibility in terms of looking at real-world data and moving rapidly. I think having consistency across units is very important. There is a real need for the agency to continue to accelerate the development of guidance documents, for example, because with gene therapy and cell therapy and many new areas coming, I think there are clear areas where the agency is evolving their positions and continuing to move towards publishing clear guidance position for the industry. I think it's important. These are all areas that I know the agency is focused on, but I think they're all important areas that we as an industry are looking at very carefully.

Great. Well, it's been a great discussion. I think there's a lot of important points raised here. And it seems like we're -- I think we've been doing these panels for a few years. It does seem like we're making kind of more and more specific kind of approaches of how to maybe address this pricing issue that seem to kind of pop up and kind of consume the group for a bit. So hopefully, we'll start to see some progress on this front as we go through the next year. But thank you guys so much for joining us. It's a very informative panel. So thank you.

Thank you.

Thank you.

Thank you.

Thanks, everyone.