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1. Trump’s controversial order to test capped Medicare payments for Part B & D drugs
  • Specifically, the order directs Health and Human Services (HHS) to implement rules to test capping Medicare payments for drugs at a “most-favored-nation price” – the lowest price at which a given manufacturer sells a drug to any other developed nation. The order encompasses both Medicare Part B drugs (given in doctor’s offices and hospitals) and Part D drugs (retail purchases). It has limitations, however – the order focuses on testing rather than full-fledged implementation; selects for certain high-cost drugs and biological products (not yet defined); and compares only with prices in countries with a similar per-capita GDP (with prices adjusted for volume and national GDP differences).
  • Americans spend $1,229 per capita annually on prescription drugs – the next closest are Germany and Switzerland, where residents spend less than $900 per year. US drug prices can be as much as 2x to 6x the price in the rest of the world, and 14% is paid by patients out of pocket. Prices have also been rising at 4.5% per year (after discounts), well above the rate of inflation. In the US, the federal government is the largest payer, with Medicare accounting for 30% of total drug expenses and Medicaid accounting for another 16%. In 2019, the government spent $97B on Medicare Part D drugs – but is not allowed today by law to negotiate their prices directly.
  • The executive order, widely considered to be politically motivated, targets the 30% of US adults who consider a candidate’s position on lowering drug prices to be one of the most important issues influencing their vote. The same poll also saw 75% of Americans in support of direct negotiation by the government with drug companies – which is common in European countries and an issue not addressed by the executive order. The omission has left some skeptical that the rules will be implemented with the same boldness as how the executive order was written.
  • On the other hand, the pharma industry continues to be very profitable, averaging a 13.8% net margin – significantly higher than other large public companies (which average 7.7%). Pfizer, the largest pharma company in the US by revenue, had a remarkable 29% net margin (37% non-GAAP) in its most recent quarterly earnings. The scale of the impact on R&D investment (as well as new entrants and biotech funding) remains to be seen.
  • In the longer run, and even if Trump is not reelected, the executive order could have far-reaching effects. Lowering drug prices is a fairly bipartisan issue in the US, which means some version of the executive order is likely to stick. Joe Biden has supported limits on drug prices – including international reference pricing and direct price negotiation by the government. With the federal government the single largest payer in the US, and the US the single largest pharmaceuticals market in the world (at just under half the global market), there could be cascading effects for healthcare systems all over the world.
Related Briefs:
  • Jul 31 2020 (3 Shifts): A rundown of the COVID-19 vaccine race and its frontrunners
  • Mar 16 2020: The new HHS rules & shifting regulatory landscape around health data/AI
2. NVIDIA’s proposed $40B acquisition of Arm is rocking the chip industry
  • Earlier this week, GPU chipmaker NVIDIA announced its intent to acquire UK-based CPU chip designer Arm for $40B, in what would be the largest-ever semiconductor deal. (SoftBank, which acquired Arm for $32B in 2016, will get cash and a minority stake in NVIDIA.) The deal promises to turn NVIDIA, which is known for its graphics chips for gaming and cloud-based AI, into a powerhouse rivaling Intel, with tentacles in “virtually every important compute domain.”
  • Arm is smaller in revenue and staff than NVIDIA but has greater reach – it has $1.9B in revenue, 6,000+ employees, and 22B chips shipped annually by licensees. In comparison, NVIDIA has $11B in revenue, 13,000+ employees, and 100M chips shipped annually. The acquisition of Arm would also expand NVIDIA’s developer reach from 2M to 15M+ developers.
  • The acquisition is rocking the chip industry. In buying Arm, NVIDIA is attempting to combine two different business models. NVIDIA’s business of selling proprietary chips is very different from Arm’s role as a “neutral Switzerland” licensing chip architecture and designs to 500+ companies. For instance, with an Arm acquisition, NVIDIA competitors Intel and AMD would become NVIDIA’s customers.
  • Arm’s position as a neutral supplier may be tarnished. Licensees are worried NVIDIA will have access to the latest Arm architectures before others in the market. There are early indications of a backlash, with licensees accelerating existing efforts to explore royalty-free open-architecture rival RISC-V, despite it lacking the maturity of Arm’s ecosystem. (Apple, which has been moving towards Arm-based chips, is reputed to have a perpetual license on the Arm architecture, though it still pays a royalty per chip.)
  • Arm China, which is 49% owned by Arm and 51% by state-backed investors, is another piece on the chessboard. Chinese regulators could require that Arm China be spun off as a condition of approval. Its situation is complicated by an ousted CEO who has refused to step down or allow Arm UK executives onto the premises. If Arm China cuts ties with its parent and operates independently, the proprietary value of Arm’s IP could be diminished.
Related Briefs:
  • Jun 26 2020 (3 Shifts): Apple reinforces its walled garden with Apple Silicon chips in Macs
  • Jun 5 2020 (3 Shifts): Huawei’s global competitiveness is threatened by international pressure
3. Major climate commitments by tech firms & energy giants
  • The past week has seen a round of major climate commitments. Earlier this week, Google announced it would run its operations entirely on carbon-free energy by 2030. This is the next step for Google, which has been “carbon-neutral” through offsets since 2007. It also said it had offset its full carbon legacy since the company’s founding.
  • Facebook also came forward and said it planned to reach net-zero – including indirect emissions from suppliers, employee commuting, and business travel – by 2030. It also committed to purchasing renewable energy and offsets to negate emissions from its operations this year. Microsoft, Apple and Amazon have made similar commitments over the past year.
  • Two energy giants also came forward with their own commitments. BHP, the world’s largest natural-resources company, will invest $2B to $4B to cut its carbon emissions by 30% by 2030. It plans to increase use of renewable energy at its mines, electrify its truck fleet, and develop approaches to make steelmaking and shipping less carbon-intensive. Oil major BP separately made its first investment in offshore wind power, paying $1.1B for a 50% stake in two projects. BP has pledged to go carbon-neutral by 2050 and is boosting low-carbon investment 10x to $5B annually.
  • Increasing commitments from businesses come at a time when estimates of climate change – albeit imprecise, varying and based on enormously complex science – are beginning to converge and offer businesses a better sense for what to expect. General agreement is that the earth has warmed about 1°C (1.8°F) so far since the pre-industrial era. As reported in the WSJ, the “current broad consensus” is an expected overall increase of approximately 3°C (5.4°F) by 2100 – a level that will be catastrophic in the literal sense.
  • Researchers are projecting US GDP would see a loss of 0.35% to 1.2% per degree of warming. Damages associated with large-scale singular events at 3°C are estimated to cause a 2- to 8-fold larger economic impact. As COVID-19 has shattered the notion that things will always function the way they have, we may see a greater willingness among businesses to engage with the reality of a 3°C increase by 2100 and take collective action.
Related Briefs:
  • Mar 18 2020: Looking beyond – 11 ways in which COVID-19 might be an inflection point
  • Feb 26 2020: Billions in climate funding from Bezos, Microsoft, KKR & others – Why now?
Disclosure: Contributors have investment interests in Microsoft. Amazon and Google are vendors of 6Pages.
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