Lara Castleton: Hello, and thank you for joining this episode of Global Perspectives, a Janus Henderson podcast created to share insights from our investment professionals and the implications that they have for investors. I’m your host for the day, Lara Castleton.

At Janus Henderson, we pride ourselves on having one of the best healthcare research teams in the industry. Through their expertise, we continually gain insight into the rapid pace of innovation happening within the sector and the tremendous opportunities they afford investors. While innovation has and clearly will continue to be a driving force within the space, government policy and rhetoric has also become a constant over the last decade. Today’s environment is no different, and there are several questions on how proposed government policy could impact the sector.

To dive into the debate, I’m thrilled to be joined by Luyi Guo, Ph.D., CFA, Research Analyst on our Healthcare Team.

Luyi, thank you for being here.

Luyi Guo: Hi, nice to be here.

Castleton: Let’s just start because today is very dynamic in the government policy rhetoric. What’s the overhang, as you sum it up, today in the healthcare sector?

Guo: Yes, we have had a very eventful year on the news overhang. It started in November with the, basically, RFK Jr. [Robert F. Kennedy Jr.] being proposed to be the HHS [Health and Human Services] head. And there were concerns for various government industries, including the FDA [Food and Drug Administration], whether, you know, there will be severe cuts to the FDA, whether the review timelines will still be met, and the industry kind of works through that. And going into the new year, people thought, okay, maybe since pharma underperformed last year, this year might do better.

What happened was, by March, there has been more talks about tariffs. And while pharmaceutical tariffs is not in the initial tariff announcement; that’s exempt. But that is an overhang because we know the president has talked about pharmaceutical tariffs, [they] will be announced. And we see that as linked to the trade negotiation, especially with Europe. Because for Europeans, the pharmaceutical industry is one of their so-called national champion industries, and they do not want pharmaceutical tariffs for exports into the U.S. So, that’s kind of linked all to that.

And then the, you know, the Street is good at estimating what the impact could be, and by now, I’m pretty sure many people are … have pretty good models reflecting what possible tariffs, if comes, for the pharmaceuticals will be.

But then the overhang a little bit more than a month ago started with the most favored nation, MFN, and that discussion about drug pricing in the United States. And I see that, again, it’s linked actually to the trade negotiation. The Europeans have been imposing sort of government-controlled drug pricing on multinational companies and for, you know, other drugs that sell in the U.S. So, that impacts a lot of the U.S. drug companies, as well, and their own pharmaceutical industry. And that’s coming to a head because as the price continues to rise on the list price in the U.S. – and, by the way, not necessarily the net price, but the list price in the U.S. is what the public sees – and the Europeans negotiate down price every year. So, there is a big gap. So that’s coming to a head, so much so that even the European pharmaceutical companies themselves are talking to their own government saying if the governments don’t pay enough for innovation, that is detrimental to their own kind of R&D infrastructure in Europe.

So that’s, you know, that’s the three … basically three hits to the industry and that becomes an overhang for the industry.

Castleton: If you package it all together and look at those overhangs, particularly like MFN, most favorite nation, what’s the likelihood that that happens? What do you see as the outcome potential?

Guo: So, for the most favored nation modeling, at this stage, it’s the most unclear for investors because, first of all, we do not know what the scope [of] it is, what government channels will be impacted. Is it going to be Medicare Part B as in “boy,” or is it going to be all Medicare, Part B and Part D? Or is it also including, you know, Medicaid?

As I think this is linked to the tariff negotiation, we will see what kind of response the European government will get because, as I understand, the most favored nation likely is also part of the negotiation with the Europeans to get the European government to pay a little more for innovation. In some ways, you can think about it similar to European nations finally agreeing to pay for more for NATO. So, this is linked, and … but all that negotiation, of course, is very much under wraps. We do not know what the impact will be and what the tradeoff is, how much negotiation power U.S. have on pharmaceutical tariffs versus how much European nations are willing to pay.

What I want to say that’s positive is for the industry, in order to get European government to pay a little more, it has to be involved by the government. It has to be national-level trade negotiation. This is happening. So, that’s … if we ever have a chance for the European countries to pay a little more for innovation, this actually is a chance. So, that’s actually, could be positive because I see MFN linked to the tariff negotiation.

Castleton: Let’s say that this does go through. To your point, maybe we do get some more spend from Europe. Just how does that affect the global landscape? Does that mean you’re a little bit more cautious on what the impact would be to the European companies or U.S.? Are you favoring one over the other? How do you think about the range of outcomes?

Guo: Yes, so, I think the multinational pharmaceutical companies are very much the same. They make their most money and profit in the U.S. They need their access to the U.S. market, and a lot of the European pharmaceutical companies, their major R&D centers, they’re all in the United States, along with the European R&D center sometimes. So, the impact, I think, will be more like, what exposure as a percentage of revenue are each companies to the United States market? So, then you can kind of consider how that will be … how much exposure they are to the U.S. government channel, right? So, each company has their unique portfolios that has a little bit difference in the exposure.

Castleton: Got it, okay. So, that makes sense. We’ve gone through some of the overhang regulatory, we don’t know what’s going to happen, particularly to trade negotiations and MFN. But I want to dig into something else that is affecting the industry in general, pharma in particular, and that is that a lot of the big drug companies have patent protections that are set to expire. So, walk us through, really, what happens with that, and how you expect that to affect kind of those bigger companies going forward?

Guo: So, again, patent protection is important, right? Without patent protection, there will be no innovation. And without innovative drugs, there will actually be no downstream generics or biosimilar drugs that we do look to as a way to solve the cost of drugs.

So, for example, 90% of the drugs in the U.S. volume are generics and biosimilars, which actually really help to keep the drug price down. So, when the drug goes off patent, you get generics/biosimilars coming that increase the market competition and the price reduces. So, basically, in essence, that drug revenue stream is no longer for the innovative major biopharma companies. For the biosimilars, we are easily seeing price drop within the first year of anywhere between 30% to close to 50% sometimes because biosimilars are harder to manufacture, and so there is a little bit more tail. But eventually, those biosimilars also replace the vast majority of the market share as we expect for the innovative companies.

So, for each companies, they go through a different cycle, and each companies will face different period of so-called patent cliffs. The key is for the companies to keep innovating, and they all know that. And that’s why the investment percentage of sales in R&D are often as high as, you know, 25%. So, that is why they need to keep coming up, disrupt their own innovation to be successful to get the next drugs that will in many ways smooth out, right, smooth out their top line, their revenue stream, and then keep their, also, the profit.

Castleton: So, patent expiration, it’s just a constant within your industry, always happening. You need to have…

Guo: Every day.

Castleton: … you need to have the skills as a team to be able to find the companies that are able to disrupt themselves. And that takes a lot of skill in terms of understanding the medicine behind the scenes, which your team does very well.

Guo: And understanding the whole competitive landscape, right? Because you disrupt yourself, but everybody else want to disrupt you, right?

Castleton: Exactly. And speaking of everybody else wanting to disrupt, mergers and acquisitions are always a thing. But in China, there seems to be a little bit more of acquisitions or innovation happening within the space. Maybe walk through the background on why that is occurring, and do you also expect that to continue?

Guo: So, I think this is very interesting topic, and I think it kind of ties back to the government … how the different governments, how they see the biopharma industry.

So, let me just back up a little bit. So, for example, for the United States, the idea of pharmaceutical tariffs and most favored nation are twofold. One is, we do want to make sure all the critical pharmaceutical drugs, especially generics and the APIs (the active pharmaceutical ingredient), we can manufacture in United States. Because we had a very painful experience during Covid when there was disruptions [to] antibiotics, vitamins – those should not happen again. So, there is a reason behind that.

And on the other hand, we also know there is … companies have used, previously, patent law tax benefit in Europe, like places like Ireland and Switzerland, so that when they locate their manufacturing in Europe, they get taxed less, especially when in the old days the United States corporate tax was 35%. Now, that has … that gap has closed, right? So, the companies have more incentive to relocate, to have their manufacturing in the U.S.

So, that’s [how] the U.S. government sees pharmaceutical industries as critical, and we know European government clearly sees pharmaceutical industries as critical. And that’s part of the negotiation right now. And they, they really don’t want to see the pharmaceutical tariffs.

China sees pharmaceutical industry, biopharma industry as strategically important, right? They are very much in support of that. That’s in contrast to the European government, less willing to pay for innovation. China is actually actively supporting their innovative companies, and that’s why there is more innovation coming out of R&D in China. And in many ways the local government makes doing clinical trials much easier. So, there’s less regulation doing clinical trials in China. You can do clinical trials much cheaper and quicker, so, you can get the first phase 1 data much quicker in China.

Now, what that leads to is there is a lot of molecules that could be interesting out there in China and the global biopharmaceutical industries, obviously, looking at those companies and those compounds and they will license and bring innovation in-house when they see something that they think they can develop better and develop it for the global market. And a lot of those companies are extremely good at clinical development. So, thinking through how this molecule can be used in different medical indications. And so, that’s why this is happening.

Castleton: Okay, so, another area to keep your … keep our focus on again with negotiations, what happens if Europe does increase innovation spend, but it seems like a trend that’s going to continue and to keep mind of within China.

Guo: That’s right. That’s right. Yes, but that is a reflection of different governments’ attitude, really, to the industry. And I think it’s super important, and I think it’s a lesson to the European government and a lesson to the U.S. government, as well.

Castleton: Great, so let’s wrap up with one more just regulatory hangup, which we haven’t addressed yet – and you mentioned at the beginning – cuts to the FDA. So, just in general, how does that – budget, staffing cuts – does that affect the industry? How are you seeing that trickle through?

Guo: So, this is a short answer actually because our team has constant dialogues with the market players, including the companies themselves. What we have seen in the drug approval process, there has been no delays, and everything is on track. So, that we are, we are very happy to see; that one of the most important functions for FDA is moving ahead as usual.

Castleton: Great, brief answers still work, love it. So, I would mention again, innovative space. Let’s end on a high note. You just came back from the 2025 American Society of Clinical Oncology annual meeting. Maybe you could just leave us with some takeaways that you came out from that meeting, some of the innovation that’s happening.

Guo: Yeah, so, I would say I will give you a little bit more. I have had two major conferences in June, the ASCO, the oncology conference, which is always the most exciting oncology conference every year in the world, and the American Diabetes Association, the ADA. So, there’s two major conferences that I attended.

What we are seeing is constant innovation. I think the innovation has been great for the industry for many years now. I would just give you a few, you know, exciting areas that I see.

Overall, I see circulating tumor DNA testing as becoming more and more into our cancer care space, which is great for patients. They can tailor – and the providers – they can tailor their treatment with the special genetic types of the tumor. They can tailor the right drugs and the right treatment for the patients. I think that’s a very good trend that keeps going.

People look at MRD negativity, which is minimum residual disease negativity, also to kind of show whether a patient is going into a deeper remission. You can potentially deescalate a patient quicker. Or you can find which patients are at higher risk of recurrence for cancer and escalate their treatment. So, those are great for each patient, and also good for the cost of the healthcare industry, right, so, you don’t overtreat.

And another thing is that I find AI is starting to also be in the diagnosis space. We just got the first approval of an AI machine-learning biomarker test. So, again, that’s really good, good news and we will see more and more.

On top of that, we are probably likely going to see oral SERDs [selective estrogen receptor degraders] for breast cancer. So, it potentially will be a new class of drugs that’s going to help breast cancer patients. And we are constantly seeing cell therapy innovation, what we call CAR-Ts, and we might be even moving towards off-the-shelf approach for CAR-Ts, which is going to be more accessible for more patients quicker.

On the ADA side, what we call GLP-1s, or incretins, we are seeing more interesting data on amylin agonist as a newer class that could be potentially combined with the GLP-1s, or the dual agonist. So, that is kind of moving the field ahead, especially for some patients who don’t tolerate GLP-1s, as well.

And last but not least, we saw the data for orforglipron, the oral small molecule GLP-1 receptor agonist, and the first phase three data is quite exciting. So, we might actually finally have a real small molecule or a pill instead of the injectables for the incretin space. So, yeah, lots going on always.

Castleton: Amazing, thank you. This is a great example – probably to be expanded everywhere, in every sector right now – but your industry, in particular, so many overhangs with government policy and rhetoric. But the constant theme that has continued for the past decade is just the innovation continues and can drive the sector forward. Very clearly, those takeaways insightful in terms of where the industry is heading, and at the end of the day, a team that can actually go in, understand both the science and the impact to the industry, is critical to navigate the space. So, I really appreciate you, Luyi, being here.

And thank you for listening. We hope you enjoyed the conversation. For more insights from Janus Henderson, you can download other episodes of Global Perspectives wherever you get your podcasts. Or check us out on YouTube or visit janushenderson.com.

I’ve been your host for the day, Lara Castleton. Thanks, see you next time.