DAY (2/15) - PRRN CHALLENGE!

 

Hello! I am Priya, and thank you so much for being here! :)

I recently watched the '100 day challenge' to build a career in finance by The Valuation School, and immediately jumped into it. This is a series where for the next 15 days I:

1) 'Pick' a sector

2) 'Read' relevant news articles, annual reports, sector analysis reports etc 

3) 'Report' what I've read

4) Make 'Notes' and see how they evolve!

To make it more interesting I've decided to pick a sector that has always been intriguing to me - the Pharma sector. I've picked 3 companies for my reference - Eli Lilly, Novo Nordisk, Johnson and Johnson.

A quick disclaimer, none of this should be treated as professional investment advise. Life is all about evolving into the best version of yourself, and I'd like to take you all on this journey of mine. Kindly only read this for gaining some additional insight, and feel free to give me any sort of feedback :)

Let's get learning! 

14/03/2025

Today I tried to focus more on Eli Lilly's MDA from their latest annual report. I found it really interesting and it truly simplifies how their management actually thinks.

I started off by noticing a nice jump in revenue but a sharp decline in net profit. The positive jump in revenue was dedicated to their 3 key products: 

-Mounjaro (diabetes drug)

-Verzino (breast cancer)

-Jardiance (diabetes)

A trend here is that Eli Lilly's focus is largely on very chronic illnesses and not the standard cold and cough. This allows it to gain a lot of benefits from a political standpoint, and also exposes it to a lot of risks.

To start with the positives, Eli Lilly is working on areas where there is a medical gap.

The health authorities are really desperate to get treatments for some of these diseases. So in return they offer a lot of benefits. For instance, quite a few drugs under Eli Lilly's drug pipeline have gotten the Fast track status, through which they can meet up with the FDA authorities more frequently, and get approvals faster!

Now why would they want faster approvals? The logical reason is, of course, it enables them to gain revenue much faster. However slow approvals come up with a HUGE RISK too.

You see, the pharma sector largely revolves around exclusivity. The minute a formulation loses exclusivity, any company can make cheaper formulations of the same drug, and eat up all the exisiting market share. When approvals come slowly, it leaves a window where a competitor could manufacture a similar drug (completely coincedentally) and take up all the revenues our company has worked YEARS to get :')

The FDA has also offered the Breakthrough status for one of their drugs and the Accelerated Approval status for a few other drugs all of which are bound to maximize the chances of getting a succesful product and reduce the time required for an approval!

However, there is no such thing as a free lunch :')

The biggest downside of working in this industry is that life threatening medication is almost a public right. The government is always going to find ways to make it a little more accessible.

For instance, in 2022 the Inflation Reduction Act was passed, which stated that the US Department of Health and Human Rights could effectively set the prices for certain drugs on their own. One of the drugs in this list is Jardiance, which is going to severely constrict its margins in 2026.

Another legislation posing a threat comes from the Benefit Redesign Programme under Medicare. So medicare is basically a government coverage programme, where the government (and insurers) will be covering the healthcare and pharmaceutical expenses of patients.

It's a great initiative really. But the new plan quite literally caps the spending of all patients at no more than $2000 per year! The rest of the costs will be borne by insurers and the government.

Sounds tame? Only the government and insurers have greater leverage over pharma companies. They can adopt 'n' number of negotiation techniques, they can ask for infinite number of justifications etc all of which is bound to reduce the margins of pharma companies.

Not just this. It can quite literally pivot where pharma money goes. 

Think about this: There is an incredible new therapy that can cure many life threatening conditions. However its development is going to take time. Its development is going to take more risk, and at an early stage, no company can promise 100% efficacy. 

Why would pharma companies take the risk? These drugs would definitely not be covered by insurers, and even if they do, a very meagre amount. They are bound to bargain excessively.

Also interesting to note: Lesser insurance coverage = lesser public accessibility to these medicines=Lesser demand for pharma companies

Apart from these a long payback period, poor healthcare infrastructure for diagnosis, higher risk of failure in pharma all pose a critical threat to such companies. It seems that the key focus now should be on developing a startegic pricing model (penetration pricing for instance) and maintaining cordial relationships with private insurers who can support the pharma companies by offering some room for competitive pricing.

Interesting to see where this goes! Thank you so much for reaching till here, see you tomorrow! :))