Should pharma investors worry about the Democrats?

As the Democrats target Big Pharma from their new position of power in the US House of Representatives, should healthcare investors be concerned?

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  1. Garry White

Democrats took control of the US House of Representatives last week – and they are dusting off their big plans to tackle Big Pharma. Most UK investors have an investment in ether AstraZeneca or GlaxoSmithKline for their attractive dividend. Should they be concerned?

As usual, drug companies started 2019 by increasing US prices on a whole range of products – albeit at a slower pace than at the start of last year. Prices of more than 250 prescription drugs, including the world’s top-selling medicine, arthritis treatment Humira, were increased this week according to industry body Rx Savings Solutions. The most aggressive company was Allergan, which upped the price of more than 50 drugs, with the list price of more than half of these treatments increased by an inflation-busting 9.5%. The average increase was 6%. Data from Elsevier shows that such price rises have been happening for a number of weeks. Between 20 December and 2 January, there were 1,179 product price changes. Just 30 of these were price cuts, with 328 of the drugs-price increases coming in between 9% and 10%. Further price rises are expected to be announced as the month progresses.

This is another issue on which President Trump has been extremely vocal, both on the campaign trail and in the Oval Office, but little progress has been made. At a cabinet meeting on Wednesday, US president Donald Trump repeated his oft-repeated mantra: “I think you’re going to see a tremendous reduction in drug prices”. However, drug pricing is a bi-partisan issue, so it is one area in which a split Congress could make real progress.

Democrats rode a wave of healthcare campaigning in the midterm elections, with particular promises to protect Americans with pre-existing health conditions and dramatically reduce prescription drug costs. Since then, Senator Elizabeth Warren has come up with an intriguing idea to cut the cost of prescription medicine. She wants the US government to become a manufacturer of generic medicines itself – but is this feasible or, indeed, desirable?

 “Drug companies use the ‘free market’ as a shield against any effort to reduce prices for families. But they're not operating in a free market; they're operating in a market that's rigged to line their pockets and limit competition,” Senator Warren wrote in a newspaper editorial last month. “The entire pharmaceutical industry in reality runs on government-granted monopolies, mostly in the form of long-term patent protections.” She noted that one of the few remaining virtues of the patent system was that it was supposed to be that when these exclusive monopolies run out, market competition kicked in to produce cheap, generic versions for consumers. “Sounds great,” she said. “But it isn't working.”

Senator Warren’s solution is the Affordable Drug Manufacturing Act. The bill aims to establish an Office of Drug Manufacturing which will allow the government agency to produce and sell generic medications. She argues that this will solve "market failures" that lead to drug shortages and steep price rises for off-patent medicines. This matters because around 90% of all prescriptions sold in the US are for generic products.

The Act will authorise United States Department of Health & Human Services (HHS) to manufacture – or contract out the manufacture – of generic drugs in cases in which no company is manufacturing a drug, when only one or two companies manufacture a drug and its price has spiked, when the drug is in shortage, or when a medicine listed as essential by the World Health Organization faces limited competition and high prices. She argues that public manufacturing will be used to fix markets, not replace them.

Senator Warren accepts this is a radical plan but noted that the federal government already contracts with private manufacturers to produce stockpiles of drugs to hoard in the event of a biological, chemical or nuclear attack. However, Senator Warren’s idea that the US government will become a manufacturer of drugs could have the opposite effect to what she wants. A federally-owned manufacturer could result in private companies abandoning certain markets, which could exacerbate shortages. It would be better to let the free market find a solution by eliminating red tape to speed up the drug approval process.

A more rapid, less expensive route to market is likely to promote the competition that Senator Warren requires in lower-margin, cheaper medications. The Act is also unlikely to pass a Republican-led Senate, particularly as the pharmaceutical industry is one of the biggest lobbyists in Washington DC. Still, the proposal has generated some positive headlines for the ambitious senator as she prepares to launch her campaign to run for president in 2020. Indeed, markets are relatively unconcerned about the statements coming out of Capitol Hill. The two best-performing equities in the 30-stock Dow Jones Industrial average in 2018 were both pharmaceutical companies – Merck and Pfizer. There is no sign of investor worry just yet. Shares in Merck rose around 35% last year and Pfizer shares were up more than 19%. This is because the most sensible route to deal with drug pricing is one that has already been proposed by the HHS. It wants to align certain drugs sales with prices outside the US by tying them to an International Pricing Index (IPI). This implies that price rises outside the US are more likely to bring them more in line with US costs.  Pharmaceutical investors should probably not be too concerned right now, but progress on drug pricing needs to be watched.  

A version of this article appeared in Friday’s Daily Telegraph.

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