US takes action on drug pricing

Drug-pricing action is likely in the US, but the Democrats will hit drugs groups harder should they win the Oval Office in 2020

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  1. Garry White

President Trump's promise to lower prescription drugs prices has hit the buffers. His most-ambitious proposal, targeting rebates given to middlemen in the country’s highly-complex medical system, has been abandoned. The plan looked likely to backfire and result in higher insurance premiums for the country’s seniors, so it was withdrawn earlier this month. With other options apparently limited, pharmaceutical companies such as AstraZeneca and GlaxoSmithKline are now firmly in the sights of Democrats vying to become the candidate in next year’s presidential election. Cashflows – and therefore dividends – could be at risk. 

Democrat presidential candidates are seeking to cap the price that drugs companies can charge – and it looks like President Trump may move in this direction too, despite objections to “price controls” by many in his party. In March, he promised that Republicans were about to become the “party of healthcare” yet he has little to show on this front during his tenure in the Oval Office.

Democrats lead the way

The 2020 Democratic field is pretty crowded right now and it remains unclear who will win the ticket. However, this week, some of the lead candidates – Senator Joe Biden and Senator Kamala Harris laid out their drug-pricing proposals – and the talk was tough.

Senator Biden said he “understands that the future of pharmacological interventions is not traditional chemical drugs but specialised biotech drugs that will have little to no competition to keep prices in check.” As a result, he plans to enact hard caps on prices for drugs manufactured by a single company. He also wants to cap annual price rises at the rate of inflation to prevent gouging.

Senator Harris’ proposed taxing drugs sold at a price above a determined fair value at 100%, as well as “march-in” rights to rescind a drug company’s patent and license it to a lower-cost rival for “the most egregious offenders”. Proposals from other candidates such as Elizabeth Warren and Bernie Sanders are of a similar vein.

The information these Democrats need to enact their proposals may already be in place if one of them wins the race to the White House next year. On Wednesday, a bi-partisan bill requiring drug makers to report a wide range of information to the federal health department was sent to the House of Representatives for a vote. It requires pharmaceutical companies to report price hikes, as well as indicate how much they spent on manufacturing, advertising, and research.

Markets expect a hit

Since the Trump proposal to target middlemen was withdrawn, the S&P 500 pharmaceutical index has fallen by around 5%. However, ultimately, the Trump administration may not end up attacking drugs companies at all. In keeping with his “America First” policies, it could become an attack on other healthcare systems around the world.  

President Trump’s Secretary of Health and Human Services is Alex Azar, a former Eli Lilly executive. He has not placed the blame for high prices on gouging by the companies themselves. “The American senior and the American patient have too long been asked to overpay for drugs to subsidise the socialist systems of Europe," Mr Azar has said.

Forcing global prices higher

Indeed, moves are already afoot. US trade representative Robert Lighthizer has been charged with striking a deal on pharmaceutical prices as part of any post-Brexit trade deal with the UK. So, in future trade talks, US pharmaceutical companies are certain to push for more transparency in the NHS’s decision-making process. They also want more patent protection and an appeals process for decisions. The main aim, however, is higher prices. This is seen as essential by the powerful US drugs lobby because many other countries use the NHS as a reference point for their own pricing decisions. This is likely to lead to very tough trade talks, as noted this week by both Boris Johnson and Liam Fox. Obviously, the UK government will be keen to keep a lid on costs for the NHS. This is just one factor that will make the talks tricky.

How damaging US drug pricing action will be on pharmaceutical cashflows is likely to depend on who wins the Oval Office. A Democratic win is likely to see drugs company profits become major targets of government – and investors will be rightly worried. A Trump re-election will see a continuation of America First – and drug prices are likely to be targeted elsewhere in the world. But, whoever succeeds, there is no doubt there will be some major changes for the pharmaceutical industry over the next few years.

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

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