Is pharma scared of Hillary or Trump?
On 8 November, the Americans will elect their next President. Often the usual suspect during election years, healthcare spending and, more specifically, drug pricing have been under the spotlight of the election campaigns.
Prescription drugs do not represent the highest share of US healthcare spending but they are an easy political target in a country where prices can be as much as 50% higher than in Europe. US pricing is a significant growth driver for the industry and any threat to that tends to hurt sentiment about the sector as witnessed by the pharma sector underperformance over the last months.
To repeal or not to repeal the ACA?
Both presidential candidates are against high drug prices but have different means to this end. While Hillary Clinton would like to expand the current healthcare system, Affordable Care Act (ACA), and advocates pricing based on innovation, Donald Trump declared he would repeal the ACA on day one. Other than calling for the need for additional competition from additional brands, Trump has shared little detail about how he would reach his objective. Still, we believe pharma pricing although a focus would be less of a priority under Trump’s presidency. Hillary’s most plausible measure involves applying Medicaid level rebates for so-called dual eligible i.e. low-income elderly people or younger people with disabilities. This would translate into significantly higher rebates for big franchises exposed to these beneficiaries. The companies with big franchises exposed to the Medicare/Medicaid, often linked to therapeutic areas most prevalent in older people, are especially at risk. On average we can expect a ~3% impact on the revenue to major pharma. Mrs Clinton also wants to expand Medicare coverage to younger individuals and enable the government to directly negotiate prices with pharma companies. If implemented, these measures will negatively impact revenues from pharma companies which are the most exposed to government plans. However, many proposals to target high drug prices have failed to gain Congressional support in the past. We believe that any material change will likely necessitate alignment of the President, House, and Senate which seems unlikely at this moment.
Pricing disruptions to remain regardless of politics, who’s next?
Beyond the common pricing rhetoric during election time, pricing environment has changed in the US and that is a fact. Third quarter earnings saw pricing concerns put pharma and the whole healthcare sector under pressure because of decelerating list price increases and competitive price dynamics in particular therapeutic classes. Prices for diabetes treatment have been particularly affected.
The payers’ focus is now on specialty drugs as this is where the US spending growth is expected to come next. In general, these therapies fulfil a major need in a patient population with high inconvenience linked to the disease and low treatment alternatives. As they embody a substantial improvement over the existing treatment, these drugs can command price premiums. Oncology has been thought of as the next target as it represents the most expensive category and as competition is increasing in the segment. However, because of the critical nature of the disease and different mechanisms of action, we believe it would be difficult for payers to limit access to these drugs. Orphan drugs are also immune to pricing pressures. Comments have recently been made regarding the increasing costs of haemophilia as several new drugs are being launched in the segment. We observe that, despite unit cost increasing, total cost of care remains similar with new drugs. Moreover, we hardly see payers restricting access because of the risks involved with switching therapy in haemophilia which could end up being even more costly for payers. All in all, pricing risks prevail in therapeutic areas where diseases are asymptomatic, non-progressive, outcomes can be easily and reliably measured and multiple alternatives with similar profile exist.
One thing is sure, pricing pressure does not affect all companies equally and we should not extrapolate one case to another. We believe pricing challenges are increasingly well mirrored in sector multiples and our view over the pharma sector fundamentals remains constructive. Payers still value differentiated and innovative drugs. We believe that these companies which demonstrate innovation will be able to get a decent return on their R&D.