Drug Pricing Executive Orders Not Likely to Affect FVEs

President Donald Trump’s executive orders targeting drug prices create modest pricing headwinds and slightly higher uncertainty for drug firms. However, we don’t expect these actions to significantly affect our fair value estimates or moat ratings due to limited details, challenging implementation, and only minor impacts.

Trump’s executive orders, signed July 24, targeted three areas with varying degrees of impact; a fourth order is pending. First, the order allowing the importation of drugs from Canada would significantly reduce U.S. drug prices (which are close to double international prices), but safely implementing this is challenging, given the different labels across countries, and drug firms are likely to limit Canada sales. Importation of drugs has been passed by Congress twice, only to fail in implementation largely due to safety concerns. Second, the order to eliminate rebates within the supply chain without increasing premiums seems difficult to implement, as those rebates are typically used to reduce overall premiums, and it is unclear what eliminating rebates would do to net drug prices in this complex system. Third, passing insulin and epinephrine discounts currently benefiting certain health centers to patients would likely reduce patients' out-of-pocket payments, but this isolated change would not likely affect drug firms significantly.

Trump also targeted the potential to use international benchmark pricing for certain drugs administered in the hospital setting under Medicare Part B, but this order has not yet been released, as he is open to discussion with drug firms until at least Aug. 24 to find alternative ways to lower drug prices. While details of this strategy are less clear, we estimate a 10% reduction to Part B drug prices would hit industry earnings by close to 1%, and higher for firms like Amgen and Regeneron. Implementing this looks challenging as well, partly due to complexities and ambiguities around international pricing.

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