Drug Pricing Reform Ideas Don't Affect Our Valuations

On Oct. 25, President Donald Trump outlined some potential action on pricing for drugs covered under Medicare Part B (administered at a hospital or physician office), further weighing on investor sentiment surrounding government-led U.S. drug pricing reform. The announcement is timed ahead of the November election and follows Trump’s signing of the SUPPORT bill to fight the opioid epidemic. We’re not making any fair value estimate changes as a result of the announcement, as several significant uncertainties make it difficult to assume a major hit to pricing.

First, it remains unclear whether this will result in any actual reform; this is a proposal, and industry reaction during the comment period (which runs through the end of 2018) could be negative, as it was during a smaller, failed effort to tweak Part B pricing under President Barack Obama in 2016. The timing of the impact is also in question, as a demonstration for some drugs could start in 2020, but we would not be surprised if implementation were delayed beyond Trump’s first term, which increases the uncertainty around implementation. In addition, it is unclear which drugs would specifically be targeted, as some drugs have high Part B spending but similar pricing in international markets (see immuno-oncology drugs and ultra-orphan-disease therapies), and it’s not clear what geographies would participate in the initial demonstration project, although it is intended to cover 50% of Part B spending. Finally, compensatory price increases outside the United States could help offset U.S. pricing pressure.

Not all big pharma/big biotech companies have significant exposure to Medicare Part B to begin with. We estimate that the companies with the highest exposure as a percentage of U.S. drug sales include

Several new pieces of information were released last week, including the Centers for Medicare & Medicaid Services’ advanced notice of proposed rulemaking, a Health and Human Services report on U.S. Part B drug pricing relative to prices in other developed nations, and a new Council of Economic Advisers report detailing Trump’s accomplishments to date on drug pricing.

The advanced notice of proposed rulemaking follows a request for information in July that was part of a larger proposed Medicare outpatient payment rule, which alluded to a possible Medicare Part B demonstration project. The advanced notice of proposed rulemaking discusses the potential to lower Part B spending (and save $17 billion over 2020-25) by using an international price index model based on a basket of international prices and private sector negotiation. The IPI model would phase down U.S. pricing over a five-year period beginning in spring 2020, focusing on drugs with the highest Part B spending. It could initially target a few drugs in the first two years of the model, ones with reliable data on international drug prices. Target prices would be 30% lower overall but would vary depending on a drug’s price in international markets. Private-sector negotiation, under a competitive acquisition program, was implemented before and failed, but we think the size of the Part B program today could give it a greater likelihood of success, which could make Part B more similar to Part D (where private-sector negotiation, via pharmacy benefit managers, helps to control prices).

The Health and Human Services report offers a detailed analysis of U.S. and international pricing for some of the highest-selling Part B therapies, which concluded that international prices in 16 developed markets (largely Europe, Canada, and Japan) are 45% lower than U.S. prices for a basket of 27 drugs that account for 64% of Part B spending. As the HHS report noted, the biggest savings could be seen with lower prices of Rituxan (which is already poised to see biosimilar entrants in the first half of 2019) as well as Amgen’s Neulasta (also facing biosimilar threats in 2019) and ophthalmology drugs from Regeneron (Eylea) and Roche (Lucentis).

The Council of Economic Advisers report highlighted some trends in drug approvals and drug spending under the Trump administration, starting with the faster generic and branded drug approval rates, but also including analysis supporting the administration’s impact on pricing, with lower rates of branded drug price growth and larger discounts for branded drugs since early 2017.