Election Seems to Ease Concerns on Drug Pricing Changes

Although the outcome of the U.S. elections is still uncertain, we expect the likely politically divided Congress with either presidential candidate to pursue modest drug policy reforms that will not materially affect our valuations or moat ratings in the biopharma industry. We continue to view the biopharma group as undervalued and expect strong fundamentals combined with an easing of concerns around major U.S. drug policies to drive stock prices higher.

Over the next two years, we expect moderate policy changes to U.S. drug prices. We view changes to the out-of-pocket payments for patients in the catastrophic phase within Medicare Part D as the most likely potential change. With the current system requiring seniors to pay close to 5% of costs of very expensive drugs, patients can be on the hook for over $5,000 per year. With bipartisan support for addressing these costs, we expect policies to change the cost structure, with the drug companies picking up some of these expenses at a relatively low hit to overall profits. Additionally, in the event of the Affordable Care Act being struck down by the Supreme Court, we would expect the divided government to be unlikely to offer a comprehensive alternative, but we wouldn’t expect a major drag on biopharma earnings as the ACA didn’t drive gains for the branded drug group.

Importantly, we believe the more significant U.S. drug pricing policies look unlikely to surface. We believe the probability of international reference pricing (pricing U.S. drugs at a similar rate to other developed markets) looks lower following an election that is likely to keep Congress divided. Also, we don’t view Medicare drug negotiation as likely, given the politically split Congress. Overall, we expect U.S. drug pricing to remain fairly similar to the current structure, which should bode well for the biopharma industry as the group has seen pressure over concerns about potential major U.S. drug policy changes.

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