Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

The day after Donald Trump won the U.S. presidential election, pharma and biotech investors seemed to decide his administration would be one in which scrutiny of drug pricing would vanish and profits would soar. Shares in the Nasdaq Biotech Index (NBI) surged more on November 9 than they had in more than eight years.

This dream was a fiction. An early clue was a Time magazine interview in December, when Trump pledged to bring down drug prices, a warning that took 3 percent off the NBI. Then, in a press conference on Wednesday, Trump accused the industry of "getting away with murder" and pledged to save billions of dollars in government health-care spending by forcing companies to bid for business. That caused the NBI to immediately drop another 3 percent.

Trump's broadside in Time was bad. His latest hit was worse. He was much more critical of the industry than usual and nodded at potential policy actions that could hurt profits. 

Despite repeated warnings from some industry observers, biotech investors keep getting blindsided by Trump. It's time for them to shed their blind Trump optimism and acknowledge the possibility that the drug-pricing debate didn't die along with Hillary Clinton's campaign. 

And Things Were Going So Well....
Donald Trump's drug pricing comments put a damper on a nice start to the year for biotech stocks
Source: Bloomberg

Though Trump didn't hint at outright drug-price controls, more aggressive government negotiation could have significant negative effects on the industry. The most logical place to start would be Medicare, which spent $162 billion on prescription drugs before discounts in 2015, up nearly $20 billion from 2014. That's a big portion of total U.S. spending, which was nearly $425 billion before discounts in 2015, according to health-care data company IMS. That's a lot of negotiating power. 

Up and Up
Drug spending is rising substantially in the U.S., and a significant portion of it comes from the government
Source: IMS

Lowering drug prices in the fashion Trump seemed to endorse is easier said than done. In order to effectively negotiate with a drug company, you have to be able to default to an alternative drug or refuse to cover certain drugs. That could curb patient choice and access to medication, likely not something most American taxpayers will cheer. But there are clearly areas where the government could play companies with similar and older medicines against each other, as private pharmacy benefit managers have done successfully.

It will be difficult to enact drug-negotiation legislation over the objections of Republican lawmakers, who have historically opposed such measures. But no one should assume pharma will get a policy free pass; Senate Democrats plan to force colleagues to take a stand on the issue this week, in fact.

The drug-pricing controversy will likely get more airtime, thanks to Trump bringing it up repeatedly and escalating his rhetoric about it. He'll be asked about it again on the national stage. 

The industry isn't exactly helping itself. Valeant Pharmaceuticals International Inc., a frequent target of drug-price criticism, keeps raising its prices despite the scrutiny. And Pfizer Inc. CFO Frank D'Amelio said on Tuesday that his company doesn't anticipate changing its approach to pricing, which suggests it may continue with moderate price increases as usual.

The President-elect keeps proving he's the same populist loose cannon he appeared to be in the campaign. Pharma investors and companies need to stop assuming GOP lawmakers can rein him in and prepare for the policy fight they thought they'd mostly be able to avoid for at least four years.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net