Drug Pricing May Finally Come to a Head With Trump Speech FridayBy
Analysts don’t expect near-term impact from White House plan
Rebates are key to debate that has been overhang on stocks
After more than a year of bitter rhetoric attacking pharmaceutical companies and the cost of medicines, President Donald Trump is scheduled to finally release his plans to combat drug pricing on Friday.
The near-term implications for biotechnology and pharmaceutical stocks remain murky on Wall Street. Cowen analysts said in a research note Thursday that they expect Trump’s speech will “be relatively benign, with more drastic proposals coming at a later date or not at all.” Wells Fargo & Co.’s David Maris, meanwhile, has cautioned that calls for lower prices and greater transparency have “never been louder.
Trump’s prolific tweets sank drugmaker stocks in January 2017 when he accused the companies of “getting away with murder” with their pricing. Health and Human Services Secretary Alex Azar said last week that Trump’s plan will be based on the 2019 budget proposal, but go “further, much further” in attacking high list prices and out-of-pocket costs. Investor fears deepened when Food and Drug Administration Commissioner Scott Gottlieb suggested the government could re-examine the safe harbor that drug rebates have under federal anti-kickback laws.
“The speeches by Azar and now Gottlieb increase the uncertainty and show a willingness by the administration to get more aggressive,” Evercore ISI analysts Ross Muken and Michael Newshel wrote in a note to clients.
The S&P 500 Pharmaceuticals Index and S&P 500 Biotechnology Index have each fallen about 7 percent this year while the S&P 500 Index is up almost 1 percent. Fund flows continue to signal that generalist investors are skittish about the group. The iShares Nasdaq Biotechnology exchange-traded fund has seen net outflows in 12 of the past 18 weeks and is rebounding after a third month of losses, its longest monthly losing streak since 2011.
Pharmacy-benefit managers have also been under pressure, along with companies involved in the the drug supply chain, since concerns about Amazon.com Inc. entering the health-care space arose last year. One of the key issues in the pricing debate is how these companies profit from rebates on medicines that may not always be passed along to consumers or federal insurance programs like Medicare. Companies defend the system and the Iqvia Institute estimates that discounts and other price concessions offset price growth for protected brands by 69 percent last year.
While it may take months or years before the government disrupts the status quo in drug pricing, investors and companies should both be prepared for eventual action, says Veda Partners health-care policy analyst Spencer Perlman.
“Even if the Trump Administration fails to deliver,” Perlman wrote in a research note, “we believe that pharma will face a reckoning at such time as the political pendulum swings back in favor of Democrats, whenever that occurs.”
— With assistance by Cristin Flanagan