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Implementation of Trump's Drug-Pricing Orders Unlikely

We don't foresee any impact on pharma companies' moats or valuations.

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President Donald Trump issued several orders on Nov. 20 designed to lower U.S. drug prices. We don’t expect implementation of these orders, however, given legal challenges, lack of support from the U.S. Congress and the incoming Biden administration, and unclear financial impacts. As a result, we don’t expect any major impact on the U.S. pricing power of drugs, a core pillar of our economic moat ratings and valuations in the drug industry.

One of the White House directives focused on pricing 50 of the largest Medicare B (hospital-administered) drugs at the lowest levels paid by developed countries. This would significantly affect U.S. prices, as we estimate drug pricing in the United States is close to double the prices in developed markets. However, we expect valid industry legal challenges to stop this order. The order doesn’t appear to have followed the normal legal process and instead was rushed out so Trump could enact the policy before leaving office. Additionally, we believe the rule is difficult to implement without legislative support from Congress. Further, we don’t expect the Biden administration to focus initially on U.S. drug pricing, especially in the form of these recent proposals, which lack full legal and congressional support.

A second White House directive targeted the elimination of pricing rebates in the U.S. drug system, an entrenched system that is very complex to undo through presidential order, especially without a clear analysis of financial implications. While we expect the drug industry to support the removal of rebates, as drug companies only receive payments excluding rebates, we expect the payer groups will oppose the rule, given the importance of rebates in payer strategies. With a high degree of uncertainty regarding the impact on the federal budget, we expect the payer groups will be successful in stopping this effort to repeal drug price rebating.

Damien Conover does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.