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Drug Pricing Reform Ideas Don't Affect Our Valuations

There's too much uncertainty to assume a significant hit to prices.

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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.

Karen Andersen does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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