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Stock Analyst Update

Moderate Outlook for U.S. Drug Pricing Policy Changes

Biden's nomination would reduce the likelihood of significant drug pricing policy changes, which is in line with our expectations.

Initial results from the Super Tuesday Democratic primary show increased support for former Vice President Joe Biden, whose nomination would reduce the likelihood of significant drug pricing policy changes, which is in line with our expectations. We don’t expect any major changes to fair value estimates or moat ratings in the drug and biotech industry based on these results, and we continue to view the industry as undervalued by more than 10% on average, due partly to excess concerns around potential major U.S. drug policy changes. We note that election results have a bigger impact on the healthcare insurers and service providers (see “Super Tuesday Primary Results Provide Relief Rally for Health Insurance and Service Providers.”)

On the drug side, the movement toward more moderate Democrat Biden likely means more minor drug policy changes in the U.S. and reduces the chances of a “Medicare for All” scenario (championed by Biden’s key opponent, Sen. Bernie Sanders), which would likely significantly reduce U.S. drug prices with the negotiating power of a one-payer system. With the election support shifting toward Biden, we believe the most likely change in U.S. drug pricing policy reform centers around a Senate bill, the Prescription Drug Pricing Reduction Act. However, we still believe this proposal holds less than a 50% chance of passing based on the mixed level of support by both parties, and we haven’t included passage of the bill into our models. However, if passed, we estimate a 5% aggregate hit to U.S. branded drug sales from Medicare inflation price caps and Part D redesign proposed in the bill. We believe the drug and biotech industries could adapt to this headwind with only minor impacts to cash flows, partly through cost cuts and increased volumes based on the lower prices mandated in the bill. Importantly, the bill would limit out-of-pocket payments by patients in Medicare, which would likely help appease demands for lower U.S. drug prices.

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