Biopharma Industry: Latest Executive Order Threatens Broad Cut to US Drug Prices

President Donald Trump released an executive order on May 12 calling for a 30-day negotiation period between the Department of Health and Human Services and the biopharma industry, with the threat of a rule from the Centers for Medicare & Medicaid Services to lower US drug prices if no deal is reached.

Why it matters: The president’s goal of bringing US drug prices more in line with pricing in other developed countries is among the more feared potential policy changes in the biopharma industry, although we have generally seen sweeping changes as a low-probability scenario.

• While discounts in the United States and other markets make it quite difficult to get a clear comparison of net prices in various markets, we’ve estimated that US prices are on average roughly double those in major international markets.
• We have estimated that bringing US prices in line with European prices across US channels (public and private) would result in a 24% hit to US drug revenue, and with most firms bringing in about half of their revenue from the US, a worst-case scenario would mean a low-double-digit top-line hit.

The bottom line: We’re maintaining our fair value estimates in this largely wide-moat industry. While a worst-case scenario would lower our fair value estimates, shares rose on Trump’s announcement, as we think investors are encouraged by the vagueness of the order and the significant room for negotiations.

• We think a likely final focus for price cuts could be Medicare drug spending in hospitals, which represents 10% of the US drug market, limiting exposure relative to broader Medicare (30%) or all government programs (closer to 50%).
• Rulemaking is a hard way to make large changes stick. Historically, Congress has been the source of major policy changes in the industry. Efforts to include Medicaid price benchmarking in the emerging reconciliation bill appear to have failed, which likely limit Trump’s scope for action.