Drug Pricing Policy in the Inflation Reduction Act a Moderate But Manageable Negative to Biopharma

The likelihood of drug-pricing policy changes in the United States changed dramatically over the course of July, and we are now assessing the impact of the various measures included in the Inflation Reduction Act of 2022 in our Big Biopharma valuation models.

Bill’s Passage Would Be a `Moderate Negative’

Assuming the bill is eligible to pass via reconciliation (the Senate parliamentarian is reviewing the bill), we think Democrats will be able to pass the Senate bill, paving the way for it to be signed into law. Overall, we don’t expect major changes to our fair value estimates or moat ratings, as the changes net out to a moderate negative that we believe is manageable, likely through a combination of cost-cutting, agreements with generic firms for limited authorized generic launches (to avoid the list for negotiated drugs), and higher launch prices (to counter pressure on price increases and earlier declines due to negotiation).

Key Impacts on Revenue Streams

From the perspective of patients, the bill reduces potential out-of-pocket costs in Medicare, making it widely popular. While government savings are highly driven by Medicare drug price negotiation and inflation caps (roughly $100 billion in savings from each measure, according to Congressional Budget Office estimates), we see three key impacts to drug firm revenue streams from the bill: shifting Medicare Part D cost-sharing to biopharma firms with more expensive drugs; penalizing biopharma firms that raise Medicare prices by more than the rate of inflation annually; and mandatory price cuts on the top-selling Medicare drugs that have extended patent protection. We had previously included potential modest U.S. drug policy changes in our Big Biopharma valuation models related to Part D redesign and inflation caps, but these didn’t result in any significant fair value estimate changes.