US drug prices: A costly cure

Rising drug prices have triggered something of a political explosion during the US presidential nomination campaigns. Perceived by some as a vote-winning tactic, the discussions have nonetheless shone a spotlight on the prices set by drug companies and paid by health insurers, hospitals and government health schemes. There are concerns that key drugs are becoming unaffordable and inaccessible, even for the insured and relatively affluent.

Stepping aside from the radical price hikes imposed by companies such as Turing and Valeant, we sought to understand what the impact of a regulatory clampdown on drug prices might mean for the pharma industry and its stakeholders. Financial impacts could vary – for example, Morgan Stanley predicted a 4% impact on 2017 earnings per share from pricing restrictions (regulatory or other). Hilary Clinton’s tweet in 2015 following Turing’s excessive price hike brought share prices in the biotech sector down by 4%. Employers and insurers are also affected, many of whom may start to transfer some of the increased costs to consumers, via higher monthly premiums or rising co-pays, or may simply exclude the expensive drugs from their lists.

1. A dual pressure for drug companies
Currently there is no regulatory “cap” on drug prices. In theory prices should be controlled by market mechanisms, for example through drug companies providing rebates (a type of discount) to insurance companies. There is a widening gap between the “net” price provided to insurers and pharmacies once rebates have been taken into account, and the headline “list price” which is the price if the drug has to be paid out of pocket. It is this list price that has been rising, due to several factors but partly to compensate for the increasing pressure to provide rebates. For drug companies, this signals pressure at both ends of the price spectrum. Furthermore, there is little evidence to show that patients are benefitting from the increased rebates.

2. Whoever wins the election, regulation is far off the mark
The Clinton and Trump campaigns have both proposed some regulatory tweaks to pricing structures, such as allowing Medicare (the government health scheme for the elderly) to negotiate prices directly with drug companies, which has been met with criticism. In addition, a trial is already underway to shift doctors to a value-based payment model. But in reality, any major federal change will be difficult to achieve in the near- to mid-term, due to congressional barriers and more pressing campaign priorities. Consequently any near-term requirements on drug companies are likely to be state-wide rather than federal. Indeed, state initiatives that are already being discussed include improving transparency on pricing structures and applying partial caps.

3. Companies are struggling to tackle the debate
Drug companies are generally resistant to either increased transparency or regulatory change, arguing firstly that pricing structures already take into consideration many complex factors, such as R&D costs, availability of other treatments, impacts on patients and ability to reduce other healthcare costs. Secondly, they contend that regulatory action would change the whole healthcare and insurance industry, with drug pricing just one part of a broader challenge. Some companies appear more proactive than others. For example, a major pharmaceutical has trials underway for “pay for indication” (where a drug is priced according to its effect on different tumours), and “pay for performance”. Again, these face various challenges such as who to reimburse, how physicians would respond, and incompatibility with the pricing structure adopted by Medicaid (the government scheme for those on low incomes).

4. Uniqueness will pay; transparency will help
Companies that have limited innovation in their portfolio and pipeline, or whose strategy has relied on price hikes without incremental R&D investment, are the obvious losers – this is already well-known by the market. Those with lower US exposure will also obviously be less sensitive to any limitations on US price hikes – again, this has been factored in by the market. The key differentiating factors for other companies will be uniqueness and transparency. Uniqueness encompasses factors such as better innovation, a higher proportion of sales from new products, and exposure to therapeutic areas that are hard to replicate. Transparency focuses on clearer patient outcomes and proactive communication on the pricing debate. Such companies have a better chance of shielding themselves from restrictions on price rises and negative public opinion. Regardless of political outcomes, we believe the healthcare industry as a whole will have to address increased scrutiny and pressure on pricing. As long-term shareholders, we continue to engage with companies including GSK, Pfizer and Roche, to understand their position, exposure, and response.

Belinda Gan, associate product manager, Global Sustainability at  Schroders 

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