What Drug Pricing Policy Talk May Mean for Biopharma

Upcoming congressional proposals on lowering drug pricing as well as a recent plan from the Department of Health and Human Services have put U.S. drug pricing policy back in the spotlight. We continue to see Medicare Part D redesign capping out of pocket costs of seniors and Medicare inflation caps as the most likely reforms to pass Congress. We forecast a 50% probability of Part D redesign (potential 1% hit to U.S. drug sales) in our base-case scenario and an overall 4% hit from inflation caps in our bear-case scenario. While price negotiation can take many forms, we haven't seen a proposal that we believe is moderate enough to pass the razor-thin Democrat majority in the Senate and also be ambitious enough to gain the support of more progressive Democrats in the House.

Therefore, we don’t expect any changes to fair value estimates or moat ratings for our biopharma coverage. We continue to expect innovative drugs will carry strong pricing power, a core pillar in the valuations and moat ratings for the industry.

Congress is reconvening and will work to pass a $3.5 trillion budget reconciliation package, and Politico reported that House Democrats plan to include Medicare drug price negotiation (along with other elements of the HR3 bill, which was originally introduced and passed in the House in 2019) in their budget reconciliation package. In the Senate, the Finance Committee is likely to release its own plan this month, and Stat has reported that the Senate may propose an international reference pricing system similar to that included in HR3, or could propose pegging Medicare prices to prices in other U.S. government programs, like the health program for the Department of Veteran Affairs or Medicaid.

We expect Congress will struggle to pass any system that includes significant Medicare price negotiation, such as pegging prices to international prices or deeply discounted (Medicaid, VA) U.S. prices, given pressure from more moderate Democrats in the Senate. In addition, if the Senate bill focuses on Medicare negotiation (rather than introducing reference prices for both Medicare and private insurance plans, like in HR3), drug firms may be able to offset much of the impact with price increase in the private market.

The Department of Health and Human Services also released a plan last week to lower drug costs, calling out drug price negotiation as a key part of controlling costs and mirroring other parts of the HR3 bill, like capping out of pocket costs in Medicare Part D and capping price inflation. However, it is not clear what sort of parameters the administration favors for price negotiation; this could be somewhere on a spectrum from prices only slightly lower than what PBMs are already able to negotiate on behalf of Medicare, to domestic reference prices, to international reference prices.

Using estimates from the Congressional Budget Office for the impact of HR3, we previously estimated that U.S.-branded drug sales could fall 21% below our current forecasts if international price benchmarking were applied to Medicare and private plans, with up to a 40% impact if such a system were applied to all drugs (the plan would likely only apply to a basket of drugs) and if drug firms were not able to offset these prices with international price increases. Based on our prior analysis of rebates in Medicaid and the VA, the impact of domestic reference pricing could also be sizeable, as high as 20%, if applied to all of Medicare (assuming no offsets).

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