The Biden administration’s highly anticipated plan for drug-pricing reform includes proposals that could limit the private sector’s willingness to invest in future research. Portfolio Manager Andy Acker and Research Analyst Luyi Guo say investors shouldn’t count on that outcome just yet.
- The Biden administration’s road map for drug-pricing reform includes a proposal to allow Medicare to negotiate drug prices with manufacturers, akin to price controls.
- Price controls are controversial since they could disincentivize the private sector from investing in research, which has some lawmakers, including Democrats, worried.
- As such, we believe expectations that legislation will be ready this month are unrealistic and other proposals could have a better chance of winning broad support, such as improving affordability for patients.
The Biden administration has unveiled the first draft of its highly anticipated road map for U.S. drug-pricing reform. Elements from the plan could be included as part of an ambitious US$3.5 trillion budget package now being debated by Congress, with the goal of using drug cost savings to offset some of the new spending measures. The plan includes proposals that could put future drug innovation at risk, creating uncertainty for the sector, but we believe investors should approach this potentially Sisyphean task1 with a level head.
What is proposed
One of the most radical changes the Biden plan supports is allowing Medicare (the government health insurance program for the elderly) to negotiate prescription drug prices with manufacturers and to make those prices available to private insurance policies (such as those offered by employers). The plan also supports limiting drug price increases.
A number of other key initiatives include:
- Promoting competition by increasing price transparency and bringing biosimilar and generic drugs to market more quickly. For example, drug manufacturers would be prohibited from making “pay-for-delay” agreements that can postpone the arrival of generic competition.
- Capping catastrophic spending in Medicare Part D to limit out-of-pocket costs for beneficiaries. (Part D is Medicare’s broad prescription drug coverage plan.)
- Creating a new agency within the National Institutes of Health that would invest in advanced biomedical research.
- Implementing testing models in Medicare’s Part B program that link a drug’s payment to the clinical value provided. (Part B covers medicines administered in a clinical setting, such as IVs.)
What we think is likely
Some of the proposals in the Biden plan – most notably, price controls – need to be passed via legislation, and while Democrats have a majority in Congress, it is a slim majority that lacks consensus.
Earlier in the year, for example, the House of Representatives passed H.R.3, a bill that also supports drug price negotiation in Medicare. But a number of Democratic members voiced concerns the bill would not garner bipartisan support. Meanwhile, Democrat Ron Wyden (chair of the powerful Senate Finance Committee) is crafting legislation that seeks to strike a middle ground between H.R.3 and a more moderate 2019 Senate Finance Committee bill that received bipartisan support.
In short, lawmakers are a long way from agreeing on the terms of reform. Meanwhile, House members are expected to finish marking up the US$3.5 trillion budget package by mid-September and vote on a US$1 trillion infrastructure bill on September 27, an agenda that leaves little time to find a middle ground. At the same time, the pharmaceutical industry is gearing up lobbying efforts against price controls, pointing to a report from the Congressional Budget Office that found H.R.3 could disincentivise private investment in drug development, leading to 60 fewer medicines coming to market over the next few decades.
The bottom line for health care investors
All of which is to say that we believe change, should it come, will likely take longer than expected and could be diluted verses current proposals. We believe to secure sufficient votes, lawmakers might have to abandon more controversial aspects (e.g., price controls) and focus instead on initiatives with broader support, such as lowering out-of-pocket costs for patients.
In our view, affordability represents the crux of the drug-pricing problem. Today, patients do not benefit from rebates and discounts provided by manufacturers to pharmacy benefit managers and other participants in the U.S. health care system. Consumers in Medicare and those without insurance pay based on a drug’s full list price, while manufacturers are compensated based on a discounted price. This gap unnecessarily distorts the market, is expensive for consumers and the government, and rightly needs to be fixed.
Hopefully, any new policy will not discourage private investment in advanced medical research, which could be a key outcome of government-directed pricing. But even then, the true impact would depend on how a “fair” price is determined. Drug development is extremely risky and expensive, with industry research showing 90% of compounds never make it out of clinical trials and the median cost of development roughly US$1 billion.2 The mRNA technology used in COVID-19 vaccines, for one, has been under development for decades, with companies labouring to produce mRNA-based vaccines long before the coronavirus emerged. We believe the Biden administration’s proposal to allocate more funds to advanced medical research recognises the importance of drug development, and that medicines which improve the standard of care for patients must be rewarded.
In the meantime, the drug-pricing debate could lead to near-term volatility for biopharma stocks. As always, we encourage investors to take the long view. Policy is never as straightforward as it seems. Excessive drug pricing has rarely been a sustainable path to growth. (Consider the blowback Biogen received for pricing its controversial Alzheimer’s drug at US$56,000 per year.) And in our view, Democrats will not want to be accused of slowing medical innovation, particularly after U.S. biopharma’s successful response to the pandemic and given increasing competition from China. In the end, the uncertainty of what’s to come may prove worse than the actual outcome. Investors may benefit by staying focused on more likely feats – such as those all-important medical breakthroughs.
1A futile task, relating to the story of Sisyphus, a character in Greek mythology who was doomed to push an immense boulder up a hill, only to have it roll down every time he got near the top.
2“Estimated Research and Development Investment Needed to Bring a New Medicine to Market, 2009-2018,” Jama Open Network. 3 March 2020.