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Donald Trump Takes On Drug Prices -- Should You Sell Your Drug Stocks?

Todd Campbell, The Motley Fool

Last week, President Donald Trump's long-awaited speech on how he plans to rein in drug prices was delivered, and while he outlined some moves that could crimp drug costs, his plan didn't include giving Medicare widespread power to negotiate prices nor did it include a plan to allow drug reimportation from lower-cost countries. The absence of these policies doesn't mean that these ideas are off-the-table permanently, but it may signal to investors that it's best to stay the course and hold onto their biotech and pharmaceuticals stocks, rather than sell them.

What's going on

There's little debate that the U.S. has a healthcare crisis at hand. Retiring baby boomers are living longer and increasing demand for everything from primary care visits to hip replacements to medicines.

Gold and silver pills spilling out of a large gold and silver pill onto a pile of fifty and twenty dollar bills.

Image source: Getty Images.

Most healthcare spending is for doctors and hospitals, but drug costs still represent a significant proportion of total U.S. healthcare costs. According to the Centers for Medicare and Medicaid Services' (CMS) National Health Expenditures report, prescription drug spending accounted for 10% of the $3.3 trillion spent by America on healthcare in 2016.

It's unlikely drug spending is going to decline anytime soon. Technological advances, such as a better understanding of the role of genetic mutations in disease, are leading to progressively more complex and thus, expensive, medicines.

Given the U.S. is already spending roughly $330 billion on prescription drugs annually and expensive new drug launches are likely to continue, it's little wonder drug prices are on the minds of consumers, Congress, and the White House. 

What are Trump's plans

Americans have been awaiting a speech on drug prices by the president since mid-April, when reports surfaced that he would offer up his thoughts on the subject on April 26.

The speech was delayed, but Trump finally addressed the nation last week. Overall, the speech was light on specifics, but the Department of Health and Human Services provided a fact sheet afterward that filled in some blanks.

Trump's goals to curb drug costs include:

  • Boosting competition
  • Negotiating prices better
  • Offering incentives for lower list prices
  • Lowering out-of-pocket drug costs, including co-insurance

Sparking competition

To boost competition, Trump wants to increase the pace that the Food and Drug Administration is reviewing and approving drugs, particularly when it comes to low-cost generic drugs and biosimilars -- a new class of biologics that can compete against high-priced specialty biologic drugs when their patent protection ends. Biologics, including Humira, the world's best-selling drug with over $18 billion in annual sales, account for an increasingly larger share of drug spending, so biosimilars' impact on spending could be significant.

In addition to encouraging more FDA approvals, Trump wants changes to the existing 180-day exclusivity period granted to the first generic drugmaker that files an application for a generic version of a drug. First-to-file generic drugmakers can "park" their application at the FDA indefinitely, effectively blocking generic entry. This can happen if a brand drug manufacturer sues a generic drugmaker or it cuts a deal with a generic drugmaker so it won't sell its generic.

Parking doesn't happen often anymore because the Medicare Modernization Act (MMA) of 2003 gave the FDA the right to forfeit exclusivity if generic drugmakers fail to achieve milestones. Nonetheless, Trump wants to eliminate the scheme altogether by changing the rule so that the 180-day clock starts as soon as a second generic company files for an FDA OK.

Trump also wants to boost competition by increasing the use of value-based pricing models wherein drugmakers offer discounts to payers if their drugs fail to work in patients.

New negotiating tactics

In Medicare, most drugs are paid for under Part D insurance or in Medicare Advantage plans that include drug coverage. Some drugs that are administered in doctor's offices or hospitals, however, are covered by Medicare Part B.

In some cases, Part D plans don't have the same power to negotiate prices as private insurers, which use a variety of tactics, including leveraging their market share by threatening to block access to drugs or giving competing drugs preference for use in exchange for price discounts and rebates.

Trump isn't proposing centralizing Medicare and Medicaid pricing power to lower drug costs, but he is supporting some changes that could result in insurers more forcefully negotiating lower prices with drugmakers.

He's opening the door for individual states to participate in a Medicaid pilot program that would create its own formulary and negotiate directly with manufacturers. He also wants to give Medicare insurers the ability to negotiate different prices for high-priced drugs based on the indication that they're used in, something that they can't do today.

Also, because privately run Medicare plans currently have to get CMS approval if they want to change how they cover drugs halfway through a plan year, and that can tie their hands if a sole-source generic drugmaker decides on a mid-year price hike, Trump wants to give insurers more leeway to adjust their plan in response to price increases.

He also wants to reduce the minimum number of drugs covered by Part D formularies for an indication to one from two; a move that may force drugmakers to offer better prices upfront in exchange for preferred use.

Furthermore, he hopes to establish an annual inflation limit for drugs covered under Medicare Part B and to eliminate loopholes and poor controls that drugmakers exploit to reduce or avoid paying the rebates they've promised to Medicaid. 

A person hands a prescription to a pharmacist.

Image source: Getty Images.

Lower list prices and out-of-pockets

List prices on drugs are akin to the list prices for an automobile. They're often only a starting point in determining the cost someone pays.

Drugmakers often negotiate price discounts or rebates to private payers, including insurers, that result in net prices that are much lower than the list price. Those discounts may not flow through to patients, though, and that's something Trump wants to see change.

He also wants to increase insurers' costs when patients are in the catastrophic phase of their Part D drug coverage by implementing a catastrophic out-of-pocket maximum; a move that could force insurers to negotiate more aggressively with drugmakers to lower their prices.

Other options that the administration is supporting are mandating that drugmakers include list prices in advertising, highlighting when drug prices aren't increased, and creating a drug price dashboard to track price changes. These moves increase transparency in ways that could shame drugmakers into holding the line on prices.

His administration wants to remove the ability for Part D contracts to include language that prevent pharmacists from telling patients when cash prices are lower than co-payments, too.

How worried should investors be

A lot of the levers being proposed are far less risky to drugmakers' bottom lines than what the industry feared. Centralized negotiating and drug reimportation could've made a much bigger dent in biopharma profitability than these changes and for now, the administration appears content to research and study those options, rather than implement them.

Also, many changes, including having rebates flow through to consumers and reworking out-of-pocket rules, impact insurers more directly than drugmakers.

Given the proposals are more industry-friendly than anticipated, I can't help but think that investors should remain much more focused on the long-term opportunity associated with developing products for a larger, longer-living population than Washington. After all, changes in Washington that investors have feared in the past, including Obamacare, ended up increasing industry revenue and profit, rather than crimping it. 

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