Pharmaceutical Policy Under Clinton

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Includes: AGN, BHC, GILD, IHE, MRK, MYL, SNY, TEVA
by: Yevgeniy Feyman

Summary

Hillary Clinton has proposed a number of policies targeting drug pricing.

Two of the more likely ideas might actually be positive for drugmakers.

Reducing the FDA backlog and out-of-pocket caps are likely to increase revenues for drugmakers.

Prediction markets and polls have Ms. Clinton well ahead of Trump in the election, and health issue nonsense notwithstanding, it's likely that come January 20th, we'll be inaugurating another Clinton into the White House. Whatever your political views, this appears to be the most likely reality. Full stop. It makes sense, then, to consider what policies (and their likelihood of becoming law) we might see in a Clinton administration on the issue of drug pricing.

An important note before moving forward: presidential campaign promises are just that - campaign promises. There is no guarantee of any of them passing, or even becoming legislation. But the ability to dictate an agenda is powerful, and the ability to veto legislation from those who put up roadblocks is equally powerful.

I'll address two proposals that I think are particularly likely to at least make it into Clinton's agenda, and offer some sense of what the effects of each on the pharmaceutical sector (NYSEARCA:IHE) might look like.

Clearing the FDA's generic backlog

There are actually two backlogs to consider. In order to get a generic drug approved by the FDA, companies must submit an abbreviated new drug application (ANDA). The first step is filing these applications. As of December of last year, the FDA has reported that there is no longer a filing backlog. But there's another backlog to consider - namely, that the FDA takes, on average, around 40 months to approve a generic drug.

It's likely that in her proposals, this second backlog is what Ms. Clinton refers to.

In terms of what her agenda would look like in this regard, it's hard to say. Already the FDA has set a target goal of a 15-month review cycle for ANDAs submitted in FY 2016. Certainly, that timeline could be further compressed with more funding through an appropriations bill or through the reauthorization of the Generic Drug User Fee Act (GDUFA). And as far as likelihood of passing - this proposal takes the cake.

As a bipartisan issue (the issue of the FDA's backlog has been raised by Republicans multiple times), there might not need to be much horse-trading involved to pass legislation on this topic. Indeed, if it gets attached to GDUFA legislation, it would almost certainly pass. Separately, it isn't out of the realm of possibility to imagine that a provision like this could also make its way into a future version of the 21st Century Cures Act.

Reducing the time-to-market of generic drugs would do two things. On the one hand, it would help companies like Teva (NYSE:TEVA), Allergan (NYSE:AGN), and Mylan (NASDAQ:MYL) get their drugs to market faster and more predictably. This would add new revenue streams faster. On the other hand, additional competition and the threat of faster competition would limit the ability of generic drugmakers to raise prices - a 15-month review cycle would make price increases more difficult to sustain. That means that for companies - such as Valeant (VRX) - relying on increases in net of rebate prices (not list-prices) to drive additional revenue, their strategy may need to change.

Out-of-pocket insurance caps

This particular proposal is relevant given the well-documented public dissatisfaction with pharmaceutical companies, and the fact that much of a patient's out-of-pocket spending - copays, coinsurance, deductibles - will tend to go towards maintenance therapies and other drugs. This is why according to the projected National Health Expenditure Accounts compiled by the Centers for Medicare and Medicaid Services, out-of-pocket prescription drug spending is actually 46% higher in dollar terms than out-of-pocket spending on hospital services. All while hospital services make up closer to one-third of total health care spending, and retail prescription drugs only make up about 10%.

This is all to say that it might be politically savvy to focus on minimizing direct cost to patients, not necessarily to insurers.

In essence, the proposal would likely take one of two forms - either annual or monthly out-of-pocket limits on what insurers can require patients to lay out for prescription drugs. This isn't too different from existing caps under the ACA, except that the existing caps are annual and apply across the board to all out-of-pocket spending. Importantly, if you were to ask me a year ago whether this was realistic - I certainly wouldn't have thought so. But over the past year it seems that even Republicans are looking for something to do on drug pricing - that makes me think that a "middle ground" that doesn't explicitly impose price controls, but rather regulates one share of total spending, might be more realistic now.

As far as the specific economic effects go, the devil is in the details. That's why thinking in terms of a range of possibilities is probably most instructive here. In an analysis that I conducted some months ago evaluating two caps - one at $3,000 annually and the other $1,800 annually - the reduction in out-of-pocket spending ranged from $5.5 billion to $9 billion, respectively. This doesn't represent an actual reduction in drug spending - in a non-dynamic analysis, these funds just get shifted over to insurers with no impact on the pharmaceutical industry.

The dynamic impacts on the pharmaceutical industry are harder to model, but we can still think about them conceptually. A first-order effect might be to increase demand for expensive therapies across the board. This means that Gilead's (NASDAQ:GILD) Harvoni and Sovaldi would become more accessible, as would the PCSK9 inhibitors (from Merck (NYSE:MRK), Sanofi (NYSE:SNY) and others) with list prices around $14,000 (importantly, list price is important when thinking about out-of-pocket spending, as patients typically don't pay coinsurance on the net price), for instance. On its own, this would mean higher revenue for the affected companies, as utilization management becomes more difficult for PBMs and insurers.

But there's a bit more here. This kind of proposal could also embolden PBMs with large market shares (like Express Scripts (NASDAQ:ESRX)) to demand larger discounts off of list price. Of course, it's harder to do this in drug classes with little competition, but as far as HCV and PCSK9s go, there might likely be enough competition to permit bigger discounts - especially if the insurers can still guarantee an increase in volume.

The main question here is about what happens with the "savings." Some share will flow to pharmaceutical companies thanks to increased utilization. It's also reasonably likely that some of this might flow back to PBMs and/or insurers in the form of increased rebates. Of course, some of this might also be made up with increased premiums for insurance coverage altogether. On the whole, this is likely to be a net positive for pharmaceutical companies, particularly those with especially high-priced retail prescription drugs.

Conclusion

These are only two of Hillary's proposals on drug pricing - but because they don't explicitly hit "drug pricing" overall, they are probably the most likely. Other ideas, like requiring additional rebates in the Medicare Part D program or reducing the biologic exclusivity period would have different, more deleterious effects on the pharmaceutical industry. Fortunately for SA readers, the ideas most likely to get traction are also likely to be a net benefit for the pharmaceutical industry.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.