Trump's Proposed Drug Pricing Policy Works For Biotechs

Includes: CELG, IBB, XBI
by: ModernMonetaryTheorist


President Trump met with the heads of several big drug and biotech companies to discuss his vision for the federal government's drug policy.

The downside of his plan is that the federal government will negotiate for lower prices for all federal programs that purchase pharmaceuticals.

The upside is a streamlined approval system for life-saving drugs that will bring them to markets faster. This will extend the shelf life of patented products, enhancing value.

The Trump Administration is rolling so fast that many people may be missing the significance of some of his new policy proposals. As soon as one thing happens and enters the news cycle, then something else happens and replaces it in the news cycle. Instead of days in the news cycle, or 24 hours, some things like his new drug pricing ideas last for minutes. Many people who are not news junkies don't even see it.

Trump has proposed a radical departure from the way the federal government pays for pharmaceuticals, and approves them. He has ideas to change policies that have been in place for decades. While there can be no assurance that any of his ideas will actually be put in place, it would be wise for investors to fully understand just what some of his proposals are. Because they could happen.

President Trump met with the heads of six major pharmaceutical and biotech companies to discuss his ideas. The companies at the meeting were Merck (NYSE:MRK), Celgene (NASDAQ:CELG), Amgen (NASDAQ:AMGN), Eli Lilly (NYSE:LLY), Novartis (NYSE:NVS), and Johnson & Johnson (NYSE:JNJ). The President outlined four key goals he would like to achieve as part of his drug pricing policy. The drug companies asked the President for tax reform.

The first goal outlined by the President is a desire to lower drug prices for the federal government, especially for the two largest health programs Medicare and Medicaid. In 2003, when the prescription drug program was added to Medicare, the law stated that the federal government is prohibited from negotiating drug prices for Medicare recipients.

The President would like to change this law and lower the prices drug companies can charge Medicare recipients. This is clearly negative for drug companies' bottom lines. However, the President's three other goals are all positive for drug and biotech companies.

The second goal is to have drug companies increase manufacturing in the U.S.. On the surface this may seem to raise costs. But the President is committed to lowering the corporate income tax rates. A couple of years ago Pfizer (NYSE:PFE) made huge headlines when they relocated to Ireland, which has some of the lowest corporate tax rates in the industrialized world. Lower tax rates would help offset any increase in manufacturing costs.

The third goal is to have other countries in the industrialized world pay their fair share of drug costs. With the exception of Japan, most other industrialized countries have some form of government controlled health care for their citizens. These governments negotiate lower costs than drug companies receive in the U.S.

For the most part they reimburse drug companies based on the costs to develop a specific drug, the manufacturing costs, and a markup for profits. But they do not allow the drug companies to pass along the costs of all the research that doesn't result in a commercially successful product. In other words, the winners are supposed to pay for the losers.

These countries avoid paying for the losers, and according to the President, are "freeloading" on the U.S. which does reimburse for all of the losers. It would be a clear positive for drug companies if they could get higher prices from other countries.

The fourth and final goal is to streamline the FDA and speed up the approval process for life-saving and other significant drug breakthroughs. Right now a company gets a 20 year patent for protection for any drug from the time the patent is filed. It is not uncommon for a company to take 10 to 15 years to move a drug from conception to final approval.

The normal process involves a Phase I safety trial. Then, if successful, a small scale Phase II efficacy trial. Then, if successful, one or two large scale Phase III trials which, if successful, are then submitted for approval.

If the approval process could cut a few years off the approval time-line, and allow much higher levels of compassionate use, then companies would reap big benefits from having the product on the market for a larger portion of the 20 year patent protection period.

Let's take a look at Celgene's research pipeline as an example of what faster approvals could mean for the overall valuation of a drug or biotech company:

Celgene has 41 products in its research pipeline, including 19 products that have advanced to Phase III trials. Obviously the odds of all of these programs succeeding is low. But the odds of several of them succeeding is more than possible. If the FDA can get successful products to patients faster, it would greatly benefit both the patients and the drug companies.

It is not known if any of these policy proposals will occur. But things could move faster than expected. Democratic Congressman Elijah Cummings has pledged to meet with the President soon to work on potential changes to U.S. drug pricing policies. Should these policies come to fruition, the big winners will be patients and taxpayers. But drug companies with the most robust research pipelines would also be overall winners.

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.