Last week, President Trump scrapped the Republican healthcare reform bill after it did not receive enough votes from lawmakers. It was an ignominious defeat for a president who had promised a repeal of Obamacare. In the end, the Republican bill seemed to be hastily put together, and not well thought out. President Trump needs to prove he can govern and that might not be good for healthcare companies.
Earlier this month, Trump again sounded off on rising healthcare costs:
"Once healthcare reform is done and Obamacare has been repealed, it will be time to get to work on medicine, bringing down the cost of medicine by having a fair and competitive bidding process. Some people think that's just as important as healthcare," said Trump during a speech in Louisville, Kentucky Monday night.
The president needs to start delivering on his campaign promises, and tamping down rising healthcare costs is an issue both political parties agree on.
Parsing The President
Below are issues raised by President Trump and my interpretation:
We Need To Bring Healthcare Prices Down
Rising medical costs reached the public consciousness during the 2016 presidential elections. According to PricewaterhouseCoopers ("PwC"), healthcare costs are expected to grow by 6.5% in 2017 - the same as last year. However, it would still be three times the rate of inflation which is still under 2%.
Despite trillions spent on bailouts to Wall Street and record low interest rates, the government has been unable to reach the Fed's 2% inflation target. Healthcare is an inelastic good. Demand remains robust in spite of price increases. Runaway costs amid anemic economic growth are devastating to the populace. The data supports Trump's claim that healthcare costs need to be reined in.
We Have To Bring Prices Down For Medicare, For Medicaid
Medicare and Medicaid are two of the biggest buyers of drugs in the U.S. They also pay exorbitant prices vis-a-vis government entities abroad. Europe has a single-payer system, and Japan covers about 40% of its country's healthcare cost. They also use their buying power to negotiate lower drug prices, unlike the U.S. Trump has intimated going to a single payer system. In the meantime, I think it would behoove the president to find those drugs that cost Medicare and Medicaid the most, and attempt to negotiate lower prices.
HCV drugs can cost $80,000 to $90,000 per regimen prior to discounts. In the past, HCV has represented the biggest payout for Medicare and Medicaid. The government could get the biggest bang for its buck by taking a scalpel to HCV costs. Despite lowering their prices already, leading HCV providers like Gilead (NASDAQ:GILD), Merck (NYSE:MRK) and AbbVie (NYSE:ABBV) could be at risk. HCV represents over 40% of Gilead's total revenue, so it has the most to lose from the government's renewed focus on drug prices.
On a per patient basis, Mallinckrodt's (NYSE:MNK) Acthar is one of the highest-priced drugs reimbursed by Medicaid and Medicare. The company still has not provided sufficient studies on Acthar's efficacy for certain diseases. Cutting payouts for HCV drugs and Acthar should be first on the government's agenda, in my opinion. The nuclear option - pushing for a single-payer status - could gain resistance from certain lawmakers, and might take longer to attain, if at all.
Push For The Importation Of Cheaper Drugs
Senators Bernie Sanders, Cory Booker, Elijah Cummings et al recently proposed a bill to allow the import of cheaper drugs from Canada. the move could potentially help tamp down runaway drug costs. The new bill - The Affordable and Safe Prescription Drug Importation Act ("The Act") - will allow the importation of qualifying prescription drugs manufactured by FDA-inspected facilities from licensed Canadian sellers. It could potentially create a more competitive landscape in the U.S. and drive prices down.
The Act has gain some bipartisan support and could have a better chance of being approved if President Trump threw his energy behind it. It would represent the opportunity for the president to work effectively with Congress to pass legislation both sides have voiced support for.
Streamlining Approval Of New Drugs
President Trump wants to streamline the drug approval process and bring drugs to market faster. That could be a double-edged sword for drug makers. The Senate Special Committee on Aging recently completed a year-long study on price-gouging in the drug industry. Its 130-page report titled, Sudden Price Spikes In Off-Patent Prescription, identified the similar characteristics among price-gougers, and recommended ways to combat them. One such recommendation was prioritizing the FDA review of generic drug applications for certain off-patent prescription drugs.
Streamlining the process to bring generics to market could create competition for price-gougers and potentially drive down prices for certain drugs. That said, price-gougers like Valeant (VRX) could be vulnerable if generics could hit the market faster than expected in order to create a more competitive marketplace.
The Nasdaq Biotechnology Index (NASDAQ:IBB) rose 0.47% Friday. It could fall hard if President Trump focuses on ways to cut rising healthcare costs. It would provide the perfect opportunity to prove he could govern and follow through on his promises. I expect drug stocks - particularly GILD, MNK and VRX - to fall further over the coming weeks from the threat of real drug legislation.
Disclosure: I am/we are short VRX, MNK, GILD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.