Big Threats To Big Pharma
Some of the leading Covd-19 pharmaceutical firms reporting earnings this past week and expectations were sky high.
Pfizer and Moderna are front and center when it comes to helping combat Covid and are also booking record profits leading to investors crowding into the stock.
With booster profits and likely further Covid-19 variants still to come, to say nothing of technological advances, there is a lot of speculation that we could be on the cusp of a new golden era in the pharmaceutical industry.
Could this be the case?
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While all the attention is on the Covid-boosted revenues other challenges are getting overlooked.
In particular, as we slowly grind towards passing some major legislation in Washington, DC we should start focusing on some possible outcomes for America's companies.
At present, there are two large political risks to the very profitable US pharmaceutical sector:
The current and gigantic "Build Back Better" package of reforms could legislatively curtail drug prices.
The growing bipartisan consensus around the willingness to carry out far more rigorous antitrust enforcement.
Only the former is receiving a lot of press right now.
But a tough antitrust regime might be the real risk to watch, especially now that some of the fears around regulating drug prices are not coming to pass.
Let's discuss why:
It is pretty undeniable that US drug prices are hefty and unreasonably so. Even a very sober assessment finds them well over 2.5 times those of other countries. It is far worse for some more experimental treatments or, bizarrely enough, brand name drugs that have lost their exclusive patent status.
Regardless of the precise details, drug prices have been a target for reform and legislation for well over two decades.
The Build Back Better bill has not yet been finalized - let alone been passed! - so any projection must be taken with a grain of salt. However, it seems likely that some new measures to allow Medicare to regulate drug prices will occur.
Right now, it seems as if the bill will include the following measures:
Allow Medicare to negotiate the prices of some medications, especially newer, brand name drugs.
Cap the out of pocket annual expenses for seniors at $2000.
Penalize companies that raise prices faster than the rate of inflation.
If this is the end result, then this package could actually be a relief for the pharma industry.
Why?
Well, the guillotine of major and prohibitively expensive legislation has been hanging over the pharmaceutical industry all year.
Executives and investors have been worried that a US legislative sea change could harm their ability to mint profits from their largest - and most profitable - market.
A few measures that, at least at the time of writing, are not included:
There is no mechanism to allow Medicare to negotiate over new drug prices.
There is also no way to tie US prices to foreign drug prices or some sort of global average.
And there are exemptions for small biotechs and pharma companies to skip any negotiation over price.
There are some real question marks about both the effectiveness and the point of all of the above measures. For instance, it might encourage large companies to own stakes in small biotech startups to circumvent drug pricing controls.
Financial hijinks are always a risk when trying to achieve political outcomes with economic incentives.
But regardless, the worst fears are most likely not coming to pass. That is an unalloyed good for the industry and removes a significant and very unwelcome fog of uncertainty over the sector.
What about the threat of a tougher antitrust regime?
Increasingly and crucially, under Republican and Democrat governments, antitrust drums beats are growing louder in the halls of Congress and the White House.
Eight US bills have been introduced in the last few years and all of them would significantly harm the way big pharma does business at present.
The harshest might be Senator Amy Klobuchar's Competition and Antitrust Law Enforcement Reform Act. This package of laws flips the onus for proving anti-competitive behavior onto the sponsors of the merger and gives them an obligation to disprove that fact. This would be a significant hurdle for most pharma mergers - big or small - to overcome.
This is both a reasonably new development and very problematic for the large and very expensively priced pharmaceutical stocks.
The reason?
Large pharmaceutical companies often buy small or dissimilar companies to help expand into new areas of business or replenish their drug repositories by buying expensive, patent protected medicines.
If these mergers start being judged as anti-competitive then many of the largest drug companies face serious challenges to replenish their drug pipelines. Between now and 2030 there are over $150 billion of US pharma revenues will be exposed to generic competitors.
At the risk of being a bit dramatic, if pharmaceutical company mergers are either denied or simply delayed under greater scrutiny then many companies could face prolonged earnings declines.
The challenge?
Yes, a bill like Senator Klobuchar's would require a bipartisan consensus to be achieved but it might not be quite as difficult as you might imagine.
Why?
In opinion polls, drug prices matter greatly to many voters and the Republican party is assiduous at courting its older, and very cost conscious base.
There is also the fact that many factions of the US GOP are moving rapidly away from being reflexively supportive of big business.
More importantly still, these antitrust winds are blowing abroad as well. The FTC announced a working group with the EU, UK and Canada to investigate further the connection between industry consolidation and higher drug prices.
Add it all up and we think this could be a space to watch in 2022 and especially 2023.
There are lots of casual assumptions thrown around about the pandemic being the start of a new wave of investment, profits and power for the pharmaceutical industry.
Rather, we could see how a combination of global and political headwinds coupled with a Biden administration suddenly more interested in working with the Republicans after the midterm elections which could alight on pharmaceutical companies - and their profits - as a perfect political punching bag.
Watch this space in 2022 and beyond.
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