Pharmaceutical stocks largely shook off the brunt of Medicare’s negotiated drug prices. But that doesn’t mean they’ll be spared any heat in the looming 2024 election.
That’s because hammering at high drug prices is good for political cachet, experts say.
Drug prices have already taken their licks this year. In August, Medicare officials unveiled the new, negotiated prices for the initial 10 drugs targeted for reductions under the Inflation Reduction Act. The negotiations lowered the list prices for some drugs by as much as 79%. They’ll go into effect in 2026.
Meanwhile, presidential candidates Donald Trump and Kamala Harris will likely have more ideas on how to tamp down high prescription drug prices in the U.S., says Michael Abrams, strategic advisor to DIA. DIA is a global multidisciplinary life sciences association. Abrams is also a managing partner at consulting firm Numerof.
“Consumers confront the issue of high drug prices every time they take a script to the drugstore to have it filled and that’s where they have to pay their portion if they’re insured,” he told Investor’s Business Daily. “They pay their copay and that’s when it hurts. And it happens a lot. So, it’s really forefront in most consumers’ awareness.”
And the presidential candidates are well aware of that fact.
Pharmaceutical stocks ramped to a 2024 high in February before bottoming out in April. The industry group of 31 companies is now reapproaching that high point.
2024 Election: Drug Prices Under Pressure
Trump and Harris seemingly agree: Americans pay too much for prescription drugs.
But, no matter who wins the White House in November, there are unlikely to be any “draconian” changes to health care, RBC Capital Markets analyst said in a report. They spoke with policy experts on both sides of the political aisle.
Rather, the U.S. could see an evolution of current drug pricing policies.
And, when it comes to that, Democrats are more dangerous for pharmaceutical stocks than Republicans.
It was under President Joe Biden, a Democrat, that the IRA passed. The new law allows the Centers for Medicare and Medicaid Services to negotiate down some drug prices. In 2026, 10 drugs from Medicare Part D — mostly over-the-counter prescriptions — will be subject to lower prices.
Each year, Medicare will add a greater number of drugs to the negotiations list. In 2028, Medicare Part B drugs — mostly biologics — will join the party.
“I think there’s a strong desire on the part of the Democrats to take this idea further,” DIA’s Abrams said. “They’ve already been promising that they would like to accelerate and expand that program from the current 10 to 20 drugs per year to 50 drugs per year. I’m sure that will resonate with some voters.”
The Republican Impact On Pharmaceutical Stocks
But that doesn’t mean Republicans don’t also pose a threat to pharmaceutical stocks and drug prices.
During his presidency, Trump did make some efforts to rein in drug prices. In a late-term bid, Trump proposed the “most favored nations” approach. It would have linked the prices Medicare pays for drugs given in doctor’s offices to an international pricing index. He also pushed for drugmakers to pass rebates onto Medicare enrollees. Usually those would go to insurers and pharmacy benefit managers.
But neither effort took hold when Biden assumed office in January 2021.
In the 2024 election, Republicans could focus on allowing Medicare to develop its own formulary, the RBC analysts said. This could negatively impact utilization and potentially pricing. Politicians on the right side of the aisle could also target conflicts of interest between federal regulators and pharma companies. This would lead to changes in how agencies like the FDA are funded.
William Blair analyst Myles Minter says Trump, at best, will focus on drug price control, “not making them less restrictive than the current state.”
“While Biden and Harris have discussed a desire to expand the footprint of the IRA (more drugs under negotiation and greater discounts), Trump has consistently supported international reference pricing, and therefore the industry might be best served by hoping for nothing more restrictive over the next four years,” he said in a report.
The IRA’s Impact On Drug Prices
Expanding the IRA remains the biggest threat to pharmaceutical stocks, experts say.
Under the IRA, small molecule drugs become eligible for Medicare price negotiations nine years after winning FDA approval. Small molecule drugs include most pills. Pharma companies say nine years isn’t a long enough sales timeline to recoup the money they invested to develop those drugs.
Biologics have a slightly longer 13-year window.
The pharma industry has consistently fought against the drug pricing law. Several companies — including Novartis (NVS), Merck (MRK), Johnson & Johnson (JNJ), Bristol Myers Squibb (BMY), Astellas Pharma (ALPMY), Boehringer Ingelheim and AstraZeneca (AZN) — have sued to block the IRA. Those efforts ultimately proved fruitless.
John Stanford, executive director of the Incubate Coalition, says companies are already backing off from developing riskier drugs.
Roche’s (RHHBY) Genentech division said it might delay seeking approval for an ovarian cancer drug due to the IRA. Alnylam Pharmaceuticals (ALNY) cited the IRA when it scrapped plans to test its drug, Amvuttra, in patients with a rare condition called Stargardt disease. The IRA doesn’t outline drug price protections for rare-disease medicines, which generally see lower uptake.
Eli Lilly (LLY) discontinued a Phase 1 study for a potential blood cancer drug due to the IRA’s “pill penalty,” according to a document published by House Budget Committee Republicans.
“I think we’re going to have more of these stories where they’re leaving innovation on the shelf,” Stanford said in an interview. “You can’t have it all. If we’re going to spend less money on drugs, we’re going to invent fewer drugs.”
Pharmaceutical Stocks: Balancing Winners, Losers
When it comes to drug prices, the winners pay for the losers, Stanford said.
“A thought experiment we do with Democratic members is say, ‘Hey, do you think a 1,000% profit on a drug is excessive?'” he said. “And most of them say, ‘Yes, that’s outrageous. That’s what we’re combating.’ I say, OK, well nine in 10 drugs fail. To even break even, that 10th drug needs to earn 1,000% profit to pay for the nine.”
But that’s a hard pill to swallow, says Bill Coyle, who heads up biopharma for consulting firm ZS.
AbbVie’s (ABBV) Humira is one of the most successful drugs of all time. At its peak in 2022, the treatment for inflammatory conditions brought in north of $21.2 billion in sales. The next year, lower-cost biosimilars took a chunk of Humira’s sales. Still, this year it’s expected to generate $9.63 billion in sales, according to FactSet.
Keytruda is a moneymaking machine for Merck. The cancer blockbuster brought in $25 billion in sales last year. Pharmaceutical stock analysts expect it to peak at $34.5 billion in 2027 before the first patents on it begin expiring in 2028. A rival from Bristol Myers Squibb called Opdivo had $9 billion in 2023 sales. Analysts project its peak at north of $11 billion in 2027.
“It’s easy to look at the Humiras of the world, the Keytrudas, the Opdivos and say, ‘Yes, they returned an amazing (return on investment),’ but not all drugs do,” Coyle told IBD. “Then of course there’s how do you account for the cost of failure? Many drugs fail in development. So, it’s a pretty complex argument.”
2024 Election: Tougher Regulations?
Regardless of who wins the 2024 election, Jesse Mendelsohn says he’s advising clients to prepare for more complex regulations. Mendelsohn is a compliance and pricing executive with Model N. Model N provides revenue optimization and compliance solutions for life sciences companies.
“Drug pricing will be a very hot topic in this election cycle,” he said in an email.
But conversations are likely to be more nuanced. State-level politicians could also have an impact on drug prices and pharmaceutical stocks leading up to the 2024 election.
“As politicians consider future drug pricing policies, they must balance the desire for lower prices with the need to maintain incentives for pharmacological innovation,” he said.
Abrams, the DIA advisor, uses stronger words. Any efforts to tamp down drug prices — including an expanded approach to the IRA — will be damaging to Big Pharma’s revenue and pharmaceutical stocks. He likened it to a “takeover by the federal government of the pharmaceutical sector.”
Drug development is complicated and risky, he says.
“So, if we were to find that the government is the one driving the car of the pharmaceutical business, I would not be all that confident about the outcome,” he said. “And I don’t think investors would be either.”
This article was originally published on Investor’s Business Daily.
