The influence of American politics on the healthcare sector 

Politics usually only have short-term effects on stock markets – so they say. But the healthcare and pharmaceutical sector is an exception to this golden rule.  

The diverse sector, ranging from pharmaceutical companies, manufacturers of diagnostic equipment to contact lenses and glasses manufacturers is often significantly impacted by political decisions.  

Currently, this is especially true for the world's most important market: the USA. At the centre of the discussion is the Inflation Reduction Act (IRA).   

By Sebastian Hofbeck, Analyst Healthcare Sector at DJE Kapital AG 

The end of free market pricing for pharma in the US? 

The USA, which is also the largest and most important market for the global pharmaceutical industry, has so far been a major exception to how prices for pharma products are set. In 2022, for example, the US accounted for 64 per cent of Eli Lilly's sales, 51 per cent of Roche's pharma division sales and 46 per cent of Merck & Co's sales. According to a study by the Department of Health Care and Social Services (HHS) in the US, which compared 27 drugs in 16 developed countries, the cost of drugs in the US was 80 per cent higher than the average cost in comparable countries. According to a January 2021 study by the RAND Corporation, the price of brand-name medicines in the US was as much as 344 per cent higher than in other OECD countries. Therefore, any changes in US market are relevant for investors in the pharmaceutical sector.  

 How the Inflation Reduction Act (IRA) could change the pharmaceutical industry in the USA  

In August 2022, US President Joe Biden signed the IRA into law. The IRA aims to counteract inflation, promote clean energy and reduce the burden of healthcare costs. According to forecasts by the Congressional Budget Office, the IRA is expected to generate 287 billion US dollars in savings over the next ten years with about 31 billion US dollars of savings expected until 2031.  

The focus will be on changes to Medicare, a government health insurance programme for US citizens who are at least 65 years old, have a recognised disability or suffer from severe end-stage kidney disease. In 2021, Medicare spending accounted for nearly $900 billion, or just under 21 per cent of US health care spending. The IRA introduced three main reforms for Medicare: capping drug price increases, limiting the maximum co-payment for drugs and allowing price negotiations.  

 Price cap on drugs likely to have little impact on pharmaceutical companies  

The act sets out to limit price increases for medicines in the Medicare program by capping them at the rate of inflation in the future. If pharmaceutical companies decide to increase the prices of these medicines by more than the rate of inflation, they will have to pay back the additional revenue to the government as a rebate. At the moment, market observers expect that the act will only have a slightly negative impact on pharmaceutical companies. It is also conceivable that companies will introduce medicines at higher prices to cushion the negative effect in the future. 

Companies will also pay a higher percentage of the cost of the products covered by the act as co-payments will be limited. This means that for a drug with a cost of $100,000 per year, the pharmaceutical company will be expected to pay $19,311 instead of $4,315.  

Controversial price negotiations 

Direct price negotiations with pharmacuetical companies are also part of the IRA reforms. However, the term "price negotiations" appears misleading since the bill only requires automatic price reductions for selected prescription drugs, which the companies must agree to, otherwise they would face significant penalties.   

The affected drugs will be the best-selling drugs at the time of the price reduction, which were either approved by the Food and Drug administration at least nine years ago in the case of small molecule drugs or 13 years ago for biologics. The bill only applies if no generics or biosimilars are available at the time. 

For the selected drugs, the law provides for a price reduction of 25 to 60 percent, depending on how many years have passed since the FDA approval.   

At the end of August 2023, the first ten drugs were named, and Medicare & Medicaid will now enter price negotiations with the affected companies. However, the price reductions will only take effect from 2026.  

The list includes Entresto, a drug to treat heart failure from Novartis, a drug made by Bristol-Myers Squibb to prevent thrombosis and strokes as well as Imbruvica, AbbVie’s drug for the treatment of breast cancers.  

In the coming years, the number of medicines selected for price negotiations will continue to rise. Since the selection of drugs is based on sales, it is mainly big pharmaceutical companies that are affected. Some of them, among them AstraZeneca, Merck & Co. as well as Novartis, have filed a lawsuit against the law. Novartis has stated that the provisions on drug pricing constitute an unconstitutional encroachment on the private property of pharmaceutical manufacturers. Whether and to what extent such lawsuits can succeed remains to be seen. 

Short- and long-term effects remain unclear  

Since the legislative package was presented, there has been much discussion about the short- and long-term impact on the pharmaceutical industry. Looking at the first list medicines, the impact for companies seems manageable. Some of the medicines only generate a small share of the overall profit and are therefore of secondary importance for the company as well as for investors. An example of this is Novo Nordisk's Aspart insulin brands, which are expected to account for only a small share of sales in 2026. Moreover, Novo Nordisk investors are currently paying much more attention to the development of its anti-obesity drugs than to the Aspart brands. Other drugs will have lost patent protection by 2026, which is why declining sales due to competition from copycat products would have been expected anyway. One example is Entresto from Novartis. Novartis itself currently expects Entresto's patent protection to expire in 2025, which is why a price reduction in 2026 would only have a small impact. It is also currently unclear how the new regulations will interact. Some people expect that the bill will lead to more research being directed towards "biologics", i.e. biotechnologically produced medicines as these will be protected from price negotiations for longer.  

In addition, it is expected that companies will have to put more money into the development of drugs so that they can be approved more quickly for different diagnosis before they are affected by price negotiations for one indication.   

The biggest risk, however, is that Pandora's box has been opened with the regulation and reforms in the Medicare insurance sector. A potential spillover effect on other health insurance sectors cannot be ruled out. Some people fear regulation could be extended to the private health insurance sector in the USA. The majority of US residents are covered by private health insurance through their employer. If regulation were to be extended to this sector, it would a significant impact on the pharmaceutical sector 

The healthcare sector is in focus ahead of the US presidential election 

Additional uncertainty for the sector stems from the upcoming US presidential election. In past election campaigns, there have been many proposals on how to reform the healthcare system to reduce costs for the insured people with the likely consequence to reduce the profits of the entire pharmaceutical sector. This creates uncertainty for investors and is therefore bad for the performance. Looking at the last five election cycles, including the pre-election campaigns, the performance of the pharmaceutical sector has lagged significantly behind the performance of the broad market. 

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