Last Friday, President Trump signed three executive orders and threatened pharma with a fourth to decrease the price of drugs. The signed executive orders include 1) providing insulin at 1 cent per unit 2) increase drug importation and 3) eliminating rebates to pharmacy benefit managers (PBMs). The potential fourth order may involve international price referencing, which would have the greatest impact on biopharma companies. If implemented, these orders will benefit U.S. patients’ wallets while negatively impact biopharma’s future revenues. However, it is important to consider the degree of impact these orders will have on different sectors and types of biopharma companies. Many policy experts do not think these orders are substantial as many of them are old and have yet to bear fruit. Furthermore, experts speculate that these orders are a political tactic to gain favor in the polls given the poor COVID response in the U.S. to-date. Overall, the executive orders are targeted, unsubstantiated, and unlikely to greatly impact the biopharma space, especially early-stage biotech, in the long-run.
We’ll break down each order and their impact on biopharma stocks:
Order 1: Providing insulin at 1 cent per unit will not greatly impact biopharma stocks given it is highly targeted towards one drug. The first order aimed at providing insulin at pennies per unit to assist the ~8M Americans who depend on insulin to manage their diabetes. This order will greatly impact the pricing potential for companies developing drugs to limit or reduce the use of insulin, such as Provention Bio ($PRVB). However, this targeted order will not greatly impact future revenues of biopharma players developing drugs outside of diabetes.
Order 2: Increasing drug importation will negatively impact companies that sell drugs at a premium in the U.S. while others sell the same drug cheaper overseas. The second order aims to increase the importation of drugs from Canada by reducing trade barriers. This order targets companies that manufacture and sell drugs at a premium in the U.S. while companies overseas that sell the same drug for much cheaper. However, this will not impact companies that manufacture within the U.S. and sell the drug abroad for cheaper, unless the Trump administration implements re-importation measures like they did for insulin.
Order 3: Eliminating rebates on PBMs target the middlemen and will likely impact big pharma rather than early-stage biotech companies. The third order impacts PBMs, who often take rebates or “kickbacks” of up to 50% drug price discounts from biopharma companies who seek to get their drugs to patients. However, this discount is not often seen by the patients - Medicare patients often pay the full price of the drug. The third order aims to narrow the rebates received PBMs, driving more of the discounts to patients. Biopharma companies will continue to provide discounts, except, under this order, more patients will see the discounts. One nuance is that large pharma often use rebates to protect their franchises past when they lose patent exclusivity. If these rebates are capped, PBMs may be less incentivized to leverage their power to drive volume towards large pharma companies. Early-stage biotech companies are less likely to be impacted given they focus on highly innovative drugs which may not need significant rebates to begin with.
Potential Order 4: International price referencing will mostly impact companies that already distribute drugs internationally, but may also limit future revenue potential for early-stage biotech companies. The fourth order is most impactful on biopharma companies. Pharma companies that distribute drugs internationally will likely be hit hardest given prices are already set abroad. For example, Vertex Pharmaceuticals ($VRTX) sells Kalydeco for over $300K in the U.S. currently sells the same drug for ~$150K in Italy may see a haircut of nearly 50% if the order is implemented. However, early stage biotech companies still have room for price negotiation overseas, so they can likely negotiate a slightly higher price overseas to maintain strong pricing potential overall.
Overall, President Trump’s executive orders scared biopharma stock investors, but its impact may be limited and the orders may be more of a tactic for gaining voter support as the elections near. Experts are not hopeful about these executive orders given they are not novel and have yet to be implemented even though they have been in discussion for years. Early-stage biotech companies are still well-positioned for success despite the recent sell-off leading up to the executive orders being signed.
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