- US government sued by blue-chip drugmakers
- Mixed results from new NHS price agreements
Policymakers and pharmaceutical companies spent much of 2023 at loggerheads over the issue of drug pricing – and it appears these disputes are only just heating up. Although new cost controls haven’t moved shares much (if at all), the industry has warned of a bleak climate for innovation if government interference continues.
As the world’s largest pharmaceutical market in terms of sales, the United States is the key battleground for these issues. Earlier this month, the Biden administration proposed a framework for determining whether the government can exercise so-called “march-in” rights if a drug’s price is deemed too high. The document offers guidance on when officials might seize the patents of medicines developed with taxpayer dollars and pass them on to companies to manufacture lower-cost versions.
These rights have long existed under US law, although authorities have thus far elected not to use them – despite pressure from healthcare activists. The new framework is not designed to endorse frequent march-in actions, but to give federal agencies a better idea of where they might be appropriate. Pharmaceutical industry trade group PhRMA said the measures constitute “yet another loss for American patients who rely on public-private sector collaboration to advance new treatments”.
This condemnation comes after a year of lobbying by the industry to block drug price negotiations introduced under the Inflation Reduction Act (IRA). The reform empowers Medicare – the federal health insurance scheme for people aged 65 and over – to broker cost reductions with drugmakers. The first 10 medicines to be subject to negotiations were revealed in August. Among this cohort was Farxiga, a treatment for heart failure developed by AstraZeneca (AZN) and Bristol-Myers Squibb (US:BMS), and Merck’s (US:MRK) diabetes pill Januvia.
All three companies, as well as several of their peers, have sued the US government over the price reforms. “We continue to believe that the IRA's drug price provisions are damaging to the innovation ecosystem and they will inhibit patient access, as well as choice and quality of care,” said Tom Cavanaugh, a chair at Johnson & Johnson (US:JNJ), at a corporate event this month.
The group’s immunosuppressant drug Stelara was unexpectedly included on the list of 10 drugs up for Medicare negotiation this year. The agreed price cuts will come into force in 2026. Nonetheless, management remains confident in its ability to deliver on its target of 5-7 per cent compound annual revenue growth through to 2030.
Pharmaceutical companies insist that price caps will limit their ability to invest in the development of new drugs – and that patients will suffer as a result. However, there’s no consensus on exactly how limiting the legislation will prove to be.
Analysis by the nonpartisan Congressional Budget Office suggests that the IRA will result in a total of 13 fewer drugs coming to market across the next 30 years. Some 1,300 new medicines are expected to launch across that time period. Independent studies have suggested that this figure could be as high as 135 fewer drugs over the next 20 years.
For their part, analysts don’t seem particularly worried – at least not about the top line implications of the first round of price talks. Wells Fargo estimates that the revenue impact on the affected companies will amount to 5 per cent or less across the board. The investment case in “individual biopharma stocks does not change on [the] IRA alone”, they added.
Critics of the Biden administration’s approach frequently cite the “small molecule penalty” – which keeps synthetic drugs exempt from negotiations for nine years after they reach the market. Biologic drugs, which are extracted from living organisms, are exempt for 13 years. Because of this, the Incubate Coalition of venture capital investors says companies will “shift their efforts to developing biologics, which are more difficult for patients to access and more expensive for the health system”.
Industry bodies have been similarly scathing about the UK’s approach to drug pricing via the National Health Service. At the start of this month, the government published new terms for the statutory scheme for branded medicines, one of its two price control mechanisms. Under the regulations, companies will pay a rebate on the sales of their branded medicines of 21.9 per cent in 2024, 24.0 per cent in 2025 and 26.8 per cent in 2026.
The Association of the British Pharmaceutical Industry said clawback rates at this level “have damaged the UK’s international standing with global life science companies”. However, companies unhappy with this can also elect to join the newly revised Voluntary Scheme for branded medicines. This system permits the level of annual allowed growth in sales of branded drugs to double from 2 per cent in 2024, to 4 per cent by 2027.
For the time being, pharma investors don’t have to fear for their listed holdings. Whether the global push to constrain drug prices ultimately hurts the pipeline remains to be seen.
