Despite EpiPen, Voters’ Interest in Federal Rx Pricing Policy Appears Weak

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Richard Evans / Scott Hinds / Ryan Baum

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@SSRHealth

September 19, 2016

Despite EpiPen, Voters’ Interest in Federal Rx Pricing Policy Appears Weak

  • Concerns over potential federal intervention in US prescription drug pricing have weighed heavily on drug and biotech stocks’ valuations for nearly a year. However, as the general election approaches, voters’ interest levels for healthcare generally, and drug pricing specifically, are less than half of the levels registered in 2008 and/or 2012. Only 8% of voters point to healthcare as a priority for the new administration, and only 4% point to drug pricing as a priority
  • Secretary Clinton’s drug pricing tweet of a year ago arguably was elicited by the Turing / Daraprim controversy, as was her more recent policy brief distributed during the EpiPen news cycle. Our view is that these reflect tactical campaign communications geared to make the candidate appear informed and progressive in the current news cycle, rather than strategic signals that point to either campaign priorities now, or legislative priorities early in a first term
  • Unless events (such as another Daraprim) resuscitate voter interest in drug pricing, the candidates are unlikely to invest in the issue. If anything, it appears that managements are more likely to share in AGN’s Jerry Maguire moment than to take more aggressive pricing actions, at least through November
  • We continue to believe that federal action on drug pricing is more likely to occur in the context of a circa 2019 health policy effort geared primarily to save the health insurance exchanges from collapsing under adverse selection pressures. Such an effort creates bandwidth for Congress to pass other related reforms, and we see extension of Medicaid prescription pricing terms and conditions to low income (LIS) Medicare beneficiaries as the most likely outcome. This policy would reduce the typical US retail portfolio’s net sales by circa 5%, and would reduce the net gains from list pricing by protecting Medicare LIS beneficiaries (+/- 16% of US net Rx sales) from pricing increases that exceed CPI

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. AMGN, BAYER, BMY, GILD, ROCHE, SHPG, SNY, VRTX); Biopharma companies with pending major product approvals (e.g. ACAD, ADMA, ALIOF, BIIB, CHMA, CLVS, CPRX, CTIC, GILD, ICPT, JAZZ, LLY, LPCN, MRK, NVO, OCUL, PTCT, SRPT, TEVA, ZSPH); SNY on sales potential for Praluent (alirocumab); CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WBA, CVS); ABBV on Humira US pricing risks; ENDP on risks to branded Rx price premia; Research Tools & Services companies as growth expectations and valuations are too high in an environment of falling biopharma R&D spend (e.g. CRL, Q, ICLR); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE)

Public reaction to Mylan’s pricing of EpiPen, and recent pledges of pricing restraint taken by select pharmaceutical CEOs, raise the question of whether drug pricing is likely to feature prominently as a topic for this election cycle, and/or as a priority for the new Congress and administration

All relevant evidence indicates that healthcare generally, and drug pricing specifically, are lower on voters’ lists of concerns than in past election cycles. As such candidates are less likely to feature health and/or drug pricing reform prominently in their election pitches, and are similarly less likely to drive legislation that is adverse to drug pricing, at least in the near term

On an unprompted basis, only 8% of respondents identify healthcare as their most important issue in this election cycle, down by more than half from the average of 2008 / 2012 responses to this same question (Exhibit 1). Similarly, only 4% of respondents identified drug costs as their most important health policy issue for 2016, also down by more than half from typical responses ahead of the 2008 election (Exhibit 2)

This time last year, public opinion was reacting to Turing Pharmaceuticals’ circa 5000% increase in the price of Daraprim; partly as a result, in October of last year more than 60% of respondents (to a survey with prompted responses) agreed that ‘government action to lower prescription drug prices’ should be a top healthcare priority for the President and Congress (Exhibit 3)

The EpiPen pricing story broke on NBC on 8/17/16, immediately before the Kaiser Family Foundation’s Health Tracking Poll conducted the week of 8/18 – 8/24/16, a week that corresponds with peak search activity related to EpiPen (Exhibit 4). At the peak of the EpiPen controversy, just more than half of respondents to the prompted Kaiser poll identified prescription drug prices as a top healthcare priority for presidential candidates (Exhibit 5), ranking the issue 4th (as opposed to the Daraprim scandal during which drug pricing ranked 2nd)

The EpiPen news cycle arguably has passed; aided in part by the fact that peak back-to-school purchasing of EpiPens also has passed (Exhibit 6). The EpiPen scandal – a 30% annual inflation story – is plainly less remarkable than the circa 5000% inflation of Daraprim by Turing this time last year, thus there’s no surprise that poll responses during the EpiPen scandal also are less remarkable

Also notable is that voter interest in drug pricing faded following the Daraprim scandal (Exhibit 7), a trend that is likely to repeat in the wake of the far less remarkable EpiPen story

By no means are we attempting to argue that drug pricing will permanently escape impactful political action – our argument is much more narrow. Specifically, we’re asserting that drug pricing is unlikely to be a prominent issue in the current general election cycle, and is also unlikely to be a legislative priority at any point in the near future

We continue to believe that adverse selection on the Affordable Care Act’s health insurance exchanges (HIEs) is both good and bad news for drug pricing. The good news is that an incoming administration, realizing that adverse selection will likely force it to spend time and political capital reforming the HIEs in or around 2019[1], rationally would choose to avoid health policy fights early in its term – especially when health policy is a relatively low voter priority. The bad news is that legislative action to save the HIEs ultimately is highly likely – and this creates a health policy cycle in which drug pricing is likely to be addressed, at least in part. Adverse selection essentially forces the Congress to either actively save the HIEs, or let them fail; and, allowing the HIEs to fail is politically fraught (for either party) given the number of subsidy eligible persons, and significant dollar values of average subsidies received

We continue to believe that extension of Medicaid drug pricing terms and conditions to the prescription spending of Medicare low income subsidy (LIS) beneficiaries is the most likely next step in federal drug pricing policy, and see this as a feasible and even likely policy change if and when the new administration and Congress tackle the issue of adverse selection on the HIEs

 

  1. See “Adverse Selection of the HIEs is Real and Accelerating; Why this makes drug price reform unlikely in the early days of the next administration,” September 7, 2016, SSR Health LLC

 

©2016, SSR, LLC, 225 High Ridge Rd, 2nd Floor, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. In the past 12 months, through a wholly-owned subsidiary SSR Health LLC has provided paid advisory services to Pfizer Inc (PFE) and to Merck (MKGAY) on both securities-related and non-securities-related topics

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