US Pharmaceutical Market – price cuts as a threat to pharmaceutical companies

• BNP Paribas Markets
  

“Europe will pay a little more and America will pay a little less” – with this request, Donald Trump signed a decree in May calling for a reduction in drug prices in the USA. The decree also leaves open exactly how this is to be achieved, but the US President’s intention is that, in the end, spending on medicines in his country should fall and then only be similar to those countries that pay the lowest prices worldwide.

Trump fails to mention that this is so difficult to implement. This is because drug prices in a country are not a one-to-one reflection of the development costs plus the companies’ profit margins, but are also based on the purchasing power of the inhabitants. This is almost traditionally particularly high in the USA, which is why the highest drug prices are paid here. As a result of the higher costs, the USA virtually co-finances the development costs that would have to be paid proportionately by other “poorer” countries.

Many factors lead to high drug prices in the USA

A model that works well, but has long been criticized in the USA. Trump’s predecessors also wanted to lower drug prices in the US, but this was not implemented. And an initiative launched by Trump during his first term of office also ultimately failed due to a court ruling.

The decree now signed by Trump will not lead to any direct price reductions either; rather, the aim is to get the pharmaceutical companies to the negotiating table. After all, they are ultimately the ones who have to reshape pricing policy. If the US government has its way, a large proportion of the costs that the companies have so far recovered via the USA should be realized in Europe in future. A demand that meets with approval, even in the pharmaceutical industry. Novartis and Sanofi, for example, only recently brought significantly higher prices for medicines in Europe into play.

However, it is not certain whether European consumers and insurers will ultimately have to pay higher prices. The only thing that is clear is that drug prices in the USA are indeed well above average. According to a study published last year by the conservative Rand Corporation, prices for prescription drugs in the USA are on average almost three times higher than in other OECD countries.

However, this difference is not solely due to the pricing policy of pharmaceutical companies. The American healthcare model itself contributes to this. In the USA, so-called “middlemen” play an important role. The pharmaceutical benefit managers set prices and cost shares for medicines for insured persons. The accusation now is that they do not pass on the discounts they receive from the pharmaceutical companies, but instead keep at least part of them themselves as commission. As a result, the middlemen are also driving up prices. Large health insurers in the USA operate their own pharmaceutical benefit managers, which is why they are now also in the spotlight.

Falling drug prices do not affect all pharmaceutical companies equally

As you can see, criticism that attributes the high drug prices in the USA solely to the pricing policy of pharmaceutical companies falls short of the mark. However, it remains to be seen whether Trump has the strength to reform the entire healthcare system in his country or whether he will ultimately only hold the pharmaceutical companies to account.

The impact of Trump’s proposed price reduction on pharmaceutical companies is correspondingly uncertain. Of course, those companies with a strong US business would tend to be particularly affected. Among analysts, Bristol-Myers Squibb, Pfizer and AbbVie, whose profits could fall by up to 20 percent if the future prices of the most important and best-selling drugs in the USA are based on the price level of those countries that pay comparatively little for the products. The predicted fall in profits also assumes that the companies will be able to raise prices in other countries, such as Europe, only slightly or not at all.

Things look better for the Swiss pharmaceutical companies. For Novartis and Roche analysts predict a drop in profits of a maximum of six percent each if the new pricing regime comes into force in the USA. If, on the other hand, drug costs rise in Europe, this could almost completely offset the bottom line, according to the assumption. AstraZeneca would potentially be the company most affected by price cuts in the USA, with a drop in profits of around ten percent in Europe.

As you can see, Trump’s initiative to reduce drug prices is not without side effects for the pharmaceutical companies, but these could prove to be manageable, especially for the Swiss companies. However, it is not yet clear how the US government and the pharmaceutical companies will reach an agreement. If it goes according to the popular Trump method of first threatening and then looking for compromises, there is certainly hope that pharmaceutical stocks could be a buy after the recent price turbulence.