Congress' ideas to reform the pharmaceutical industry and U.S. drug pricing haven't worried investors about manufacturers' long-term profits, even as short-term investors are betting on the side of public angst.
With the Trump administration floating big ideas like drug importation and an international reference pricing model, short-term investors are betting almost $1 trillion against the pharma sector.
But the story playing out on Wall Street shows two sides of Washington's drug policy debate: public outcry versus the reality of politics.
So far, only the Senate Finance Committee has offered major reforms to drug financing within Medicare and Medicaid. The bipartisan proposals from committee leaders Sens. Chuck Grassley (R-Iowa) and Ron Wyden (D-Ore.) narrowly passed the panel over GOP objections.
Now the proposal's fate is up to Senate Majority Leader Mitch McConnell (R-Ky.), and the possibility of a vote hasn't spooked analysts.
"We assume at this point that any pressure on pharmaceutical profitability will be moderate," said David Kaplan, director of corporate ratings at S&P Global. He predicted proposals like those in the Senate package likely won't hurt margins beyond "a few hundred basis points."
A core policy in this legislation would bar manufacturers from raising the price of existing drugs beyond the rate of inflation each year. The pharma lobby is lambasting the idea, and nearly all of the panel's Republicans voted to strike the proposal before it passed out of committee. A vocal group among the GOP is still demanding a change before any potential floor vote.
But Kaplan shrugged off the idea of market alarm over this so-called "inflation caps" policy. He characterized it as a "rearview mirror" proposal that wouldn't fix past egregious price hikes to drugs like insulin.
"There would be no price declines — it just won't get worse very quickly," Kaplan said. "The criticism of that is, it almost seems a bit mild."
Pharmaceutical executives have also been relatively even-keeled about the Senate proposals in their recent slew of earnings reports, with the drug giants beating expectations.
Dave Ricks, CEO of Eli Lilly and Co., projected for investors last week that the Senate legislation's proposed Medicaid price curbs would have a "moderate negative impact" on the company's insulin business. Eli Lilly is now under scrutiny from state attorneys general over its insulin price increases.
He also downplayed the idea that the inflation cap proposals for Medicare Parts B and D would ever make it into law, saying it "will perhaps be the less likely to be enacted proposal that we've seen."
Gilead Sciences Chief Financial Officer Robin Washington wouldn't publicly disclose last week how dependent the company is on Medicare and Medicaid, which would show the potential financial hit of the proposals, but acknowledged with HIV in particular "we have a high proportion of public pay rate." Instead, she said Gilead will keep working on programs that "support full access" to drugs for those patients, likely a reference to various co-pay assistance programs.
Bristol-Myers Squibb Co. held its earnings call before the Senate proposals were public, so Executive Vice President Christopher Boerner only noted for investors that "specifics matter here." The company is heavily invested in Medicare Part D (responsible for 26% of all its revenue) and Part B (responsible for 24% of all its revenue), and Boerner said keeping a diversified portfolio will be important depending on how policies shake out.
On the other hand, the heat from public opinion on drug pricing has helped drive short-term bets against pharma giants like Bristol-Myers Squibb, Johnson & Johnson, Allergan, Mylan and Roche.
According to Ihor Dusaniwsky of New York-based financial analytics firm S3 Partners, shorting has gone up 16% this year alone, from $786 billion to $914 billion. He deemed this increase significant and said it's largely due to the activity in Washington. It could grow depending on how polling on drug prices goes in the lead-up to the 2020 election.
"It means there's something there," he said.
While pharmaceutical lobbyists have their eye on the more extreme proposals like drug imports, in the short term they're waging a big battle against the proposals that long-term forecasters don't seem worried about, such as inflation caps. They have called the proposal a price control and oppose it largely in the name of preserving funds for research and development.
The Pharmaceutical Research and Manufacturers of America said the legislation as a whole would "siphon more than $150 billion from researching and developing new medicines and give those savings to the government, insurers and PBMs, instead of using those savings to lower costs for seniors at the pharmacy counter."
Pharma's financial hit from the proposed reforms is relatively small, although it represents significant savings for the government and patients: over $100 billion over 10 years, according to the Congressional Budget Office. In 2016 alone, the U.S. spent $329 billion on prescription drugs. So far this year the pharmaceutical and health products sector has spent more than $155 billion on lobbying alone.
For policy experts, there's a lot at stake in the Senate's proposals to overhaul Part D. They say it isn't sustainable without major reforms of the "catastrophic phase," where currently the government pays 80% of a drug's cost and the patient pays 5%. Under the new structure, manufacturers and the government would each pay 20% and Part D insurers would pay 60%, up from 15%.
Insurers and manufacturers are both motivated to nudge patients into the catastrophic phase with their list prices and rebate structures.
According to the Medicare Payment Advisory Commission, more than 360,000 Medicare patients reached the catastrophic phase in 2016 after one pharmacy visit. This was a jump from just 33,000 patients in 2010.
HHS' watchdog agency has flagged that Part D's spending — slated to make up 15% of Medicare's spend — is tied to list price increases, and that manufacturers have been hiking the prices of the most-used drugs. Costs have gone up even though the number of prescriptions has gone down.
"In a normal world, drug prices would never go up once they've been launched because over time drugs get competitors, and in a sense the launch price was set to maximize long-term profits," said Paul Ginsburg, a MedPAC commissioner and director of the USC-Brookings Schaeffer Initiative for Health Policy. "But we see these substantial price increases for existing drugs."