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Sustainable prices: a bitter pill for drugmakers?

Contributor
  • Martin Jarzebowski

    Director of Responsible Investing

The material risks facing pharma go beyond reputational harm.

As the election season kicks into high gear, we are reminded of just how divisive our national politics have become. Once again, health-care reform is a key issue, with the debate raging on over how best to provide cost-effective care to America’s aging population. Even within each party, there is little consensus on what should be done. But there is one aspect of the discussion on which politicians, and the public, have found common ground: affordable drug prices.

The drug pricing debate has existed for decades, but steadily increasing prices and growing intrusion on consumers’ pocketbooks have conspired to elevate the issue to new heights in the U.S. Access and affordability of prescriptions has become headline news, and the public has become outraged. This comes as, simultaneously, the cost of care over the past two decades has shifted onto the consumer via ever-higher deductibles and co-pays, making Americans increasingly aware of their out-of-pocket expenditures. Today, the average family’s health-care costs can easily surpass their annual cellphone, internet and utility bills combined. No wonder the political response has been bipartisan.

Given the confluence of consumer and political awareness, there are now a slew of proposed regulatory actions centered on encouraging price competition, controlling inflation and increasing access. Health and Human Services is evaluating an initiative to benchmark certain Medicare drugs to an index of average prices in international markets, which tend to be much lower. House Speaker Nancy Pelosi has expanded this effort by proposing that the federal government negotiate prices annually for the top 250 most expensive drugs. Not to be outdone in an election year, President Trump says he’s planning an executive order to close the gap in drug pricing between the U.S. and foreign countries, the details of which are still in the works.

The public wants action on health care, and with no end in sight to the debate over how to pay for coverage, drug manufacturers and supply chain participants are squarely in the crosshairs.

Whatever policy measures are taken, they’re almost certain to have a financially material impact on the industry. How a drugmaker is able to navigate these headwinds is a key ESG issue in assessing the company’s sustainable growth, with access and affordability directly linked to revenue performance. As Federated Hermes High Yield Portfolio Manager Steve Wagner explains, “Investors need to evaluate these regulatory risks carefully, because not all firms will be affected equally.” Pharmaceutical companies and intermediaries most exposed to the U.S. market likely will bear a meaningful share of the burden. The types of drugs in a company’s portfolio also will matter since some treatments, such as more complex biologics administered by health-care professionals, are more easily regulated than others.

What is certain is that with the increasing convergence of global drug access and affordability, transparency on pricing and value-based measures increasingly are representing the new normal for the biopharmaceutical industry. The public wants action on health care, and with no end in sight to the debate over how to pay for coverage, drug manufacturers and supply chain participants are squarely in the crosshairs. How they manage this shifting paradigm almost certainly will determine their fate and investors are keeping a close eye on which biopharmaceutical firms emerge with the most sustainable long-term revenue streams.

DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

High-yield, lower-rated securities generally entail greater market, credit, and liquidity risk than investment-grade securities and may include higher volatility and higher risk of default.

There is no guarantee that considering ESG risks will be a successful investment approach.

Federated Advisory Services Company