US drug legislation to weigh on global Pharma growth and margins
The US Senate is seeking to pass prescription drug pricing legislation through the budget reconciliation process, which could dampen longer-term profitability for global pharmaceutical companies, says Fitch Ratings.
The new bill is similar to the package that passed the US House last year, which would allow Medicare to negotiate prices with drug manufacturers. A key factor to watch is the Senate request that the new law adheres to the complex budget reconciliation requirements, which would allow passage of the legislation with a simple majority given the evenly divided Senate.
Fitch’s assessment of the potential rating implications, should the legislation become law, would initially center on branded pharma manufacturers with cash flow generation derived from the affected drugs. Global pharma companies generally maintain diversified product portfolios, which should minimize pricing pressure for any single drug. However, there would be limited offsets to declining revenue, which could moderately affect sector profitability and cash flow.
We would assess whether issuers would be willing to reduce dividends and share repurchases or make any other capital allocation changes to mitigate the effect of lower revenue on leverage and FCF. Issuers choosing to reduce shareholder-oriented capital allocation to maintain financial policies could mitigate downside risk to ratings.
Generic and biosimilar manufacturers may find the core drug negotiation proposals unattractive because such proposals will make it more difficult to estimate the potential returns on investing large amounts of R&D over long periods for drug candidates that may be expected to experience price negotiations.
We believe the legislative proposals could add to the challenging business conditions for biosimilar biological manufacturers, which already include uncertain regulatory pathways for biosimilar approvals, patent thickets created by manufacturers of reference biologics, and overall market acceptance.
The bill is broadly similar to the version the US House passed as part of the Build Back Better Act (BBA) last fall, which later failed to pass the US Senate and become law. Similar to its predecessor, the Prescription Drug Pricing Legislation outlines provisions to lower the price of prescription drugs that have been on the market for a number of years and moderate future drug price growth.
Medicare would be allowed to negotiate prices for high-priced, single-source drugs beginning in 2023 representing the highest amounts of spending within Medicare Parts B and D; negotiated prices would become effective in 2026. The number of negotiation-eligible drugs starts at 10 in 2026 and increases to 15 in 2027 and 2028 and to 20 in 2029 and thereafter.
Penalties would be levied on, or rebates required from, manufacturers that raise the price of drugs faster than inflation starting in 2023. The legislation caps prescription drug spending under Medicare part D at $2,000 per year and caps premium increases at 6% per year beginning in 2026 through 2029.
In contrast to prior versions, the new bill would require the US Health and Human Services Director to negotiate prices for the maximum number of drugs allowable in a given year, which would limit the ability for future administrations to curb the bill’s effectiveness. In addition, the bill provides some incentives for biosimilar competition.
The mechanism would be to delay for up to two years the selection of a biological product for price negotiation if there is a “high likelihood” of a biosimilar biological product being licensed and marketed before a negotiated price were to become effective. However, the draft legislation also stipulates that this mechanism would not apply to a manufacturer of a biosimilar biological product that is also the manufacturer of the reference biological product.
Expansion of the currently proposed legislation to include a larger list of drugs, with the number of eligible drugs each year additive to prior years, or direct or indirect pressure on commercial rates due to Medicare’s negotiated rates, could have a broader effect on the pharma sector. Earlier proposals that were not included in the failed BBA legislation would have allowed the government to lower the price of up to 250 drugs, no matter how new or how innovative.
