First, let’s acknowledge the obvious—nobody knows what Trump’s win might mean for the pharma industry—not even Mr. Trump. Most presidential candidates outline detailed policies before an election, but as The Economist wrote in its Schumpeter column, “Mr. Trump arrives with a tatty envelope scrawled with a few jottings on the back.” At the same time, pharma stocks are up 10%, so the market sees this as good news.
Prior to the election, the pharma landscape looked grim. A few bad apples caused significant pressure on drug pricing, and government intervention was being seriously considered in a variety of areas. Poor public perception, private sector rebate pressure, and unfriendly state legislation abounded. At the federal level, there was talk of a “pricing watchdog,” and several CMS experiments and demonstration projects were in process. Further, both presidential campaigns declared support for parallel re-importation, as well as centralized CMS drug price negotiations.
What happens now? One of two broad scenarios will unfold: The “Normal Republican” scenario or the “Vintage Trump” scenario.
The “Normal Republican” scenario is largely what would have happened under classic conservativism and a Republican trifecta. This assumes Trump will bend to the will of the establishment, and the pharma industry will generally benefit.
The “Vintage Trump” scenario—a potent brew of populism, a lack of nuance, denial of orthodox thinking, and unexpected Democratic support—might result in extremely poor outcomes for the pharma industry. Let’s take a closer look at what might happen under each scenario.
The “Normal Republican” Scenario
The Normal Republican scenario starts with a repeal of the Affordable Care Act. However, its replacement is unlikely to rollback pharma industry fees paid today or the Medicaid rebate increase from 15.1% to 23.1%, as that will be seen as giving money back to the industry.
A repeal of the insurance mandate will mean smaller, riskier pools—leading to higher prices and fewer insured—though Speaker Paul Ryan’s age-based subsidy may temper the reduction.
A devolution of Medicaid expansion to the states—even with block grants—is likely to reduce pharma revenues. Pharma will lose some of the incremental volume it gained, though the percentage reduction in net sales may be mitigated since these prescriptions were less profitable.
On the positive side, this scenario likely involves much less explicit government supervision, as evidenced by the removal of price control-related language from the Trump campaign website the day after the election. Constructs such as the Independent Payment Advisory Board and Patient-Centered Outcomes Research Institute may be eliminated or defunded, and a DTC spend tax or a pricing watchdog panel will not happen. Sen. John McCain and others will continue hearings and supervision related to price even in this climate, however, so pharma should not assume that this topic is behind us.
An additional element of the Normal Republican scenario may be repatriation of ex-U.S. profits under a significantly lower tax rate. This should enable more investment within the U.S. and may trigger a new wave of within-the-U.S. pharma M&A. Other gains may also become possible along the way, such as fixing 340B, reshaping the Part B demo project, and not paying rebates on scripts that fall within the consumer deductible. However, less regulation can also be “shoot-yourself-in-the-foot” risky for the industry long-term. Might it be better off with some disciplined self-policing?
The Vintage Trump Scenario
The Vintage Trump scenario has a lower probability, but cannot be ignored and will mostly negatively impact the pharma industry. Under the populist theme that made the Trump campaign a success, he may want to send a strong signal on price controls for drugs. He promised on three occasions to cut $300 billion in drug cost on the campaign trail, which is ridiculous (This amounts to wiping out the entire industry—is it an “opening bid”?). The thought remains consistent with the “other-countries-are-taking–advantage-of-us” mantra—foreign populations pay less because the U.S. population effectively pays the innovation premium.
Mr. Trump loves to make a deal—and CMS centrally negotiating all Part D drugs would appeal to the “dealmaker” in him. Part D rebates are already 15 to 20 points above the corresponding rebate in the commercial channel, and a central negotiation will further widen the gap between gross and net price. A second outcome is the re-importation of drugs from countries with lower prices. This was supported by both campaigns and meant to relieve price pressure. Since Democrats would support both of these moves (even if many Republicans oppose), they might pass Congress assuming the Democrats are willing to find common cause.
What Should Pharma Do
To reiterate, the uncertainty is in the nature of this regime—reliably conservative or radical outlier. So what is pharma to do?
Regardless of which scenario unfolds in D.C., pressures that will continue include:
- Public antipathy that will re-ignite with the next Turing;
- Ongoing state efforts on price transparency and limits such as the failed California Prop 61; and
- The tripling of rebates in four years extracted by giant private sector payers and PBMs.
All of these point to different future pharma imperatives, including:
- Shape the discussion of value beyond innovation and beyond the short term;
- Offer products and services tied to value metrics stakeholders truly care about;
- Create evidence or share risk to prove that this value exists;
- Communicate the value and innovation to regain lost trust; and
- Price products in a way that is commensurate with the value.
It will be very tempting in the coming months to assume a friendly and normal administration will let the pharma industry return to business-as-usual or remain with the strategy of staying silent and dodging arrows—but that would be a lost opportunity. As an industry, we must change.
Pharma must continue to push itself along the value path it started on—and not just because the less-likely outlier scenario could happen or because other non-Trump pressures will continue. It is the only viable path to a future 10 to 20 years from now.
