Text size President Donald Trump made lower prescription drug prices one of his top goals in his State of the Union speech on Tuesday night. The main proposal he highlighted—a plan to bring U.S. drug prices in line with prices overseas—could have an impact on the stocks of pharmaceutical companies like Roche (RHHBY) and Bristol-Myers Squibb (BMY) Due to the political pressure and pushback on prices by insurance companies, big pharma companies have already been forced to slow price hikes. But further policy changes could cut deeper into margins for an industry whose profit growth has been almost entirely dependent on such hikes in the past few years. Trump released a “blueprint” last year to bring prices down, and his speech touched on issues already mentioned in that blueprint. In the State of the Union address, he focused in particular on one of the ideas—a plan to bring some drug prices more in line with international prices. “It is unacceptable that Americans pay vastly more than people in other countries for the exact same drugs, often made in the exact same place,” Trump said. Other countries, some of which have single-payer systems with more negotiating power, tend to pay less than Americans for prescription drugs. The Department of Health and Human Services thinks Medicare should pay a rate that’s more in line with other countries, at least for drugs classified as Part B (administered in doctor’s offices and hospitals). The “international pricing index” would look at rates in 16 other countries. Trump thinks those other countries are essentially “freeloading” off of U.S. consumers, who are subsidizing their cheaper prices. Forcing drug companies to use the international rate could lower U.S. prices, though it could also presumably convince drug companies to increase their prices overseas. Medicare Part B prices could also be impacted by other administration proposals, including one that would change how doctors are paid. HHS thinks Medicare could save $17.2 billion if it paid international rates, but Part B rules are still being debated. Drug-industry lobbying group PhRMA has warned that Trump’s plan “would jeopardize access to medicines for seniors and patients with disabilities.” Credit Suisse analyst Vamil Divan says Roche and Bristol-Myers Squibb are the two large-cap companies most dependent on Part B, and thus most likely to be impacted by the proposals. Divan puts Roche’s U.S. pharma sales exposure to Plan B at more than 20%, and Bristol-Myers at more than 10%. Roche has pushed back on the Trump pricing proposal, saying in an emailed statement to Barron’s that “importing international price controls would lead to arbitrary pricing that does not reward innovation or outcomes and does not provide value to U.S. patients and our health-care system.” Bristol-Myers didn’t immediately respond to a request for comment. During his speech, Trump also mentioned potentially forcing more price transparency from drug companies, which negotiate prices with insurers and pharmacy-benefit managers. Such negotiations are complicated, and are tough for consumers and regulators to track. Democrats have also introduced bills to lower drug prices, including one that would allow Americans to import drugs from Canada and another that would go even farther than Trump’s to bring U.S. prices in line with international ones. Most of these bills are still considered a long shot, given the divided Congress, and the current partisanship in Washington. And some analysts saw the State of the Union speech as a reiteration of old proposals—not really a change in rhetoric. “We would argue the rhetoric might cause some fresh uncertainty as more info is discussed over new legislation—but shouldn’t impact models, estimates, or ratings,” wrote Jefferies analyst Michael Yee. Stock prices suggest that might the case. Bristol-Myers has gained 1.6% to $50.91 at 3:30 p.m. today, while Roche has dipped 0.2% to $33.41. The Health Care Select Sector SPDR ETF (XLV) has risen 0.4% to $90.71, besting the S&P 500’s 0.3% decline to 2730.48. But expect the pressure on drug companies to remain elevated for at least the next year. Write to Avi Salzman at avi.salzman@barrons.com
US President Donald Trump reiterated plans to reduce the cost of prescription drugs in his recent State of the Union speech, including using closer alignment with international prices. The president said he would “work closely and cooperatively with Congress on a plan that lowers drug prices so we can continue to provide affordable health care for all Americans.” Analysts said the plan would impact the likes of Roche and Bristol-Myers Squibb, which have Part B US sales exposures of 20% and 10%, respectively. Pharma lobby groups warned changes to international price controls would lead to "arbitrary pricing".