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Trump executive order: Minimal impact on US generics

US President Donald Trump has signed a wide-reaching executive order to lower the prices of medicines in the US.

* The executive order directs companies to align prices of prescription drugs with those paid by similar nations (international reference pricing model).

* Principally, President Trump intends to take action against pharmaceutical manufacturers charging higher prices to Americans while providing steep discounts to other wealthy nations.

* The order also expands the efforts to include Medicaid in addition to Medicare.

* We believe the implementation of this order will face challenges. In addition to legal challenges (as witnessed during most favored nation; MFN rule CY20), the current order has not provided inputs on specificity of drug selection and/or payment structures.

* As far as the impact on Indian pharma companies is concerned, we foresee very limited impact. Based on our interaction with companies, the generics pricing spread is thin across developed nations, and hence, the scope of reduction in prices is expected to be limited on the US generics portfolio.

Executive order details

* The order directs the US Trade Representative and Secretary of Commerce to take action to ensure foreign countries are not engaged in practices that purposefully and unfairly undercut market prices and drive price hikes in the US.

* The order instructs the Administration to communicate price targets to pharmaceutical manufacturers to establish that the US, the largest purchaser and funder of prescription drugs in the world, gets the best deal.

* The Secretary of Health and Human Services will establish a mechanism through which American patients can buy their drugs directly from manufacturers who sell to Americans at a “Most-Favored-Nation” price, bypassing middlemen.

* If drug manufacturers fail to offer most-favored-nation pricing, the order directs the Secretary of Health and Human Services to: (1) propose rules that impose most-favored-nation pricing; and (2) take other aggressive measures to significantly reduce the cost of prescription drugs to the American consumer and end anticompetitive practices.

* This order builds on actions from President Trump’s first term to make progress on reducing price disparities at home and expands those efforts by including Medicaid in addition to Medicare.

* As per media reports, the order gives drug makers price targets in the next 30 days, and will take further action to lower prices if those companies do not make "significant progress" toward those goals within six months of signing the order.

Our view

* The order is more inclined toward innovator pharma companies, which might be having pricing disparity on medicines sold in the US and other developed nations.

* Pricing of generics in the US is efficiently market-driven with minimal regulation. Generic drugs are often cheaper in the US than in other countries, given there are 500-600 manufacturers and there is consolidation at the distributor level.

* Countries like Canada, UK, Germany, France, and Japan have pricing regulated by government, based on negotiations.

* Based on our interaction with experts/company management, the spread between pricing of generic drugs in the US and other developed nations is very limited.

* Accordingly, we estimate a very limited impact of the executive order on US generics.

* Further, the latest executive order lacks specificity on drug selection, or payment structures, raising red flags about its compliance with administrative law.

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