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Pharma pays for getting too comfy with Trump
January 11, 2017 / 9:19 PM / a year ago

Pharma pays for getting too comfy with Trump

NEW YORK (Reuters Breakingviews) - Pharma is paying for getting too comfy with Donald Trump. The president-elect on Wednesday accused the industry of “getting away with murder” on drug prices. Investors had dismissed his earlier pledge to renegotiate costs as campaign rhetoric easily outweighed by tax cuts. By close of trading on Tuesday, the Nasdaq Biotech Index had risen 8 percent since the election, a similar rise to the S&P 500. Its near 3 percent fall caused by his latest stance should force a broader rethink.

A lab technician conducts a trial of substances during a tour of at the U.S. Food and Drug Administration (FDA) headquarters in Silver Spring, Maryland, November 4, 2009. REUTERS/Jason Reed

Trump’s introductory comments were long on hyperbole and short on important detail. He attacked the industry for ”leaving [the United States] left and right“ and said ”they “supply our drugs, but they don’t make them here to a large extent.”

Sure, a number of companies have used so-called inversion M&A deals to move to low-tax jurisdictions such as Ireland, but most headquarters or chief executives have remained here. And the business of making pills has decamped offshore, but it’s a very small and commoditized part of the process. The real value in the business - discovering and marketing medicines - remains disproportionately in American hands.

The real threat comes from Trump’s renewed promise to “negotiate new bidding procedures.” America’s Medicare program that provides health insurance for the elderly spends about $75 billion a year on drugs and rising. The government is forbidden by law to use its heft to negotiate lower prices.

Perhaps some $20 billion, or just above 5 percent of total U.S. pharmaceutical spending, could be trimmed though, based on various economists’ estimates - far less than Trump’s absurd campaign claim of $300 billion. Those savings would mount as the population ages. The industry’s high operational leverage means this would hit future profit hard.

And the industry is an easy and obvious target for Trump, regardless of whether he has all the right facts. High prices have made it unpopular: more than 80 percent of Americans favor drug price caps or controls, according to a recent poll by Harris.

Investors had become complacent about a seemingly pro-business administration taking shape. Wednesday’s public dressing-down is a timely reminder to investors across the markets that Trump’s populist campaign threats - including vows to rip up trade agreements - are not to be dismissed lightly.


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