Politics, Pricing, and Proposition 61

What Keeps Investors and Big Pharma CEOs Awake at Night

California is my happy place. I love the Pacific Ocean (Laguna Beach in particular), the mountains and all the great restaurants. California is also the birthplace of many of the tech advances that transformed the world, including microchips, software, and a significant amount of the hardware that made the internet possible. It is loaded with creative and talented people in Hollywood and throughout the state. It is also the birthplace of the Drug Price Relief Act… aka Proposition 61.

On November 8th of 2016, Californians will vote on Prop 61. Prop 61 would prohibit California government agencies (Medi-Cal notwithstanding) from paying more for prescription drugs than the price paid for the same drug by the U.S. Department of Veterans Affairs (VA). Prop 61 has made it onto the ballot with the hopes that California’s numerous public agencies can try to save money on prescription drugs.

The latest polling has the initiative passing. Anywhere from 65 to 73 percent (depending on which poll you read) of California’s population is in favor of a “yes” vote on Proposition 61. So with the elections only a few weeks away, what are the ramifications of a “yes” vote? No one knows for sure. The war of the words has begun in earnest.

Proponents of the initiative say it will curb excessive drug costs and save Californians billions of dollars over the next few years. They further state that drug companies are greedy and that the companies make life saving medicine and then price it so obscenely high that many folks don’t have access to those drugs. Bernie Sanders is such a proponent and has been one of the most vocal critics of Big Pharma.

However, the California Public Employee Retirement System (CalPERs), the largest pension plan in North America, came out with a paper that was cautionary and mentioned that Prop 61 might have some unintended consequences. These include higher costs overall for drugs, less availability of certain drugs, and perhaps price hikes for the Veterans Administration which currently obtains significant pricing discounts. In response, a law firm commented that CalPERs’ conclusions are “DEEPLY FLAWED.” Truth is, no one knows the outcome, should the ballot initiative pass.

But the initiative apparently DOES have Big Pharma worried. While both sides have put up substantial money, the dollars put up by the large drug makers to defeat the initiative dwarfs that of those in favor of Prop 61. The big three drug makers, Pfizer, Merck and Johnson & Johnson have donated over $7 million, each, as of October 1st. In fact, more money has gone into this initiative than nearly any previous California initiative.

We have been alerting our readers now, for quite some time, that while the healthcare sector has some major tailwinds at its back, these stocks – particularly big pharma and biotech – are vulnerable to the political and regulatory risks. It appears these risks are beginning to manifest themselves. The political rhetoric is high. The voters are circling like vultures. Proponents say that the drug companies are scared… scared that if Prop 61 wins in California, that California public entities will negotiate significant discounts on drug pricing, hence reducing profits and margins for drug companies. They go on to state that “such an action would no doubt cause an immediate demand for the same VA discount rate to be made available to other states, the federal government, and likely private entities. In short, adoption of VA pricing by the State of California would be a pricing disaster for the entire U.S. drug industry.”

What some fail to realize, is there are many, many contracts and deals already in place between PBMs, drug makers, governments and patients. Any attempt to force drug companies to substantially lower prices from a previously-agreed-upon, long-term contract, is likely to end up in court. In Sickness and Wealth believes cooler heads will prevail and that even with a “yes” vote on Prop 61, the drug companies will be fine, despite the impact. Perhaps they will have to negotiate future drug pacts with local and federal governments. Perhaps there will be some pressure on profits and margins as well as returns on equity.

But important to note, California is not only home to Silicon Valley and the entire tech birthplace, it is also home to many early stage biotech companies that employ thousands of professionals. Suck enough profit out of the drug makers, and you can be sure that some of those biotech start-ups and subsequent innovation will be snubbed out, as venture capital abhors excessive regulation. This would be catastrophic to California and to patients who are currently alive or enjoy a greater quality of life, because of, innovative medicines.

And my parting shot to all those screaming that people are being price gouged by drugs like Gilead’s $84,000 Hep C treatment… there are alternatives:

  • Competition with Hep C drugs is emerging with far cheaper options. But keep in mind that Gilead’s Solvaldi is a cure for 95% of the patients who get the treatment. Further studies will reveal the outcomes of competitors’ lesser priced drugs.
  • Another alternative is liver transplant. The costs, with all meds and pre surgical testing: OVER $1,000,000. And with a liver transplant, it’s not a cure. Survival rates of liver transplant patients is 5-10 years. The virus usually attacks the new liver.
  • The third alternative is end-stage liver disease which will lead to death.

Yes $84,000 is a lot of money. That will no doubt come down in the very near future as competition heats up. Until then, it beats a million dollars for a transplant, and sure beats dying.

Leave a Reply