The two seismic political events of 2016 – the UK’s decision in June to leave the EU and Donald Trump’s victory in the US presidential elections in November – both prompted pharma companies’ share prices to rise. In both cases, that was partly because pharma stocks are always a safe haven for investors in times of turmoil. But investors also seem to assume that the anti-establishment trend that underpinned both Brexit and Mr Trump’s victory will bring less pharma regulation. 2017 will see that assumption, and many others, fully tested.
In the US, Mr Trump has certainly talked about lowering business regulations after he takes over the presidency on January 20th 2017. His recently released Action Plan for his first 100 days calls on the Food and Drug Administration (FDA) to cut red tape “to speed the approval of life-saving medications”. Although the FDA has already gone a long way in speeding up approvals, pharma companies are likely to welcome that, as are many patient groups, despite mutterings about the risks to drug safety.
Many pharma companies may also welcome renewed Republican attacks on the Affordable Care Act of 2010. Although Obamacare promised to expand the market for drugs by expanding insurance coverage, it also necessitated tighter pricing controls that may now be shelved. In his election campaign Mr Trump vowed to repeal the ACA altogether, although in practice he may well take the easier route of dismantling it piece by piece, starting with the Medicare budget.
However, it is not clear what would take Obamacare’s place. Details of the Republicans’ mooted Health Savings Accounts are scanty so far, and the most likely scenario is that decisions over insurance provision will be delegated to a state level. That uncertainty and fragmentation in itself may be costly to pharma companies. As a populist leader, moreover, Mr Trump is likely to be responsive to public protests over drug price inflation. Although systematic price controls may now be less likely than they would have been under Hillary Clinton, there may be skirmishes on individual cases. Nevertheless, less regulation may also mean less scrutiny of competition, making it harder to stem price rises for particular product groups.
There is similar uncertainty in the UK over the future of drug regulation once the country leaves the EU, a process that will start in 2017. Pharma bodies were almost unanimous in opposing Brexit before the referendum because, despite gripes with EU rules, they at least offer some synergy across 27 markets. For that reason David Davis, the Brexit secretary, wants the UK to negotiate a “standardised” approval process with the EU. The UK is also likely to implement the EU’s new medical device regulations, or least ones that are very similar. However, British businesses will also want to use the opportunity to cut red tape and speed up approval processes. Otherwise there is a risk that leaving the EU could prompt some pharma companies to delay launches in the UK.
Perhaps more importantly, many pharma investors are convinced that Mr Trump (and to a lesser extent a post-Brexit UK) would be softer on taxes. The Republicans have long supported the idea of a smaller state, and Mr Trump himself stood on a platform of tax cuts. That may also include a laxer attitude to tax inversion deals – such as the Pfizer-Allergan one that was cancelled in early 2016 amid a crackdown. It is partly the revived prospect of mega-mergers that is helping to drive pharma stocks higher. More likely, however, a lower US tax rate could stop companies from needing to flee to lower-tax countries in the first place, and help them to repatriate profits held overseas.
Set against all this, however, comes the potential damage to international trade in both the US and UK. The risks are most acute in the UK, where almost 45% of life science exports go to the EU. For now, the increasingly weak UK pound has actually pushed up overseas earnings at UK companies such as GlaxoSmithKline (GSK), but the future remains uncertain, particularly if the UK decides to opt out of the single market. Moreover, with their EU markets under threat, UK pharma companies are now increasingly nervous about US trade too.
So far Mr Trump has directed most of his ire over rising imports at Mexican-made cars and Chinese steel, and The Economist Intelligence Unit currently expects any rise in tariffs to be directed at particular products. Yet a tighter trade regime may affect pharma too, and not just European companies like GSK. Mr Trump has talked about labelling China a currency manipulator, which would free him up to impose trade restrictions more widely. The Indian generics industry is also watching US policy pronouncements closely, conscious that their success is sometimes at the expense of US-based pharma companies.
On their side is the continuing need to keep US generic prices low, as well as US companies’ concerns over international protection of their intellectual property (IP) rights. Yet that is unlikely to be enough to prevent some damage to international trade. For example, the Trans-Pacific Partnership – which would have cemented many of those IP rights – is now dead. And unlike in the UK, the US shock has pushed the dollar higher. The effect is unlikely to be lasting, but it may dent overseas earnings in the short term.
Ana Nicholls is chief healthcare analyst at the Economist Intelligence Unit
