Potential new drug price regulations for the pharmaceutical sector should have manageable impact near-term while leaving a long-standing overhang in place.

The combination of a history of drug price increases and the persistence of price disparities between the U.S. and other developed economies in which governments play a more direct role in price determination continues to ensure that drug pricing in the U.S. retains the attention of policy makers.

In making the case for less stringent regulations, pharmaceutical companies highlight the distinctions between list prices and net prices, which are list prices adjusted for discounts and rebates embedded to preserve formulary access—arguably the core of misaligned incentives in the supply chain. The companies encourage focusing on portfolio net price changes, which have been more benign in recent years, as opposed to product-by-product list price changes. They also argue that net price disparities between the U.S. and other developed economies are not as stark as list price disparities. However, limited product-level disclosures of net prices on account of competitive and contracting constraints get in the way of the industry’s case.

In recent years, proposals for regulating drug pricing in the U.S. have converged around a couple of ideas. The first and most concerning for the industry is government-negotiated pricing, whether directly through negotiations with U.S. government agencies or indirectly through references to prices in other developed markets. The industry projects potential negative implications for patient access and R&D investments, and support in Congress has historically be limited. The second idea relates to limiting out-of-pocket costs for patients through Medicare benefit design and other mechanisms that have historically enjoyed bipartisan support in Congress and a better reception from the industry.

As legislative work on the Biden administration’s infrastructure package continues in Congress, it is clear that positions have not shifted much. While dynamics remain fluid and carve-outs for special cases may emerge, reform proposals related to government-negotiated pricing (including international reference pricing, direct price negotiation for Medicare drugs, and allowing Medicare-negotiated drug prices to apply in the commercial market) appear to be facing significant hurdles.

Overall, we anticipate modest policy changes in the near term but expect drug pricing to remain an overhang for the industry over time. While near-term implications for fundamentals and valuations in the industry should be broadly benign, we have been encouraging management teams in our ESG engagement meetings to take a long-term view in their pricing practices in the U.S. to ensure sustainable operating results with moderating sensitivity to the policy environment.