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Drug Pricing Power Transcends Politics

Although some proposals could trim growth prospects, they shouldn’t have a major impact on more innovative drugs.

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We don’t expect any significant fair value estimate changes in the drug group based on Democratic presidential candidate Hillary Clinton’s disclosed drug pricing plan targeting unjustified price increases for older drugs. While passage of the plan in Congress would be very uncertain, if the plan were to take shape, we expect less innovative generic drugs and older branded drugs to be the focus of price controls. Further, we believe the core element of patent protection supporting drug prices is still intact, supporting our moat ratings in the pharmaceutical and biotechnology industries. Our moat ratings and valuations reflect our skeptical outlook on less innovative companies and their weaker prospects for pricing power, including our no-moat and negative trend ratings for  Endo (ENDP) and  Mallinckrodt (MNK), for example.

Parts of Clinton’s proposed plan would face low chances of passage in Congress or tough implementation. In response to unjustifiable price increases for older drugs, Clinton proposes increasing supply of competitive drugs and issuing penalties, which generally go against Republican support of market driven forces. Further, if drug prices increase too much, Clinton also supports drug importation, which is generally supported by Republicans but difficult to implement through the FDA.

Damien Conover does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.