See feature article below: Biotech Market
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Report For: Biotech Market
Biotech stocks like Amgen (AMGN), Celgene (CELG), Biogen (BIIB), and Regeneron Pharmaceuticals (REGN) are getting crushed today on worries that government regulators could propose limits on Medicare drug spending. Evercore ISI’s Mark Schoenebaum explains:
The Independent Payment Advisory Board (IPAB) is an independent executive committee intended to contain Medicare spending growth by proposing CMS reforms to be implemented by the U.S. Department of Health and Human Services. The IPAB is “triggered” (comes into existence) when the actual growth rate exceeds a target growth rate set by the CMS actuary. Although IPAB can propose reforms to any portion of CMS spending, we do not believe that the IPAB will target Part D drug spending specifically.
Drug spending is an unlikely target. Outpatient prescription drug spending (e.g. Part D) accounted for 11% of 2014 Medicare benefit payments. Hospital inpatient services (23%), Medicare Advantage (26%), and other services including dialysis (14%) are bigger contributors to overall spending. Historical targets have included reductions in payments to plans and providers coupled with delivery reform under the Affordable Care Act and 2011 Budget Control Act. Neither the ACA nor HHS has the authority to regulate drug prices.
There are limits to what IPAB can do. (1) The IPAB is not allowed to cut payments to hospitals until 2018; (2) the magnitude of cuts the IPAB can propose is capped: 1% of CMS outlays in 2016, 1.25% in 2017, and 1.5% in 2018 and beyond.
The timeline, if triggered. 15 members would need to be appointed by the president with the advice & consent of the Senate, propose a draft of reforms to HHS by Sept 1; to Congress by Jan 15th for implementation by Aug 15th to take effect the following year. Given this timeline, the earliest we would expect reforms, if any, to take effect would be 2019.
Shares of Amgen have declined 1.1% to $148.96 at 1:20 p.m. today, while Celgene has dropped 2.5% to $96.84, Biogen has slipped 1.6% to $233.52, and Regeneron Pharmaceuticals has fallen 2.3% to $$344.70. The iShares Nasdaq Biotechnology ETF (IBB) is off 1.9% at $253.55.
UPDATE: In a report released yesterday, Bernstein’s Tim Anderson and team warned that the IPAB could be triggered this week:
On April 25th we wrote a report on IPAB, which stands for the Medicare Independent Payment Advisory Board. This is the entity that, under certain circumstances, has the power to propose/implement cuts to the Medicare program if a certain spending threshold (the “trigger”) is met. We said that the trigger determination would likely occur somewhere in the late May to July timeframe.
Our latest information is that the trigger update is likely to come this week per industry contacts. Based on precedent, this could get announced simultaneously in two ways. The Centers of Medicare and Medicaid Services (CMS) would likely describe it as part of its annual Medicare Trustees Report that discusses many different aspects of the Medicare program, one of which is IPAB. And, there may be a separate, stand-alone press release from the Chief Actuary of CMS announcing whether the IPAB trigger has been met.
Why does this matter? It matters because IPAB has far-reaching authority to lower Medicare spending by recommending cuts that could impact a variety of stakeholders, but none of this is spelled out very clearly in statute, meaning there is uncertainty about what IPAB could propose exactly. Nonetheless, many Washington insiders have felt that the pharmaceutical industry could be in the cross hairs, but here too there is uncertainty. In terms of the magnitude of any potential cuts recommended by IPAB, this depends on how far projected Medicare spending is above the predetermined threshold, but it might only be a smaller amount (in the context of how big Medicare spending is). However, the uncertainty attached to this could spook investors.
Source – Barrons / Ben Levisohn
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