Morningstar - Q1 2021 - 33

EXHIBIT 3

Biden's Key Drug Policy Initiatives These proposals would have modest effects on pharma and biotech companies.
Likelihood of
Enactment

Impact to Industry

Morningstar Comment

Allow Medicare Price
Negotiation

Low

Low/Negative

The consolidated pharmacy benefit/managed-care industry already has strong negotiating power
with drug firms for Part D, and we think low likelihood of passage, combined with the relatively
minimal leverage (not a credible threat of denying coverage of novel drugs), prevents a moat impact.

Limit Drug Launch Prices

Moderate

Low/Negative

With most drug launches at prices close to independent recommendations, this policy seems to
target rare cases of outliers and is not likely to have an impact on overall drug prices.

Limit Drug Price Growth
to Inflation

Moderate

Low/Negative

While an increasingly likely policy change, we estimate the impact would be manageable at an
industry sales hit of 3%.

Drug Importation

Low

High/Negative

Lowering U.S. drug prices to ex-U.S. pricing levels could drastically reduce margins for most
drug firms, and there is bipartisan support for reimportation legislation. However, we think it would
be very difficult to implement and has low likelihood of being passed in an effective form.

End Tax Breaks for Drug
Advertisements

Moderate

Low/Negative

Firm that are very reliant on direct-to-consumer ads (including Pfizer and AbbVie/Allergan) could
see reduced demand for their products but also significant expense savings as a partial offset.

Increase Generic Drug Supply

Moderate

Low/Negative

Generic supply is already fairly strong in reducing branded drug prices after patent losses.

Sources: JoeBiden.com, Morningstar.

Medical Technology
In the medical technology sector, we expect
only minor changes to our moats or valuations
if some policy changes are enacted. For
example, we anticipate that the firms that are not
focused on Medicare patients will generally
benefit from more volume if access is expanded
again. With the implementation of the
ACA, increased access generally resulted in more
patient volume. But some areas of med tech
benefited more than others. For example,
LabCorp LH and Quest Diagnostics DGX received
a nice boost to volume from expanded coverage
that brought in more patients and covered
preventive services. In contrast, some categories
of medical devices, such as knee implants
and pacemakers, didn't see the same kind of
boost because most of those patients are already
covered by Medicare. If patient access
expands under the Biden administration, we'd
expect a positive impact on the labs and any other
medical device businesses that encompass
more than the Medicare crowd, such as Dexcom
DXCM and Insulet PODD for diabetes patients.
Consolidation

Another area of consideration for investors is
consolidation in the sector. Consolidation could

run into resistance under the Biden administration,
as more aggressive antitrust action is one
of the reforms that Biden has proposed. The
med-tech industry remains shaped like a lopsided
hourglass, with extremely large multinationals at
the top, a small number of midsize firms in
the middle, and thousands of development-stage,
often privately held firms with emerging
technology at the bottom.

if Johnson & Johnson JNJ or Stryker SYK were to
attempt acquiring the midsize Smith & Nephew
SNN, the deal could run into regulatory opposition
under the Biden administration. This would be in
contrast to the very similar acquisition that Zimmer
made of midsize Biomet in 2015, which further
concentrated market power and required very little
in the way of divestitures.

The large firms at the top, which throw off
generous amounts of cash, typically augment
internal research and development by acquiring
other companies and their technology. For
the small development-stage firms that are like
minnows, selling to a large multinational
has become the preferred exit strategy for their
early investors, especially as the hurdles to
profitable, independent commercialization have
risen thanks to the higher clinical bar to
secure a pricing premium.

We have made no changes to the moat ratings or
fair value estimates of healthcare companies
based on the results of the election. We expect
Biden to issue executive orders to shore up the
ACA. He also has ambitions to find more-affordable
insurance options that could help the U.S. almost
reach universal coverage. A public option would
have the most potential to alter the U.S. healthcare
system, but even under a budget reconciliation
process, it would be difficult to pass. If a version
does pass, we suspect it would be more likely to
influence the individual exchanges than the
employer-sponsored insurance that covers roughly
half of Americans. All in all, expect the status quo
in the healthcare industry. K

No Change

A more strenuous antitrust enforcement could
introduce a chill to M&A activities, especially
of any combinations of established competitors in
the market (less so for development-stage firms
that typically hold emerging technology for which
a market has not yet developed). For example,

Julie Utterback, CFA, is a senior healthcare analyst at
Morningstar Research Services LLC.

morningstar.com/lp/magazine

http://www.JoeBiden.com http://www.morningstar.com/lp/magazine

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