Donald Trump's next top pick for running the Department of Health and Human Services (HHS) is Eli Lilly & Co. (LLY -0.62%) executive Alex Azar, and that's drawing the ire of patient advocates who believe the decision is akin to letting the fox guard the henhouse. Azar's role as President of Eli Lilly's U.S. operations during a period of time that included significant price increases could return the drug-pricing debate to the headlines and reenergize interest in legislation that's unfriendly to the industry. As a result, biotech stocks suffered an industrywide sell-off on Tuesday.
Filling an empty seat
Azar's nomination is the result of Trump's first Secretary of HHS, Tom Price, resigning amid a scandal over his use of private jets paid for by taxpayers.
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Since Price stepped down on September 29, there's been a power vacuum at the agency, which is arguably one of the most important to American consumers. In addition to being in charge of the Centers for Medicare and Medicaid Services (CMS), the Department of Health and Human Services also runs the National Institutes for Health (NIH), which is a big source of drug research grants.
Last year, Trump won the Presidency on a platform of reform that included a broad reshaping of healthcare and a specific targeting of high drug prices. So far, the administration hasn't been able to make progress on either of those fronts, and it's anyone's guess if that would change under Azar.
Public and private sector blurs
It's not uncommon for private-market experts to be tapped as Secretary. For example, Treasury Secretaries, including Robert Rubin and Hank Paulson, have historically come from the banking industry. The current Treasury Secretary, Steven Mnuchin, is a former banker, hedge fund manager, and mortgage lender.
It's a bit less common to have former pharmaceuticals executives running HHS. For example, President Obama's HHS secretaries were former Governor Kathleen Sebelius and Sylvia Mathews Burwell, who had previously held leadership roles in nonprofits, including the Bill and Melinda Gates Foundation.
Azar isn't a government rookie, though. He formerly clerked for Supreme Court Justice Antonin Scalia. During George W. Bush's presidency, he served as deputy assistant secretary of HHS from 2005 to 2007 before resigning to join Eli Lilly as a senior lobbyist.
During Azar's tenure at Eli Lilly, however, prices for some of Eli Lilly's best-selling drugs skyrocketed, and that's likely to be in focus during Azar's confirmation hearings on Capitol Hill. Eli Lilly boosted the cost of its best-selling insulin Humalog earlier this year by nearly 8% -- a rate that far outpaces inflation. As a result, Humulog now costs $274.70 per 10 ml bottle, up from about $100 per bottle in 2010.
What's next
Confirmation hearings are likely to bring the issue of drug prices back front and center, and that could make for a lot of volatility in biopharma stocks. In the past, Trump has championed the reimportation of drugs from Canada and greater negotiation powers for Medicare. It's unclear how much traction either of those solutions could ultimately get, however, given that part D Medicare providers are already negotiating independently on drug prices, and drug reimportation hasn't become law yet, despite support for it in the past.
If Azar is appointed as secretary of HHS, it could end up being a victory for the industry. Historically, he's laid the blame for high drug prices at the feet of insurers, not drugmakers. He's also an advocate for faster approval times and fewer regulatory hurdles, both of which are industry friendly policies.
Personally, I wouldn't underestimate the ability of drug companies to effectively manage political risk, or to profit from healthcare reform. After all, it was widely expected that the industry would suffer significantly from the passage of the Affordable Care Act, yet broadly speaking, Obamacare's been a boon to the industry. For this reason, investors should probably focus more on the long-term industry tailwinds resulting from a larger, longer-living population than Washington's whims and whispers.
