Will 5% be the next price-hike ceiling? California law adds to industry pressure: analyst

California's new drug pricing law won't pull back the curtain on now-secret numbers till early 2019, but drugmakers need to brace themselves for widespread ripple effects, in that state and beyond, according to Leerink Partners analyst Geoff Porges. 

Notably, Porges wrote that California's law could create a de facto price hike limit of 5% per year around the industry, because the law requires drugmakers to warn the state about price hikes that accumulate to 16% over three years, and justify them, too.

Or the law might do just the opposite. While unintended consequences of new laws are hard to pinpoint, Porges wrote that it "would not be a complete surprise to see faster price increases for some drugs, even as the bulk of the industry tries to avoid the extra scrutiny and transparency of their pricing decisions." 

Why? Because if a drug company were to hit the 16% price hike threshold that triggers warning and justification requirements, that company might be incentivized to go "well above" the threshold, Porges wrote. 

Gov. Jerry Brown signed the law on Monday, winning praise from activists and scorn from some industry watchers who contend it won't achieve the goal of lowering prices. PhRMA, the industry trade group, opposed the legislation. Advocates praised the state for taking drug pricing into its own hands. 

In the short term, drug companies are likely working with analysts, consultants and lawyers to sift through the details of the law and prepare their responses. Over the long term, Porges feels the law will "increase the pressure on pharma companies to slow their price increases to a pace that is more consistent with the overall rate of inflationary pressure in the economy." As scrutiny on the industry has mounted, price hikes have already slowed this year compared to recent years, but Porges sees the new bill in California adding to that pressure. 

This, he says, "will probably result in another step down in the powerful U.S. pricing tailwind which has so favored the industry for the last decade." That's already happening to some degree, as many drugmakers are limiting price hikes to 9.9% or less per year, in line with Allergan CEO Brent Saunders' "social contract" pledge announced last fall. Sanofi said it would align its increases with the U.S. government's official rate of healthcare inflation.

RELATED: At $475,000, is Novartis' Kymriah a bargain—or another example of skyrocketing prices?

Initial launch prices probably won't take a hit under the new California law, according to the influential analyst and his team, but industry will now need to justify those numbers. 

"As in all such regulations, the ability to comply and finesse the rules and still maximize realized price will be more accessible to large companies than to small ones, and the growing burden of all such regulation does favor the larger organizations with broader portfolios and internal departments and professionals to manage such requirements," Porges wrote. 

In a new post on the law, Drug Channels' Adam Fein wrote that the law will benefit pharmacies and healthcare providers the most because they can purchase drugs ahead of a price hike and then be reimbursed at the new list price level. Patients and payers will see limited benefits, he wrote, while the state doesn't stand to gain from the measures.

Aside from regulations on price hikes, the new law requires payers to disclose costs for the top 25 meds each year.  

The same day that Gov. Brown signed Senate Bill 17, he authorized another bill that restricts pharma's copay coupons on branded meds when a generic is available. There are exceptions, and PhRMA resisted that legislation as well. 

The action in California is the latest in a state-by-state assault on drug prices as Congress has not been able to advance on the issue. Nevada and Maryland have implemented their own laws targeting different segments of the industry. If the trend continues, it could create serious trouble for pharma as drugmakers sell their products in each state and will have to tailor their operations to meet varying regulations.