What You Need to Know About Proposition 61

It’s election day, and all eyes are on who will become the next President of the United States. But Proposition 61, which California voters also decide on today, likewise has major ramifications for the pharmaceutical industry and its investors. Here’s what you need to know as we head into election day.

What is Proposition 61?

The California Drug Price Relief Act, or Proposition 61, would ensure certain California state agencies pay the same discounted price for drugs as the US Department of Veteran Affairs does. That’s a savings of around 24 percent.
It may sound, then, like Prop 61 calls for some major price-slashing—which means drug profits would also decline (as would, perhaps, shareholder returns). But here’s the thing: state agencies covered by the bill are fairly limited. They include universities and state prisons, as well as California’s low income insurance program. All in all, between four and seven million people would see the price of their prescription medications drop—the numbers vary depending on which side you’re talking to.
Keep in mind, this is in a state with some 40 million residents.

And yet, each side is fighting hard—and paying millions—to come out on top. In fact, Prop 61 is the most expensive ballot initiative in American history, with major drug manufacturers like Merck (NYSE:MRK), Pfizer (NYSE:PFE), Allergan (NYSE:AGN), Amgen (NASDAQ:AMGN) and Johnson & Johnson (NYSE:JNJ) donating to the ‘no’ side.

At stake

So why the financial outpouring, considering how few people will really be affected? Senator Bernie Sanders, in an ad advocating for Prop 61 to be passed, hits the issue on its head:
“Proposition 61 is a very important step forward. It will be great for the taxpayers of California and it will be a real blow against this greedy industry that will reverberate all over America.”
Charged language aside, the point is clear: this landmark ballot initiative will establish a precedent. And frankly, it seems to be one the drug industry is afraid of.
CNBC reports that the opposition campaign, backed by members of Pharmaceutical Research and Manufacturers of America, has majorly outspent the other side: their expenses run around US$109 million, compared to the US$16.9 million put out by the pro campaign.
Of course, pharmaceutical companies aren’t the only ones lobbying against Prop 61: numerous state veterans organizations oppose the bill, arguing that it will result in higher drug prices for veterans, while failing to deliver savings to most Californians.

What to expect today

Initial polls showed the ‘pro’ side well in the lead. In recent weeks, however, that gap has narrowed, with the opposition campaign gaining ground. Now, both sides appear to be neck in neck.
Regardless of the outcome, however, one thing is for sure: lawmakers aren’t going to abandon the topic of pharmaceutical price gouging any time soon. A series of scandals brought the subject into the spotlight this year, and the presidential campaign generated still more attention around it. As America heads into 2017 with a new president at the helm, you can bet—whatever voters decide—that this conversation will continue.
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Securities Disclosure: I, Chelsea Pratt, hold no direct investment interest in any company mentioned in this article.