President Trump’s effort to lower drug prices haven’t hit the pharmaceutical industry’s bottom line yet, but investors are bracing for the potential impact in 2019.
Companies tend to raise treatment costs in January, and given the public pressure Trump has personally put on the industry — his involvement forced Pfizer to reverse planned price hikes earlier this year — experts say those increases are likely to be lower. Instead, investors and others say drugmakers might pursue gradual price hikes through the year in an effort to avoid public scrutiny.
[Related: Trump administration says its drug blueprint has already lowered prices]
That could slow some of the momentum the drugmakers gained in the second quarter of 2018, with Roche, Eli Lilly & Co., Novartis, Merck, Jazz Pharmaceuticals, AstraZeneca, Celgene, and others all reporting sales growth, some at double-digit levels. Revenue at Abbvie, for example, jumped 19 percent in the quarter ending June 30.
“The drug industry in the United States is enjoying an operating margin of 50 percent and still growing,” Ronny Gal, managing director at Sanford Bernstein, said in a recent interview. “To say that the drug industry would sell products to the government at risk of not being profitable is a bit far-fetched.”
The lingering uncertainty over the shape and impact of Trump’s plans highlights the difficulty the administration faces in trying to revamp a complicated pricing system used by an industry that remains an influential force in Washington.
Still, the Department of Health and Human Services has taken several initial steps in advancing a blueprint unveiled in May. The agency recently issued a rule that, if implemented, would open up the Medicare Advantage program to further price negotiation.
The administration is also expected to seek an end to the drug rebate program, a move that could dramatically reshape the current pricing environment, in which pharmacy benefit managers act as middlemen, negotiating discounts for themselves that are passed along to customers.
“We’re going to go to a marketplace where we don’t have rebates,” Pfizer Chief Executive Officer Ian Read told investors on a July 31 earnings call. “I don’t know the speed of that, but I do believe the administration has been focused on that because that will reduce pharmaceutical prices at the point of sale.”
Other changes, like abolishing so-called “gag clauses” that prevent pharmacies from informing customers when it is cheaper to buy prescriptions with cash as opposed to billing insurance, also have yet to be implemented.
With little clarity from the White House, companies across the healthcare industry are left trying to interpret sometimes contradictory actions and statements from the Trump administration.
The confusion, however, is not weighing on the industry’s market performance. The S&P Pharmaceuticals Select Industry Index is up 15 percent since the end of June.
“These companies, at least in the public statements, are all saying they expect something to happen,” said Charles Rhyee, senior research analyst at Cowen Inc., but “some of them suspect the change might not be that much.”
Some pharmacy benefit managers even believe their industry might gain an advantage. One proposed rule from Health and Human Services would allow further negotiation on drug prices in private Medicare plans, for example.
“There are multiple places where the drug industry has been an actual beneficiary of the current changes,” Gal said. “It doesn’t feel like the drug industry will come out of this administration scot-free, but the amount of damage that will be done in this reform process is probably minimal.”
