Pharma Stocks Struck as Drug Pricing Story Takes Its Toll

  • A new price war set off by payers hurts S&P health-care index
  • ‘We may be seeing the end of days,’ Baird analysts say

It’s been a brutal October for health-care investors. The worst may be yet to come.

A year after presidential candidate Hillary Clinton first tweeted about outrageous price gouging, the reality of pricing pressure in the U.S. hit Wall Street in the most concrete way: earnings.

From drug distributor McKesson & Co., to biotechnology giants Amgen Inc. and AbbVie Inc. and insulin maker Eli Lilly & Co., this week’s third-quarter results showcased widespread evidence that the industry has pulled back on prices under the growing pressure from politicians and pharmacy benefit managers. The crush has sent shares down in the U.S. and beyond, hitting foreign drugmakers like Denmark-based Novo Nordisk A/S, the world’s largest maker of insulin, that have a large portion of their business in the country.

“We’re only just getting into the storm now,” Novo Chief Financial Officer Jesper Brandgaard said in an interview with Bloomberg Television. “We can’t in any way say that the worst is behind us.”

The earnings season so far has yielded an apparent turning point in the industry -- a new era where drugmakers won’t be able to rely on price increases to boost revenue and profit. Most striking of all, according to Leerink Partners analyst Geoff Porges, was Amgen’s announcement late Thursday that it didn’t expect to be able to raise the price of its top drug, a medicine to treat autoimmune diseases called Enbrel, in 2017. The stock slumped 9.6 percent on Friday.

‘Still Shocking’

“It’s still shocking. This signals a really pretty profound sea change in the landscape for the industry,” Porges said by phone. “Payers are using more and more aggressive tactics to extract price concessions from manufacturers.”

Porges estimated that more than 80 percent of Amgen’s operating income growth in the last six quarters came from Embrel price increases.

Analysts covering the biotech industry -- who are used to wild stock moves in the high-risk sector -- expressed their bafflement on Friday.

“After this week, we’re almost speechless, which, as you know, doesn’t happen often,” Baird & Co. equity analysts wrote in a note.

The price shocks rippled far and large. AbbVie plunged 6.3 percent on Friday after reporting that third-quarter sales of its top-selling arthritis injection, Humira, fell short of predictions.
Novo’s decision to cut its long-term growth profit target sent shares of U.S. rivals Lilly and Merck & Co. down as well. Earlier in the week, Lilly had posted a 14 percent slump in U.S. sales of its Humalog insulin, because of lower prices.

Price War Casualties

McKesson Chief Executive Officer John Hammergen took investors by surprise on a conference call Thursday when he said a rival wholesaler, which he didn’t identify, had started a price war. The stock plunged 23 percent on Friday, the most since 1999. Competitors Cardinal Health Inc. and AmerisourceBergen Corp. sank 9.8 percent and 13 percent, respectively.

“The idea that a key industry participant could potentially harm industry economics on price baffles us,” Ross Muken, an analyst at Evercore ISI, wrote in a note to clients.

So far this month, only three stocks in the 59-member Standard & Poor’s 500 Health Care Index have increased, while 11 have declined more than 10 percent. The index ended the week at its lowest since March 28.

The rest of earnings season may show more evidence of price pressure. Pfizer Inc. and Gilead Sciences Inc. -- maker of hepatitis C drugs that have list prices of $84,000 to $94,500 -- report quarterly earnings next week. Valeant Pharmaceuticals Inc., the target of government probes on pricing, is scheduled to post earnings on Nov. 8, the day of the U.S. presidential election. And Mylan NV, the center of public outrage over the price of its EpiPen allergy shots, reports the following day.

“Halloween comes early to haunt biotech,” the Baird analysts said in their note. “Rhetoric this week on commercial payers has us believing we may be seeing the end of days.”

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