Drug Investors Feel Pain of Price Pressure as Earnings Take Hit

  • Health care is worst performing subsector in S&P 500, Nasdaq
  • Investors worry again drug pricing pressure will hit results

The earnings season is off to a rough start for drugmakers.

Drug and health-care stocks were some of the worst performers in the U.S. on Tuesday as investors began to worry that pressure on pharmaceutical prices will once again hurt results.

Pharmaceutical and biotech stocks were among the biggest decliners in the Standard & Poor’s 500 Index, with medical distributors being the most hit. On the Nasdaq Composite Index, the health-care subgroup had the worst day, as well.

Investors are concerned that drugmakers won’t be able to increase prices, or will have to give steeper discounts -- hurting margins. Early in the morning, Cardinal Health Inc. cut its forecast for the fiscal year, citing declining prices. Soon after, Johnson & Johnson said that first-quarter sales of several key drugs fell short, partly because of price pressure.

That’s sparking fears of what’s to come when other drug and biotech companies report quarterly results in the coming weeks.

J&J’s pricing dynamics “should impact the broader biopharma industry,” Leerink analyst Geoffrey Porges said in a note to clients. “We do not anticipate that these issues will be isolated to J&J alone.” He called Amgen Inc. and Celgene Corp. “most vulnerable.”

Broader Problems

Drug distributors are in trouble, too. Shares of McKesson Corp. and AmerisourceBergen Corp. dropped Tuesday along with Cardinal, which slumped 12 percent after Cardinal CEO George Barrett said the industry was “going through a challenging phase.”

“The pharma performance, in particular, is likely to worry investors, and naturally not just for J&J, but the broader space on the back of Cardinal’s report as well this morning,” said Michael Weinstein, an analyst with JPMorgan Chase & Co.

For a long time in the U.S., drugmakers could charge largely what they wanted. In recent years, however, health insurers, pharmacy benefit managers and politicians have put the industry under pressure, aggressively pitting rival manufacturers against each other, refusing to cover some treatments, and hauling executives up to Capitol Hill for a grilling before Congress.

While list prices are still going up, drugmakers have to give bigger rebates to health insurers and pharmacy benefit managers, who decide which drugs get covered and which ones are left off lists known as formularies.

J&J, the world’s biggest health-care company, fell 3.1 percent after posting its quarterly earnings Tuesday, the biggest stock decline in more than a year.

“If there’s a takeaway from today’s J&J report, it’s that the status quo got more expensive this quarter,” analyst Weinstein said in a note to clients. “Discounts to maintain formulary status spiked in the first quarter, making the pricing environment in several categories much more challenging.”

‘Most Important Issue’

The biggest casualty of the new environment has been Valeant Pharmaceuticals International Inc., whose shares are worth just a tiny fraction of their August 2015 peak after the company’s aggressive pricing practices were targeted. Mylan NV, which was questioned about price increases on its EpiPen allergy shot, is down 22 percent in the last 12 months.

Drug pricing is a key challenge in this space, Credit Suisse pharma and biotech analysts wrote in a note Tuesday. They found that almost all of last year’s earnings growth in the industry could be attributed to price increases. The dependence on increases is “the most important issue for any pharmaceutical investor today,” the analysts said. Bristol-Myers Squibb Co. and AbbVie Inc. have the most at risk among U.S. companies, they said.

Some drugmakers have tried to get out in front of the issue. J&J and Merck & Co. have begun publishing pricing transparency reports. Others, like Allergan Plc, who has been among the most outspoken industry leaders, promised to raise prices only once a year and to limit increases to the single-digit percentage range.

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