Drug stocks sink as backlash against price hikes hits bottom lines
The backlash against steep pharmaceutical price hikes over the last year has notoriously taken down individual drug companies — Mylan, Valeant and Turing among them.
Now, drug wholesaler McKesson Corp.’s nearly 24.2% stock decline on Friday, the company’s biggest single-day price decline ever, along with a pricing policy about-face for Amgen Inc. appear to reflect larger ramifications across the health care sector from those pricing scandals. The SPDR health care exchange-traded fundXLV, -2.28% was down 2.0% and the Nasdaq Biotech Index NBI, -1.34% down 1.5% in early-afternoon trade.
Wall Street analysts and investors have long speculated about pricing strategy turning into a risk for pharmaceutical and biotech companies. But attempts to determine the riskiest companies by that measure have encountered a challenge: all pharmaceutical companies had been making big price increases.
McKesson MCK, -24.54% on Thursday offered a clear signal of change when it said a “softer pricing environment” in the U.S. hurt its second-quarter results, in which income dropped by more than half and caused the company to slash its 2016 profit outlook. As a middleman in the pharmaceutical system, McKesson is compensated based on drug revenue, and thus, benefits from drug price increases.
“What we have seen this year to date are fewer products with price increases, and those price increases are at lower rates than both prior-year results and our expectations for the current” fiscal year, said CEO John Hammergren, according to the FactSet transcript.
The company expects coming pricing trends for branded drugs to be “meaningfully” below those this fiscal year, based on second-quarter results, he said.
Competitors AmerisourceBergen Corp. ABC, -13.67% and Cardinal Health Inc.CAH, -11.36% also plummeted in early-afternoon trade, with 13.0% and 11.7% declines, respectively.
nce that pricing pressure is here to stay. The company said Thursday that it plans to move growth for blockbuster Enbrel on higher sales rather than increases in price, sending its stock diving 10.9% in Friday early-afternoon trade.
The plan marks a departure from Amgen’s previous strategy with the drug. MarketWatch reported in July that Enbrel price increases offset a decline in the drug’s market share, prompting analysts to question “liberal price increases” as a long-term strategy.
The company has used Enbrel price increases to propel more than 80% of its operating income growth over the last six quarters, according to Leerink analyst Geoffrey Porges, who deemed the move “devastating” and “game over” for Amgen.
The change “unwinds one of the company’s last remaining defenses against revenue and earnings erosion from biosimilar and branded competitors,” Porges said.
Despite the spiraling controversy, and evidence that consumers support pricing regulation in one form or another, there’s been little movement on Capitol Hill. Pricing pressure has instead come from commercial entities, especially employers and drug-negotiating middlemen called pharmacy-benefit managers.
Pharmacy-benefit managers “stop the pricing music regardless of the government,” Porges said. And “there is no reason to expect the volume trends to increase in coming periods…absent net positive price, Enbrel’s trajectory, and profit contribution, will be inexorably negative.”
McKesson shares dropped 38.4% year to date, compared with a 4.3% rise in the S&P 500 SPX, -0.52% Amgen shares dropped 11.8% year-to-date.