The drug industry is showing signs it is slowing the pace of price increases after years of hefty hikes, alarming shareholders worried that pressure from politicians, consumers and employers will continue to stifle pricing power.
Shares of many drugmakers, wholesale distributors and pharmacy-benefit managers were battered Friday on new evidence in corporate earnings reports that pharmaceutical companies are declining to ratchet up prices as sharply as in previous years. McKesson Corp., one of the largest wholesale drug distributors, shed a quarter of its market value after disclosing that competition and a slowdown in price inflation for brand-name drugs would reduce its profits for its current fiscal year.
Shares of drugmaker Amgen Inc. dropped 10% Friday after the company late Thursday said it wouldn’t be able to charge much more next year for its blockbuster rheumatoid-arthritis treatment Enbrel, after several years of sales gains fueled by repeated price increase. The Nasdaq Biotechnology Index fell 2% Friday.
The prospect of price moderation—while good for patients and insurers—spooked analysts and investors concerned about the profits of drug companies and middlemen.
“There is tremendous concern in the marketplace about structural change to pricing,” Goldman Sachs analyst Jami Rubin said on a conference call with executives of drugmaker AbbVie Inc. on Friday.
Drugmakers in recent years have repeatedly boosted prices for many drugs at rates well above the broader rate of inflation, and have introduced new drugs at prices that can top $100,000 a year per patient.
The rising cost burden has triggered a backlash from patients, doctors and insurers, who say the costs put drugs out of reach for some patients and strain health-care budgets. High-profile actions including Mylan NV’s repeated price increase for the emergency allergy treatment EpiPen have triggered investigations by members of Congress and the Justice Department.
Mylan has said net pricing for EpiPen is lower than list price because it pays rebates to PBMs and insurers, and offers discounts to patients.
The Obama administration earlier this year proposed a new policy designed to curb Medicare spending on prescription drugs, by reducing what it considers to be an incentive for doctors to prescribe more expensive drugs. The proposal hasn’t been made final.
Companies and organizations that pay for portions of their employees’ health care also have become emboldened by the public backlash and are pushing back against drug-price increases via the pharmacy-benefit managers, or PBMs, that administer employee benefits, said Ronny Gal, an analyst with Sanford C. Bernstein. “There’s just less money to go around,” he said.
In February, 20 major employers including American Express Co., Macy’s Inc. and Verizon Communications Inc. formed an alliance to use their collective clout to reduce health care costs—including drug costs. The group expects to test pilot projects in 2017 to help employees obtain more affordable prescriptions.
Drugmakers are still able to raise prices or charge high starting prices for new drugs in certain categories, such as cancer, where there aren’t lower-cost alternatives.
Pharmacy-benefit managers and insurers have increasingly chosen to exclude certain drugs from their preferred-drug lists if they have a suitable, lower-cost alternative. CVS Health Corp. in August said it would stop paying for Sanofi’s Lantus diabetes treatment in 2017, anticipating that Eli Lilly Co. and Boehringer Ingelheim GmbH will soon begin selling a lower-cost copycat version of Lantus.
McKesson said it has been forced to lower the prices it charges to independently owned pharmacies to match the prices charged by competing wholesalers aiming to grab market share.
“We have made a very significant change in our pricing practice to match where the market is today,” McKesson Chief Executive John H. Hammergren told analysts on a conference call on Thursday.
McKesson contracts with manufacturers to distribute drugs to customers including retail pharmacies and hospitals. Some of its contracts allow McKesson to benefit when manufacturers increase prices, by selling its inventory of a drug at the new, higher price. A slowdown in price increases is beginning to hurt its profit margins.
McKesson’s stock plunge on Friday erased about $9 billion in market value, while shares of the company’s main rivals, AmerisourceBergen Corp. and Cardinal Health, fell 13% and 12%, respectively.
Some drugmakers have signaled a willingness to restrain price rises, or link prices to how much patients benefit from drugs. Allergan PLC, in response to the public outcry over pricing, said in September it would limit its price increases to single-digit percentage increases, taken no more than once a year.
Drugmakers say they are facing more intense pricing pressure in the U.S. this year in certain treatment areas.Novo Nordisk A/S’s American depositary receipts tumbled 13% after the Danish company cut its 2016 sales and profit forecast, citing U.S. pricing pressure, primarily for its insulin drugs for people with diabetes.
“The competitive environment in the U.S. within both diabetes care and biopharmaceuticals has become more challenging, negatively impacting the price of our products,” Novo Chief Executive Lars Rebein Sorensen said on a conference call with analysts.
Companies including Novo have boosted list prices for insulin in the U.S. in recent years, but much of it has been funneled back in the form of rebates to PBMs. Still, the increased prevalence of high-deductible health plans means that some patients must pay the full list price themselves for at least part of the year.
The pricing pressure may now be hitting another lucrative class: so-called TNF inhibitors, which treat rheumatoid arthritis and other autoimmune diseases.
Amgen on Thursday blamed softer net pricing for Enbrel next year on the need to pay higher rebates to the PBMs. Amgen said the higher rebates would help ensure that drug plans continue to reimburse for patients’ use of Enbrel.
“We’ll be driving the business on volume, not on net selling price next year,” said Anthony Hooper, chief of Amgen’s commercial operations Thursday.
The concerns spilled over to Amgen’s rival, AbbVie, whose drug Humira is in the same category as Enbrel. AbbVie on Friday reported lighter-than-expected sales of Humira for the third quarter. AbbVie Chief Executive Richard Gonzalez told analysts there was little change in the net price of Humira—after rebates and discounts—in the supply contracts that AbbVie has negotiated with payers for 2017 and 2018, compared with this year.