U.S. Markets open in 7 hrs 28 mins

Drug Pricing Woes Linger on Repealing Drug Rebate Proposal

Zacks Equity Research

Major pharma industry players were in the red on Jul 11 following the scrapping of the Trump administration’s proposal to eliminate rebates offered by the drug companies to pharmacy benefits managers (PBMs). The proposal was part of the government’s efforts to control drug pricing.

PBMs act as intermediaries to negotiate with drugmakers for rebates on the listed price of their branded drugs to lower the costs on behalf of small buyers and insurers. PBMs retain a percentage of the rebate offered and sell drugs to the buyers/insurers. However, these rebates and discounts were rarely passed down to the buyers aka pharmacies. The proposal stated that drugmakers will instead pay a certain fee to PBMs in return for placing the drugs on co-pay or medicare beneficiary list and the rebates will be directly delivered to buyers/pharmacies.

Following the Trump regime’s decision not to proceed with the proposal for revoking rebates to PBMs, shares of PBM like Cigna Corporation CI rose while those of pharma companies declined. The committees overseeing this proposal remained wary of the fact that it could lead to rise in medicare premiums. The experts also suggested that the implementation of the rule will cost the federal government almost $177 billion over the next decade.

The proposal to remove rebates offered by drug makers to the PBMs prompted the pharma players to put the onus of skyrocketing drug prices on PBMs’ shoulders. However, the Trump administration’s announcement to withdraw the proposal has brought the drugmakers in focus again. Moreover, the decision also spurs uncertainty for the pharma industry as the government is hell-bent on curbing the exorbitant drug prices. Investors remain skeptical about the next step from the administration and also expect drugmakers to bear the brunt of the same. This misgiving has caused the large pharma shares to crash down with Merck MRK, Bristol-Myers BMY, Eli Lilly LLY and Pfizer PFE stocks registering a dip of 3-4% on Jul 11.

Drug pricing controversy has plagued the industry since the last presidential campaign. Time and again, Trump has criticized drugmakers for escalating drug prices ever since he assumed office. He remains committed to take on the industry bigwigs on pricing issue and the opposition (Democrats) also supported this cause, making the situation more challenging for the pharma industry.

In 2018, several large pharma companies deferred their plans to increase the drug prices or decreased the same amid a strong opposition from the government. Earlier this year, senators grilled the respective management of these companies over the drug pricing issue and blamed the American patent system for perking up the prices by almost monopolizing the markets for drugs.

Notably, the Trump administration is planning an executive order, “favorable nations clause”, which will restrict drugmakers to charge the lowest price for a drug in any global market. If passed, the burden will be on the pharma companies to suffer the loss due to price decline, which will likely dent the industry’s profits.

Meanwhile, a judge in the United States District Court in the District of Columbia ruled in favour of the pharma companies related to the disclosure of wholesale prices of the drugs in television advertising by the drugmakers. The federal court ordained that the pharma companies are not required to reveal the price tags in television adverts.

Every government has vowed to keep the drug prices under control. However, there has been little progress. As a matter of fact, drug prices have been touching staggering levels over the past decade, piling up pressure on patients in the United States with rising healthcare costs. Moreover, it is argued that PBMs prefer branded drugs over the generic versions due to better margins, which can induce high costs for customers. Meanwhile, the pharma companies argue that the high costs of drugs reflect high cost of research and development.

We expect the tussle between pharma companies and the government over drug pricing issue to persist in 2019. This raises volatility for the whole pharma/biotech/drug market.

While Merck has a Zacks Rank #2 (Buy), Bristol-Myers, Pfizer and Lilly carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Pfizer Inc. (PFE) : Free Stock Analysis Report
Bristol-Myers Squibb Company (BMY) : Free Stock Analysis Report
Eli Lilly and Company (LLY) : Free Stock Analysis Report
Merck & Co., Inc. (MRK) : Free Stock Analysis Report
Cigna Corporation (CI) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research