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Big Pharma Stocks Hit Hard by Drug Price Proposals

Declines could present a good buying opportunity

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Barry Cohen
Sep 20, 2021

Summary

  • Pharmaceutical industry shares off sharply in the past month.
  • Declines tied to Biden administration proposals to cut drug costs.
  • Is market overreacting given plans may never materialize?
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Drug stocks are in a tailspin, and you need to look no further than Washington for the primary reason. A White House plan to cut the price of medications has led to a more than 10% drop in the Dow Jones U.S. Pharmaceuticals Index over the past month as investors bailed on Big Pharma, concerned that any price controls would eat into sales and profits.

Does this decline represent an opportunity for investors? It could if the past is prologue. After all, recent administrations, nearly all Democratic, have proposed legislation to reign in drug costs in the past, yet none of the schemes ever materialized. A big reason is the power wielded by Big Pharma and its trade association, PhRMA.

The Biden administration has a myriad of plans to cut prescription drug costs for Americans. Among the proposals are:

  • Allow the federal government to negotiate drug prices for Medicare and pass on the savings to the private sector.
  • Testing value-based models by which payment for drugs would be based on their clinical value to patients.
  • Drug-importation programs that reduce costs.
  • New legislation to slow price increases over time on current drugs.
  • A limit on the amount Medicare beneficiaries pay out of pocket for drugs.
  • Speeding up lower-priced alternatives to patented and name-brand drugs

As expected, PhRMA is vigorously defending the status quo, calling Biden’s proposals a “misguided” effort to shift money from one part of the government to spend it elsewhere, according to a New York Times article.

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Caption: Does the sharp decline in shares of Big Pharma represent a buying opportunity?

“The policies the president outlined today would undermine access to lifesaving medicines,” the lobby’s president and chief executive, Steve Ubl, said in a statement, adding, “Many in Congress know that access to medicine is critical for millions of patients, and Medicare is not a piggy bank to be raided to fund other, unrelated government programs.”

This missive was backed in an open letter to Congress from the heads of major biopharma companies, including Eli Lilly and Co. (

LLY, Financial), Bristol-Myers Squibb Co. (BMY, Financial), Biogen Inc. (BIIB, Financial), GlaxoSmithKline (GSK, Financial), and a host of others. They wrote that allowing Medicare to negotiate drug prices would "threaten patients' access to medicines and sacrifice future medical advances." Given their life-saving contributions to the battle against Covid-19, the pharma industry has enjoyed a boost in reputation that could rally support for its opposition to price controls.

Some of the well-known members of Big Pharma who have seen their stocks battered in the past month include:

Should the Biden administration’s proposals die on the vine or emerge in a watered-down state, pharma stocks could rebound nicely. Investors might want to keep an eye on developments in Washington.

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Disclosures

I am/we are Long LLY, BMY, JNJ and BMY.
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