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Debunking the Drug Pricing Scare

Summary:
The last few years haven’t done wonders for the reputation of the pharmaceutical industry. In 2015, Turing Pharmaceuticals faced public outrage after hiking the price of Daraprim, a drug used to treat the parasitic disease toxoplasmosis in vulnerable populations such as pregnant women and AIDS patients, by more than 5,000 percent. This year, Mylan is embroiled in an ongoing controversy after the price of its emergency allergy treatment EpiPen increased sixfold in under a decade. Meanwhile, both major U.S. presidential candidates have promised voters that they will work to lower consumer drug prices. The combination of bad publicity and potential government interference has weighed on healthcare stocks. After the Turing news broke and Democratic candidate Hillary Clinton pledged to tackle pharmaceutical “price gouging”, the iShares Nasdaq Biotechnology ETF plummeted 20 percent in just seven trading days. In August, Clinton’s criticism of EpiPen pricing spurred another decline in the index.   So what’s a nervous healthcare investor to do? Buy the dips in healthcare stocks. Lorenzo Biasio, a healthcare analyst on Credit Suisse’s Investment Solutions and Products team, says fears that the U.S. government will force widespread drug price cuts are exaggerated.

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Debunking the Drug Pricing Scare

The last few years haven’t done wonders for the reputation of the pharmaceutical industry. In 2015, Turing Pharmaceuticals faced public outrage after hiking the price of Daraprim, a drug used to treat the parasitic disease toxoplasmosis in vulnerable populations such as pregnant women and AIDS patients, by more than 5,000 percent. This year, Mylan is embroiled in an ongoing controversy after the price of its emergency allergy treatment EpiPen increased sixfold in under a decade. Meanwhile, both major U.S. presidential candidates have promised voters that they will work to lower consumer drug prices. The combination of bad publicity and potential government interference has weighed on healthcare stocks. After the Turing news broke and Democratic candidate Hillary Clinton pledged to tackle pharmaceutical “price gouging”, the iShares Nasdaq Biotechnology ETF plummeted 20 percent in just seven trading days. In August, Clinton’s criticism of EpiPen pricing spurred another decline in the index.

 

So what’s a nervous healthcare investor to do? Buy the dips in healthcare stocks. Lorenzo Biasio, a healthcare analyst on Credit Suisse’s Investment Solutions and Products team, says fears that the U.S. government will force widespread drug price cuts are exaggerated. Both Clinton and Republican rival Donald Trump support allowing Medicare Part D, Medicare’s prescription drug coverage plan, to negotiate directly with drugmakers on prescription prices, rather than each prescription plan operating under Part D negotiating on its own. If Medicare, with its 40.5 million beneficiaries and formidable bargaining power, negotiated on the plans’ behalf, drug prices would likely fall substantially. Giving Medicare negotiating power requires lifting a ban that dates back to 2003, however, and President Barack Obama’s multiple proposals to do so met resistance from the pharmaceutical lobby and went nowhere in Congress. The next president is likely to encounter the same.

 

Instead, a different pricing mechanism—one drugmakers support—is gaining traction. Under the “pay-for-performance model,” pharmaceutical companies are paid in relation to the efficacy of their drugs. In one version of the model, a drug is initially provided for free or for a low price, and prescription drug plans pay more if the drug achieves specific outcomes, such as reducing the number of times patients end up in the hospital. Biasio says the model rewards pharmaceutical firms for innovation while ensuring that prices have at least some correlation to how much the drugs benefit the healthcare system — fewer hospitalizations, for instance, result in lower costs for insurers and patients — rather than being based on a set fee per tablet. The initial drug discount makes pharmaceutical companies’ products more competitive with older, cheaper medications, and prescription plans will keep buying effective drugs even if prices rise. Several pharmaceutical companies have already established pay-for-performance deals with U.S. health plans, including Novartis, for its heart medication Entresto; Eli Lilly for diabetes drug Trulicity; Merck, for diabetes drugs Januvia and Janumet; and Amgen, for cholesterol medication Repatha.

 

Healthcare stocks are also a defensive play at a time of sluggish growth and elevated geopolitical risks around the world. Credit Suisse also expects a groundswell of mergers and acquisitions, chiefly among biopharmaceutical and biotechnology companies. The size of Pfizer’s recent $14 billion deal to acquire biotech firm Medivation shows how eager established biopharmaceutical companies are to snap up promising biotech firms. Four other companies had Medivation in their sights—and may all be on the hunt for other targets.

 

Investors wary of potential drug pricing changes but who nevertheless want to maintain exposure to healthcare have rotated out of biopharmaceuticals and into medical technology firms and life sciences tools and services over the last couple of years, causing the two industries to outperform both pharmaceutical and biotech stocks. Life science companies such as Illumina and Thermo Fisher have taken advantage of the growth of genomic analysis, offering products with uses in fields ranging from oncology to cattle breeding. Biasio calls cardiovascular therapy products “one of the of most innovative therapy areas in medtech,” and highlights both Medtronic and Edwards as companies to keep an eye on. They’re keeping a finger on the pulse of innovation in more ways than one.

The post Debunking the Drug Pricing Scare appeared first on The Financialist.

Alice Gomstyn
My career began in newspapers, with my byline appearing in The Boston Globe and The Providence Journal, among others. I started working in web journalism in 2008, reporting on business for ABC News and later founding the network’s parenting blog. I’m now a full-time business writer and editor.

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