Pricing Pressure on Pharma

Above the Noise

Pricing Pressure on Pharma

Healthcare is frequently at the heart of political debate in the US. So, with mid-term elections on the horizon in the US, it is no surprise to see political rhetoric on the issue of drug pricing intensifying.

US President Donald Trump recently levelled a broadside at drugmakers and healthcare ‘middlemen’ for making prescription drugs unaffordable for Americans. This is not a debate that is split on party lines, however; recent polling has shown the majority of Americans believe drug costs are unreasonably high.

Drug firms dependent on pricing

It is hard to overstate the importance of the US to the global pharmaceutical industry. US patients account for a large proportion of the industry’s global profits, and the issue of drug pricing has been crucial to these firms’ success – many of the leading pharma companies have seen all of their earnings-per-share growth come from US drug-price rises. Perhaps this is why, of nearly US$2 billion spent on lobbying in the US in 2017, contributions from other industries were dwarfed by that of pharmaceuticals and health products, spending more than US$100 million above that of the nearest other industry.[i]

Big challenges for pharma

I referenced last month the difficult task of finding sustainable income growth in healthcare. The immediate aftermath of Trump’s comments on drug pricing in fact saw healthcare stocks rise, as it became clear the administration had avoided taking the tough measures that might have been expected. However, we still believe pricing pressure is going to have a big impact on profit margins and ultimately share price. 

That said, we continue to see individual companies where business models are not as sensitive to these global themes and provide potential sources of growing dividends. For example, expanding demand in Chinese healthcare looks to be an attractive trend over the next three to five years.

 

[i] Statista, opensecrets.org; CRP

 

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