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Is Pfizer's Price Hike an Effect of Drug Policy on Sector?

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Pfizer, Inc. (PFE - Free Report) is reportedly raising prices of almost 100 drugs, effective July 1. This is the second time that the drug giant has raised the prices of its drugs this year. The scrutiny of drug prices has increased since Trump assumed office. However, with a softer drug pricing policy formed last month, we expect other companies to follow suit.

The increase in price was nearly 9% for the majority of the drugs, within the agreed limit of 10% price rise a year. However, price of a few drugs like Xalatan, Viagra and Chanix have already increased in double digits including the price hike of January.

On May 11, Trump announced plans to control drug prices in the United States. However, a group of investors believe the plan is not likely to have a major impact on the profits of large pharma companies. Instead of including provisions of direct negotiations by Medicare with the pharma companies, Trump targeted intermediaries, certain small pharma companies and foreign countries. Thus, Medicare is a major customer of drugs, paying nearly 30% of dollar values of prescriptions filled. Medicare could have negotiated lower prices directly from the manufacturers.

The President also expects to increase competition by streamlining some approval-related regulatory processes and promoting faster approval to generics/biosimilars. The plan allows more substitutions/additions in Medicare’s drug list for single-source generics to contain price rise and gives sponsors more negotiation power with manufacturers. It also instructs companies to display list prices in advertising. The plan also focuses more on transparency related to pricing and availability of generics.

Moreover, the announcement of the price hike by Pfizer comes after weeks of Trump’s claim that pharma companies will take massive price cuts voluntarily soon.

Pfizer has defended the price rise by stating that list price does not reflect actual price, which includes discount. It also mentioned that it has hiked prices for only one-tenth of its drug portfolio and also reduced prices of five drugs by 16% to 44%.

Meanwhile, price hike by one company may soon trigger a market-wide increase in drug prices. Thus, Pfizer’s move can again stir the opposition related to drug price rise, especially by large pharma companies. Along with Pfizer, stock prices of several other large cap pharma companies moved north on Jul 2 including Johnson & Johnson (JNJ - Free Report) , Eli Lilly and Company (LLY - Free Report) and AbbVie Inc. (ABBV - Free Report) . A rise in drugs prices will certainly help these companies to boost its profits.

So far this year, the large cap pharma industry has declined 5.1% against the S&P 500’s rise of 2.2%.

We expect investors to remain focused on other pharma companies for any announcement related to drug prices and any subsequent move by the government to restrict any further hike.

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