The backlash over high drug prices is hitting pharma where it hurts

The simmering public outrage over drug prices finally seems to be catching up to the pharmaceutical industry.

Earnings reports in recent days have laid out a grim picture of slumping sales and anemic growth projections at several large drug makers and wholesalers. Executives blame many factors — including heavy competition and hardball tactics from insurers — but analysts say the bottom line is crystal clear: Pharma can no longer count on steadily hiking drug prices.

That realization has sent some drug stocks on a roller coaster. It’s also battering the middlemen in the prescription supply chain, who have made their money by taking a cut of ever-rising prices.

“This is the first quarter where drug pricing showed up in black and white numbers, on income statements and on balance sheets, and was an unmistakable factor in actual earnings,” said Brad Loncar, a biopharma investor who runs a cancer immunotherapy fund.

Pressure to hold the line on prices is most acute in the market for drugs treating chronic diseases, like diabetes, multiple sclerosis, and rheumatoid arthritis. There’s big demand for such treatments, sure, but they’re also highly competitive markets; patients can choose from among several similarly effective drugs.

The fallout has been evident in third-quarter earnings reports.

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Consider Amgen, one of the nation’s largest biotechs, based in Thousand Oaks, Calif.

Amgen’s blockbuster drug Enbrel, which treats inflammatory diseases like psoriasis and rheumatoid arthritis, is facing “volume decline due to increased competition,” Anthony Hooper, an executive vice president at Amgen, said in a conference call.

Amgen had previously relied on increasing prices to make up for falling sales. But on the call, executives said they would have to focus instead on boosting demand. That’s a tough path, considering that Enbrel competes directly with AbbVie’s Humira, the top-selling drug in the world.

Amgen’s stock tumbled 10 percent this past Friday on the news, and continues to trend downward. Not that AbbVie has been doing much better: It also took a stock hit when it said its sales had slowed, too.

Biogen, the big biotech based in Cambridge, Mass., faces a similar struggle: It acknowledged last week that it had relied “primarily” on price increases to keep revenue from its multiple sclerosis drug Tecfidera rising. Executives said the company now plans to focus aggressively on growing market share, even though the overall market for multiple sclerosis drugs in the US isn’t expanding.

Another example: Stock of McKesson Corp., a massive wholesale drug distributor, dropped a stunning 26 percent on Friday on fears that drug price hikes would slow — and so would revenue for the middlemen who get those drugs to consumers.

McKesson said it was seeing “fewer products with price increases,” and added that when there were price hikes, they were more modest than in the past. It projected price hikes for the upcoming year “to be meaningfully below” last year’s numbers.

McKesson’s stock price is slowly rebounding. So are the shares of two other drug wholesalers that took a hit last week, AmerisourceBergen and Cardinal Health. But analysts remain shaken.

“The stocks have had virtually unprecedented volatility,” said Geoffrey Porges, a biotech analyst at Leerink. “These are stocks that were sort of the heart of many people’s defensive portfolios. To have them down even 5 percent is painful — and 10 percent is unthinkable.”

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Public pressure to bring down prices — and the resulting political posturing — is undeniably one factor roiling the industry now.

Both Hillary Clinton and Donald Trump have lambasted drug makers as greedy and called for reforms. And Senator Bernie Sanders has made the topic his personal crusade, taking to the airwaves and to Twitter to blast pharma companies time and again.

He recently took both Eli Lilly and Novo Nordisk to task for their price hikes — driving down the drug makers’ stock even further.

But some of the most formidable pressure on the drug industry has been exerted not in the form of tweets and TV commercials, but in behind-the-scenes lobbying from insurers and from the middlemen known as pharmaceutical benefit managers.

These entities, known as PBMs, work to lower costs for insurers by forcing drug companies to pay up if they want to keep their medications accessible to consumers.

PBMs can, and do, refuse to list certain drugs on their “formularies” unless they can collect rebates from the drug maker. And insurance companies won’t cover drugs that aren’t listed on the formularies.

“Payers are increasingly willing to block access to certain products as a way to drive discounts,” said Adam Fein, president of the pharmaceutical economics analysis firm Pembroke Consulting.

Read more: Big Pharma spending millions to defeat effort to slash drug prices

This game of hardball inevitably hits drug makers’ bottom line: Either they give up substantial revenue to pay big rebates and keep their spots on the formularies, or they lose access to large swaths of patients.

Novo Nordisk, for instance, cited pressure from PBMs as one reason for recently cutting its long-term profit growth forecasts, from 10 percent to 5 percent. The Danish company, which focuses on the highly competitive diabetes market, also announced disappointing sales numbers in the US.

“We’re only just getting into the storm now,” Jesper Brandgaard, the company’s chief financial officer, told Bloomberg. “We can’t in any way say that the worst is behind us.”

Indeed, it’s not just the public, politicians, or PBMs going after pharma companies: Employers are also trying to use their leverage to demand lower prices on prescription drugs.

And some doctors are declining to prescribe pricey new drugs when cheaper ones are available. A new class of cholesterol drugs, for instance, was projected to bring in $3 billion a year in worldwide sales. They’ve grossed just above $150 million in the past year.

One category of drugs that has been relatively insulated from the pricing pushback: cancer treatments.

Many are extremely expensive, yet doctors have still been prescribing them and insurers, by and large, have been paying. So the pricing pressures haven’t hit the oncology sector with full force.

Yet.

“You can bet, over time, insurers will try to control the cost … for cancer care as well,” Porges said. “It’s going to be more difficult for payers to get their hands around oncology — but that being said, this is the fastest growing area of health spending, and they will certain try to implement ways to control cost.”