ViewPoints: Pfizer Trumped?

What happened?

Pfizer will defer US price increases on dozens of drugs that came into effect on July 1 following discussions with President Donald Trump and the Secretary of Health and Human Services (HHS), Alex Azar.

The company said recently raised prices will be rolled back to what they were prior to July 1 and will remain that way until the administration's previously outlined drug pricing blueprint goes into effect or until the end of 2018, "whichever is sooner."

The bigger picture

Investors have shown little caution towards the administration's rhetoric on drug pricing; Trump's claim in late May that pharma companies would shortly volunteer "massive price cuts" was largely met with derision when these did not materialise.

Against this backdrop, Pfizer's decision to acquiesce comes as something of a surprise; more so as CEO Ian Read has been one of the staunchest supporters of industry pricing practices.

Indeed, despite Trump's recent promise of price cuts, Pfizer's decision to raise the price of more than 40 medicines at the beginning of the month confirmed the company was one of the least likely to change tack. It says that once rebates and discounts are taken into account, the net price of these drugs would have essentially remained flat.

Pfizer is only one of a handful of drug-makers to have implemented mid-year price increases and did so with some gusto. Taking into account multiple dosages, it increased the list price of more than 100 products, and did so in many cases by more than 10 percent. By contrast, Celgene - which also increased the price of a handful of drugs earlier this month - did so at a lower magnitude than it has done previously.

It could be argued this is not the first time Pfizer has underestimated political risk, which contributed significantly to the collapse of its merger with Allergan in 2016 and the attempted acquisition of AstraZeneca in 2014.

Other implications

An "unprecedented reversal" of recent price increases "marks tangible administrative influence," wrote analysts at Morgan Stanley in a note to investors, while Bernstein analyst Ronny Gal noted earlier this week that the HHS has been seeking material list price decreases from various manufacturers over the past two weeks, having been "blindsided" by Trump's promise of major price cuts.

When Azar detailed pricing initiatives in May, he suggested the President could call out individual companies as one means to exert pressure. This could be one example of the points scoring exercise some analysts believe will take precedence over real action on drug prices; an approach now intrinsically tied to how the Trump administration operates.

It is not, however, an isolated shot across the bow. Morgan Stanley analysts also note that earlier this week an HHS adviser to Azar (John O'Brien) suggested the administration's actions could potentially "extend beyond what was in the (original) blueprint," published in May. O'Brien suggested these proposals are now being revisited in light of some recent drug price increases and the administration may consider more aggressive approaches to containing or reducing drug prices.

Final thoughts

Pfizer reports its second-quarter results at the end of the month and will inevitably be questioned on the near- and longer-term implications of its decision to dial back these price increases and what impact it will have on its earnings in the second half of the year. In the meantime, its motivations are burdened by considerable conjecture.

It is important that Pfizer has indicated its action is temporary, notes Morgan Stanley's David Risinger; Ian Read has given himself an opportunity to take stock five months down the road and pushed the ball into Trump's court.

Simultaneously, he may have done his peers a favour by relieving some pressure on the industry at large and exerted more on pharmacy benefit managers (PBMs) and other 'middleman' organisations - those that Pfizer is effectively saying are responsible for offsetting the net impact of any price increases.

Responding to Pfizer's announcement, Azar reiterated the administration is working to lower "list prices and out of pocket costs," rather than net drug prices; supporting Gal's argument that the administration "will not introduce policies that will materially negatively impact the drug industry."

With Pfizer having conceded some points to the President, it may be PBMs that are targeted next. Read has previously argued that PBM-mandated rebates “have served an important contribution to allowing negotiations on volume-related transactions," but are "now becoming less helpful in getting cost-effective solutions to patients."

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