🔍Stocks in Focus

Healthcare’s middlemen emerge as scapegoats for sky-high pharmaceutical prices in the US

by
Nathan Crooks
Quantfury Team
pharma

It’s no secret that pharmaceutical drugs can be much more expensive in the US than in many other countries, and the incoming administration of President Donald Trump knows that consumers want lower prices. Drug manufacturers prefer the government to stay out of the way, however, and they’re trying to pin the blame elsewhere and protect their biggest source of revenue.

According to a recent government study, US prices for both brand name and generic drugs were nearly 2.8 times as high as prices abroad. Novo Nordisk’s (NYSE: NVO) popular weight-loss drug Wegovy, for example, costs $1,349 a month in the US but only $92 in Europe, where countries negotiate prices directly with manufacturers. 

Drug companies have long argued that high prices are needed to offset high-risk research and development costs, and that means countries with strict price controls are essentially allowed to freeload because manufacturers know they can depend on the lucrative US market once they start marketing a successful new medicine. In an effort to avoid any new Trump price controls that would be popular with voters—while acknowledging the current system isn’t fair—manufacturers like Pfizer (NYSE: PFE) have been singling out an opaque but massive corner of the industry that functions as an intermediary with insurance companies.

Pharmacy benefit managers

Pharmacy benefit managers—a group dominated by CVS Health’s (NYSE: CVS) Caremark, Cigna’s (NYSE: CI) Express Scripts and UnitedHealth (NYSE: UNH) Group’s Optum—negotiate things like prices, rebates and prior authorizations; they’re facing increased questions about the hefty margins they extract. The scrutiny has seemingly united drug makers, the administration of former President Joe Biden, and Trump himself, who earlier this month said he wanted to “knock out the middlemen.”

Indeed, the Federal Trade Commission called out the sector earlier this month in a report that said specialty generic drugs were being marked up by thousands of percent to the tune of a staggering $7.3 billion in excess costs from 2017-2022. Ongoing chair Lina Khan—who became known for her tough enforcement of antitrust regulations—said the “three major pharmacy benefit managers hiked costs for a wide range of lifesaving drugs, including medications to treat heart disease and cancer” and that their practices “may inflate drug costs, squeeze independent pharmacies, and deprive Americans of affordable, accessible healthcare.”

Just how Trump and his administration plan to focus on the US healthcare industry—worth nearly $5 trillion a year—still isn’t clear. Amid the uncertainty, healthcare stocks have largely lagged the broader market over the past year, with the S&P 500 Health Care Index rising just 4% compared to a gain of 25% for the S&P 500. CVS Health shares declined 26% over the same period, while Cigna fell 3% and UnitedHealth gained 4%. Pfizer—whose shares fell 8% in the last year—is hoping for friendlier waters, even as the market still seems to be taking a wait-and-see approach. 

Pfizer throws a punch

Pfizer CEO Albert Bourla—who’s also the incoming chairman of the Phrma industry group—joined the pileup against pharmacy benefit managers last week, saying that they were responsible for the high prices consumers love to complain about, and not the drug companies themselves.  

“We need to find a clear way to change the way the system works right now, with the PBMs, and what the President calls the middlemen, and they are,” Bourla said this week in an interview with CNBC. “Right now, the difference between the list prices that you pay to the pharmacy when you go to buy your medicine, and the net prices that we charge to the PBMs. It is a 50% difference. It’s half. You pay double what they pay us. That is what makes it completely unaffordable.”

The CEO seems to be hoping that he can shift the blame for higher prices to the pharmacy benefit managers and keep the spotlight away from manufacturers. He argued a better business climate would help uplift the entire sector, although he said he’s still looking to influence policy in a “pro-innovation” direction that wouldn’t limit prices drug makers can charge.

Are pharmacy distributors up next?

While much of the current debate is currently honed in on the unpopular PBMs, there’s another sub-sector that could be ripe for disruption if the hunt for more middlemen heats up even more: pharmacy distributors. The companies are responsible for physically storing, transporting and delivering medications from manufacturers to their final destinations, and the industry is controlled by just three firms: McKesson (NYSE: MCK), Cencora (NYSE: COR) and Cardinal Health (NYSE: CAH).

The big three distributors together book more than $800 billion of revenue a year, but in a world where massive pharmacy chains like CVS and Walgreens (NASDAQ: WBA) already have extensive logistics operations—and in which Amazon (NASDAQ: AMZN) is expanding its same-day delivery of medications to nearly half the US—it’s easy to see how their value proposition could also start to draw scrutiny. Possibly seeing the writing on the wall, each of the firms has been trying to diversify into cancer care by scooping up networks of oncology doctors. Their shares have risen over the past amid the shift into new territory. 

Targeting PBMs may provide a quick political fix to lower consumer prices without directly impacting drug manufacturers, and the companies currently in the hot seat are all owned by much larger health conglomerates which should help mitigate any serious bleeding a crackdown could bring. But if the quest to cut out the middlemen gets more aggressive—especially as artificial intelligence drives efficiency in both insurance and logistics—it’s the distributors that could face an even bigger threat.