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Did Pfizer Blink, And What Will Pharma Do Now?

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After the 2017 Forbes Healthcare Summit last December, I wrote that pharmaceutical companies were on borrowed time when it came to further price increases.  This past Tuesday, Pfizer confirmed that time had run out for raising prices without blow-back.  Given the volume of dialogue about drug price hikes, business as usual has ended and two questions loom large for Pharma. Will the US Government's next step be a direct challenge to Pharma's self-regulation of drug prices? Who will next gain attention because of Pfizer and why? My thoughts on this last question are at the end of this article.

Back to Pfizer: On Tuesday, July 10, after being the object of presidential pressure in an extensive conversation with President Trump, Pfizer’s CEO Ian Read agreed to defer drug price increases of up to 9.4% on 41 drugs scheduled to go into effect on July 1. The price increases will be delayed until President Trump’s blueprint to strengthen the healthcare system goes into effect or by the end of the year, whichever comes first.

A word of caution on drug pricing practices: attention should be paid as to whether a permanent freeze or rollback of drug prices will even result in lower prices to consumers, as already noted by Senator Wyden (D-OR). In plain speak, it might be easier to verify nuclear facilities in North Korea than to learn the actual price pharmaceutical companies are paid for individual drugs.

Still, the interesting element to consider was the pressure that fell onto Pfizer even though there had been no challenge to price hikes by Allergan, plc, Abbvie, Inc. and others in early January. At that time, Allergan increased prices on 18 drugs by 9.5% and Abbvie raised prices on five drugs from a low of 8% to a high of 9.7% for its blockbuster drug Humira®

A Conference Call Statement and What the Difference a Tweet Can Make

On the day following the price rollback, Pfizer also announced it will be divided into three business units at the beginning of the 2019. Besides the curious timeliness of this decision, it is quite a peculiar strategy change.  It was only a few weeks ago, during the most recent quarterly conference call, that management’s response to an analyst’s question about their enthusiasm for reorganization was …"we are taking off the table for the foreseeable future." The combination of Pfizer’s price increase reversal along with this new plan for division into three businesses have brought into question the true future strategy of Pfizer, and to a degree that of the entire pharmaceutical industry’s corporate tactics.

Pfizer’s second quarter earnings announcement is scheduled for July 31. Wall Street analysts will be listening carefully to the earnings conference call and asking very direct questions about the company’s price rollback and reorganization. The first and foremost question analysts and investors will want answered is what Pfizer intends to do to compensate for the loss of revenue the company would have received from the price increase.

Putting Pfizer’s actions into an industry-wide spectrum, the issue of the rising cost of pharmaceutical drugs has become an economic and political concern with big pharmaceutical companies having come under increasing earnings pressure with the demise of blockbuster drugs that contributed substantially to revenue. What will be the industry-wide consequences of Pfizer’s precedent-setting reactions to these two challenges?

If you consider President's Trump follow up tweet after the Pfizer rollback announcement, what might happen next? The Trump administration’s focus on reducing government spending has been a focal point. It is then essential to consider that the U.S. government is our nation’s largest healthcare consumer. Medicare, Medicaid, US Military and Veterans Healthcare for more than 150 million people. Negotiating drug prices has saved billions of dollars for some government medical plans, but Medicare, which serves more than 59 million enrollees is prohibited by law from negotiating prices with drug suppliers. To address this specific issue, back in March FDA Commissioner, Scott Gottlieb offered some suggestions that could be used to circumvent Medicare’s proscription on negotiating prescription drug prices by passing along drug rebates directly back from the drug makers. Though any new legislation in this area is remote this late in an election year, President Trump has shown no reluctance to use executive orders to achieve his goals, and if he could craft a way around even a small part of the  negotiation restrictions, he would likely be rewarded with a significant public support.

It is inevitable that attention also will be directed to the split of Pfizer into three businesses: Innovative Medicines, including biosimilars and a new hospital business unit for anti-infectives and sterile injectables; Consumer Healthcare; and an Established Medicines business for off-patent branded and generic drugs that will operate according to  Ian Read “with substantial autonomy within Pfizer.” There already is speculation that this tripartite split is indicative of a prelude at attempting to shed less profitable or unprofitable products and their associated costs. Ian Read's quote in the press statement about each of the three businesses leaves us with a question – Is Pfizer expecting a negative growth potential in any of the newly formed businesses when Read says “We see this new structure better positioning each business to achieve its growth potential”?

Back to the second question: Who will be next? The answer lies in what Pfizer’s reorganization means to other diversified, large healthcare enterprises like a Johnson & Johnson. Not even factoring in yesterday's $4.69 Billion jury verdict in Missouri, JNJ is a complex story with many nuances. With more than 265 operating companies, it is already organized into three divisions. The largest by revenue is pharmaceuticals with $36.3 billion in sales that grew by $12 billion in the six years from 2011 to 2017. Next comes medical devices with sales of $26.6 billion in sales and revenue growth of less than $1 billion over the same six years. The smallest division by sales is Consumer Healthcare with $13.6 billion, which shrunk by $1.2 billion over six years.

Given this new found and unwanted visibility, it is credible to assume that both the Pfizer and JNJ management teams and their boards are being besieged by investment bankers who would be more than willing to help these two companies spin off one or more of their divisions. And business follows trends, so on its next earnings call if Pfizer is asked about divesting itself of one or more of these new divisions, would Johnson and Johnson be able to avoid similar divestiture questions? Will this be the beginning of a wave of reorganizations described by “streamlining, shedding costs and unlocking shareholder value?” This is not a simple story, but I'm fairly certain that Wall Street bankers want to make it one.