Pharma Stocks Could Be in Deep Trouble in 2015. Here's Why.


via user Derek Gavey.

Pharmaceutical companies have had some of the best-performing
stocks over the last couple of years thanks to an innovation boom
that has produced a host of new game-changing drugs, from
Gilead Sciences

‘ hepatitis C therapy Sovaldi and its follow-on Harvoni, to

‘s revolutionary new cancer treatment Keytruda. Pharma stocks
have crushed the broader market in recent years, as shown by the
incredible performance of the
iShares Nasdaq Biotech Index


IBB Chart

This wave of breakthrough new therapies has, in turn, led to
impressive levels of revenue growth across the healthcare sector.
This trend might come to a screeching halt, though.

Earlier this month, the somewhat shocking announcement that
pharmacy benefits manager
Express Scripts

 had cut a deal with

to favor its
newly approved hepatitis C
therapy Viekira Pak

for genotype 1 patients, over Gilead’s competing drugs, appears
to mark a sea change in the pharma landscape that could trigger a
major reversal in these stocks. Here’s why.

Cold war turns “hot”

Payers have grown increasingly frustrated with soaring drug
prices, and Express Scripts has been among the most vocal
companies on this hot-button issue. But words are starting to
turn to action.

In 2014, Express Scripts knocked 48 branded drugs off of its
formulary, and it upped this number to 66 for 2015 (prior to
excluding Sovaldi for genotype 1 patients). Revised formularies
from Express Scripts and other pharmacy benefit managers
CVS Health

are having a major impact on pharma companies. The competition
between AbbVie’s and Gilead’s respective hep C drugs illustrates
this point nicely.

Source: AbbVie

AbbVie’s stock should have soared after it procured an
exclusive multiyear agreement with Express Scripts for Viekira
Pak. Instead, the company’s shares ended the day essentially
flat, while Gilead’s crumbled by double-digits.

AbbVie reportedly had to significantly discount its drug to
get this “sweetheart deal,” presumably reducing its profit margin
in a major way. While details of the deal have not been made
public, the way AbbVie’s shares reacted indicates the market
clearly was not impressed.

Misery loves company

Gilead is far from alone in this battle against payers, and this
issue is not restricted to costly new hep C drugs.


, for instance, has been in a losing fight with U.S. payers over
its newer respiratory drugs, including Breo Ellipta, failing to
gain the coveted preferred formulary status with Express Scripts
this year. The result has been anemic sales for a drug expected
to succeed the blockbuster Advair, a massive workforce reduction,
and a stock price that has fallen off a cliff:

GSK Chart

Investors need to accept that this payer pushback against
pricey new drugs is rapidly becoming an industrywide issue. CVS

for example, excluded a whopping 95 brand-name drugs from its
formulary for 2015, and said this list could grow to 200 in the
final version.

The message from payers is clear: Give us significant
discounts or your drugs won’t receive favorable reimbursement
terms — or be covered at all.

Glaxo could be setting the stage for a new pharma

After its well-chronicled problems with U.S. payers that Glaxo
management aptly referred to as a ”
new reality in U.S. primary care

,” CEO Andrew Witty began shifting the company’s focus from drugs
to vaccines and consumer healthcare products.

Specifically, Witty sold Glaxo’s high-margin oncology unit to

in exchange for a portion of Novartis’ vaccine portfolio.

Put simply, Glaxo is now looking elsewhere for growth, perhaps
as a way to avoid the uncertainty that comes with convincing U.S.
payers that a new drug should receive a reimbursement premium.
The inevitable result will be a much smaller company, but maybe
one that is better suited to this so-called new reality.

Why pharma stocks might plunge in 2015

At the end of the day, I think this highly publicized
“Gilead-Express Scripts feud” speaks to the broader issue of how
pharma companies could struggle to continue posting unprecedented
levels of growth. After all, AbbVie won’t exactly receive a
windfall from its deal with Express Scripts due to its massive
discount to this particular payer. Instead, it might have kicked
opened up Pandora’s box by essentially giving payers the power to
set drug prices.

If this trend continues, and major payers have already said it
will, I expect the double-digit revenue growth that many pharmas
are collecting to dry up, and stocks to pull back as a result.
How much is anyone’s guess. But Glaxo’s dramatic fall and
subsequent streamlining efforts could be a harbinger of things to
come across the industry.

But here is 1 great healthcare stock to buy for 2015
and beyond

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another great year for stocks. But if you want to make sure
you’re buying one of the best healthcare stocks, you need
to know where to start. That’s why The Motley Fool’s chief
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The article
Pharma Stocks Could Be in Deep Trouble in 2015.
Here’s Why.

originally appeared on

George Budwell

owns shares of AbbVie and Gilead Sciences. The Motley Fool
recommends CVS Health, Express Scripts, and Gilead Sciences. The
Motley Fool owns shares of Express Scripts and Gilead Sciences.
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