Blue Chip Drug Stocks Face ‘Reckoning’ on Future Downgrades

Shares of major drug makers including Pfizer Inc. (PFE), Eli Lilly & Co. (LLY), Amgen Inc. (AMGN), Novartis AG (NVS) and AbbVie Inc. (ABBV), are already dramatically lagging the broader market this year. Now, some market watchers expect the pharmaceutical giants to suffer pullbacks as profit concerns lead analysts on Wall Street to downgrade more shares of the leading pharma players, per Barron’s.

11 Companies Under Scrutiny on Drug Prices

• AbbVie (ABBV)
• Amgen (AMGN)
• AstraZeneca (AZN)
• Celgene (CELG)
• Eli Lilly (LLY)
• Johnson & Johnson (JNJ)
• Mallinckrodt (MNK)
• Novartis (NVS)
• Novo Nordisk (NVO)
• Pfizer (PFE)
• Sanofi (SNY)

Source: Committee on Oversight and Reform, per Barron’s

In a note published earlier this week, S&P Ratings assigned the pharmaceutical industry a “negative” outlook for 2019, indicating that it expects more downgrades than upgrades for shares of drug companies.

Primary concerns facing the segment include the potential for mounting political and market pressure to force drug makers to reduce prices, in turn squeezing profits. Pharmacy benefit managers, which now have more pricing power after a period of industry consolidation, could pushback. Potential liabilities from a few of the firms’ involvement in lawsuits related to the opioid crisis also loom.

In Washington, where the Trump administration and the Democrats in Congress agree on virtually nothing, they have rallied behind a quest to lower prescription drug prices. This spells bad news for the industry which attributed 100% of its earnings growth in 2016 from U.S. price increases, per Credit Suisse, cited by Barron’s.

Meanwhile, shareholders may demand higher payouts, in the form of dividends or buybacks, to make up for a “moderate” decline in earnings, per S&P Ratings. While the analysts expects drug makers to stay in the green even with lower prices, this secondary pressure could push them over the edge. Another option for drug companies is to attempt to appease shareholders by making large debt-financed acquisitions, wrote S&P Ratings. Regardless of the outcome however, each decision would result in much weaker balance sheets across the drug industry.

The outlook is even murkier for a few large companies that sell opioids, and could be subject to massive fines as they face 1,900 lawsuits from states and municipalities. Some high-profile defendants include Endo International Plc (ENDP), Mallinckrodt Plc (MNK) and Teva Pharmaceutical Industries Inc. (TEVA).

Regardless of the outcome, it’s may be safe to say that these pharmaceutical industry leaders won’t be reaping in the fat profits that they’ve been accustomed to over the years, given huge public pressure to reduce prices.