Major government spending bills tend to create both winners and losers. The $1.9 trillion stimulus bill recently passed by Congress and signed into law by President Joe Biden is no exception. In this Motley Fool Live video, recorded on March 10, Fool.com contributors Keith Speights and Brian Orelli discuss four pharma stocks that could be losers as a result of the legislation.
Keith Speights: While the $1.9 trillion stimulus package could create some winners in the private sector, a lot of times government legislation also creates losers. There’s one provision buried in the stimulus bill that hasn’t gotten a lot of attention. There’s a provision to sunset a Medicaid cap that limits how much states can collect in rebates on certain drugs.
For our viewers who are unfamiliar with this rebate process, what drugmakers do is they set a price for their drug. But in many cases, they’ll provide rebates to the purchasers, whether it’s Medicaid in this case, or pharmacy benefit managers, other payers, and they’ll give rebates to those payers to get their drugs on their formularies and to encourage and promote the purchases of their drugs.
Maybe a list price of the drug might be $100. The pharmaceutical companies might give a $20 rebate, so the actual cost ends up being $80. One of the provisions in this stimulus package is to remove the limitation on how much rebates Medicaid can collect.
Brian, what stocks do you think might be losers from this particular change?
Brian Orelli: Eli Lilly (NYSE:LLY) has a lot of insulins and that’s obviously a big competition among the different insulins because they are a little bit fungible in terms of one insulin versus the other. AbbVie (NYSE:ABBV) with Humira, again rheumatoid arthritis, there’s a whole bunch of different rheumatoid authorized drugs. Merck (NYSE:MRK) has diabetes drugs as well. Janumet and Januvia, and then Jazz Pharmaceuticals (NASDAQ:JAZZ) has a narcolepsy drug called X-Y-R-E-M, is it Xyrem?
Speights: I think that’s how you pronounce it, yeah. Some of these drug names are especially difficult to pronounce. [laughs].
Orelli: I saw some study once where they looked at the amount of Z’s and X’s and Y’s in drug names versus the general words in the dictionary. It’s crazy high the usage of Z’s and X’s and Y’s in drug names.
Speights: Now, I noticed a couple of common denominators with the ones that you listed. First of all, one common denominator is that all of these drugs are pretty pricey, right?
Orelli: Yeah, I think maybe insulins are not necessarily super high, but Humira’s a biologic or small drug but I think they can raise the price because not many people have this drug.
Speights: Then another common denominator, at least for most of them anyway, is that they all have pretty stiff competition. Obviously, there are companies other than Eli Lilly that make insulin products. AbbVie’s Humira faces really intense competition in its market. There are quite a few autoimmune disease drugs, quite a few diabetes drugs that compete with Merck’s Janumet and Januvia.
Orelli: That’s the reason why these rebates have to happen, right?
Orelli: Because they’re trying to get to be the lowest-priced and therefore the only drug that’s on the formulary, or to not be excluded from the formulary, you have to lower your prices enough.
Speights: Right. That’s really kind of the point I was getting at, is that these rebates are competitive tools for drugmakers. So any company that faces competition, especially if they have a higher-priced drug, they’re likely to give rebates, and they could be impacted by this change to Medicaid.
The companies you mentioned probably are the ones that will be most impacted because they’re making an awful lot of money from those particular drugs, particularly AbbVie with Humira, I think it’s still the top-selling drug in the world, at least the last I checked.
Orelli: Until the vaccines.
Speights: Yeah. You’re right. Humira’s about to be dethroned by Pfizer‘s vaccine, Moderna’s vaccine.
Speights: There are winners and losers with the stimulus package in the healthcare industry. Let me ask this though, Brian, how bad do you think the impact will be on these particular stocks; Eli Lilly, AbbVie, Merck, and Jazz Pharmaceuticals?
Orelli: I don’t know how much the Medicaid cap is. The question is how much is going to Medicaid and then it’s only a portion of that. I’m not sure that it’s really going to be that big of an impact, but it may be noticeable percentage points, but not tens of percentage would be my guess.
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