Inflation overall may be held in check for now, but drug prices are still skyrocketing, according to a report by the AARP. Name-brand drugs used most often by seniors rose 9.7% for the 12 months ending in March. General inflation rose just 0.3% over that same time period.
On the surface, that's good news for drugmakers. Pricing power is something every investor should look for in a company, and these increases should make your mouth water:
|
Drug |
Companies |
Increase April 30, 2009-March 31, 2010 |
|---|---|---|
|
Flomax |
Boehringer Ingelheim |
27.6% |
|
Seroquel |
AstraZeneca |
15.6% |
|
Aricept |
Eisai and Pfizer |
13.9% |
|
Ambien |
Sanofi-aventis |
13.9% |
|
Avandia |
GlaxoSmithKline |
11.6% |
Source: AARP.
But of course, this can't last. Drug pharmaceutical companies won't be able to counteract decreases in volume with increased prices forever. The government can -- and will -- control prices as best it can.
Note also that drugmakers may have increased their prices in anticipation of forced discounts required by the health-care reform bill. Drugmakers may not see much of those increases, although they might soften the blow from health-care reform a little.
On the flip side, the price of generic drugs fell 9.7%. The generic-drug companies will be able to make up for the lost revenue with increased volume as a large number of drugs come off-patent in the coming years, but the trend remains worth watching investors in generic-drug companies Teva Pharmaceuticals
Investors need to maintain realistic expectations for pharmaceutical companies in the coming years. Health-care reform has only just begun. You're likely better off investing in companies that can increase revenue through volume increases, on the merits of superior products, than in companies that rely on price hikes to boost their top line. That latter strategy simply won't hold up forever.
