3 Big Pharma Companies Driving Price Inflation

America is just about the only place on earth that allows drugmakers to set and raise the price of successful drugs to whatever the market will bear, and it shows. Between the fourth quarter of 2016 and the fourth quarter of 2018, the big biopharmaceutical companies below raised prices for these popular treatments at a rate four times faster than inflation.

Sometimes new clinical data shows a drug's benefit is better than everyone thought and an argument can be made that the new price reflects the new information. That hasn't happened with these drugs, but the companies announced huge price increases anyway.

Data source: Institute for Clinical and Economic Review. WAC = Wholesale acquisition cost. Q4 = Fourth quarter.

These egregious price increases wouldn't be possible if Medicare were able to negotiate, but the U.S. government isn't allowed to set a maximum price that it's willing to pay.

If this unique aspect of the U.S. market suddenly fell in line with the rest of the world, how badly would it hurt these three pharma stocks? Read on to find out.

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1. AbbVie: Humira

AbbVie's flagship anti-inflammation injection, Humira, has proven itself useful many times over since launching in 2002 -- but not during the two-year period between the end of 2016 and 2018. European sales of Humira are already sinking in response to biosimilar competition, and AbbVie offset a lot of that loss by raising the list price in the U.S. 19.1% during the time frame studied.

The Institute for Clinical and Economic Review (ICER) thinks Humira's net sales increase worked out to $1.86 billion between the end of 2016 and the end of 2018. If AbbVie had simply raised Humira's price in line with the medical care consumer price index (CPI), though, it would have risen around $427 million.

Unfortunately for AbbVie, huge unjustified price increases for Humira weren't enough to keep the entire company's needle moving forward. Trailing net income has tumbled 31% since the end of 2016 to $4.1 billion at the moment.

Running fewer clinical trials means an awful lot of Humira revenue reaches AbbVie's bottom line. If the company was suddenly limited to price increases in line with inflation, it wouldn't lead to complete catastrophe, but it would tear a significant chunk out of earnings that are already under pressure.

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2. Pfizer: Lyrica

This past June, Pfizer's Lyrica lost patent protection in the U.S. and sales of the blockbuster nerve pain reliever have already started falling. If Pfizer limited its price increases to the rate of inflation, the company would have left around $575 million in high-margin Lyrica revenue on the table.

Since the end of 2016, Pfizer's trailing net income has increased by 75% to a whopping $12.7 billion at the moment. If Pfizer was suddenly required to limit price increases on its most popular treatments to the rate of inflation, its bottom line would probably continue climbing.

3. Gilead Sciences: Genvoya and Truvada

Unlike AbbVie, Gilead Sciences has been making unjustified increases to the prices of two HIV treatments, Truvada and Genvoya, several years ahead of their expected loss of exclusivity in the U.S. market.

Genvoya is a four-drug tablet that keeps the HIV virus at bay as long as patients swallow one every day for the rest of their lives, and it probably won't lose market exclusivity for another decade. Genvoya launched in 2015 and Gilead launched a new three-drug tablet called Biktarvy last year that should be safer for patients. Gilead would benefit a great deal if patients upgraded their lifelong treatment option from Genvoya to Biktarvy, which could explain why Gilead raised Genvoya's net price even faster than its list price.

Truvada is a 17-year-old treatment for HIV that's become quite popular among healthy people since the FDA expanded its label to include pre-exposure prophylaxis (PrEP) in 2012. The FDA has approved a generic version, but pediatric exclusivity will probably keep generic competition from reaching pharmacy shelves until 2021.

Recently, the FDA approved a safer alternative for PrEP from Gilead called Descovy at a list price of around $60 per pill. At the expense of its public image, the company has raised Truvada's price to the same level as Descovy. Rebates and discounts are closely guarded secrets, but I'd bet a bottle of these pills that Descovy's significantly less expensive than Truvada right now from an insurer's standpoint.

Despite Gilead's successfully switching as many patients as possible to new products with longer periods of exclusivity ahead of them, the company's trailing net income has fallen around 56% since the end of 2016 to $6 billion.

Gilead catches a lot of flak for the way it's encouraging patients to switch, but it's important to point out that the company recorded $5.1 billion in research and development expenses over the past 12 months. Profits have tanked, but the company's annual R&D budget has hardly budged since the end of 2016.

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Schrodinger's medicine

It's impossible to know exactly how much of an impact letting Medicare negotiate could have on the pace of innovation, but it would be significant.

Here's what we know for sure: A near-record 69 biotech companies made their stock market debut on the Nasdaq exchange last year, and hundreds more raised nine-figure sums privately to develop new drugs. Worldwide, the rate of new drug discovery and development has never been faster than it is right now. This would not be the case if companies like Gilead, Pfizer, and AbbVie hadn't spent the previous decade shoveling enormous profits at potential new drugs.