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‘The tide is coming in’: Wall Street is becoming increasingly convinced one of the stock market’s most important sectors is headed for disaster

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‘The tide is coming in’: Wall Street is becoming increasingly convinced one of the stock market’s most important sectors is headed for disaster

Some of the world’s biggest drugmakers were stuck on the sidelines during the market’s surge in January, and analysts think the pain might endure for years.

Giants including AbbVie and Pfizer stumbled last month. They climbed in late 2018 when investors took a more defensive stance, so they were in less demand during January’s rally.

But a different problem lurked in the shadows: the possibility of damaging federal investigations and new rules that could reduce prices. That would, in turn, be a major drag on share prices.

“The Democrats took control of the House of Representatives, and Congressman Cummings (of Maryland) stated that he would investigate drug companies and ask companies to testify in hearings,” said Morgan Stanley analyst David Risinger.

Late Thursday, the Department of Health and Human Services released a series of proposals that could eliminate rebates that drug companies pay to pharmacy benefits managers — the companies that administer drug plans.

The agency says it wants to lower prices and copays for people buying their medicine through Medicare Part D and other federal programs. It’s not clear the proposals will be adopted, but it’s clear momentum has built behind the idea.

Baird analyst Eric Coldwell said the proposals are “potentially devastating to the current pharma ecosystem” and are a sign of even bigger shifts in the future.

“The US healthcare system is a sandcastle and the tide is coming in,” he added.

Other market watchers were less troubled by the proposal, saying it might help drug companies at the expense of other health care companies like pharmacy benefits managers.

Leerink analyst Geoffrey Porges said the plan might be attractive to drugmakers because a future Democratic president would attempt a more drastic overhaul. But he said it’s still bad news for “the biggest companies in the industry” and “monolithic brands” including AbbVie’s Humira, the biggest-selling drug in the world by revenue.

Porges says drugmakers are already projecting weaker growth in 2019 than investors are used to as the industry deals with lower prices, slower prices hikes, and the increasing use of lower-cost generic and biosimilar drugs.

AbbVie stock fell 12.9% in January after a disappointing fourth-quarter report. Amgen, another company Porges said might suffer, fell 5% last month. Meanwhile, the S&P 500 climbed 7.9%, its best single month in years.

Risinger agreed there are long-term political threats to drug companies, especially if Democrats win full control of the federal government in the 2020 elections. That’s one of the reasons he doesn’t expect pharma stocks to do better than the rest of the market.

He said biotech companies “are smaller and more nimble and often more innovative” than their larger peers, and many of them are possible acquisition targets, as Celgene was when Bristol-Myers Squibb agreed to buy it in one of the largest health care deals ever. That also helps those stocks and not classified as big pharma.

“A number of these companies are behemoths,” he said.

But not everyone thinks the picture is that bleak. Kate Warne, an investment strategist for Edward Jones, said the companies will find ways to adjust.

“They’ve navigated this before,” she said. “Are they going to be able to raise prices as much as they would like? Maybe not. But they’re patient, they’re savvy, they’ll figure out ways to get compensated.”

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