Conventional wisdom has it that the pharmaceutical industry has generally slowed hefty prices increases on brand-name drugs during the primary seasons in most general election years, especially when prices rose, in real terms, during the preceding year. But there are always exceptions to rules and 2012 may prove to be one, at least according to Sector & Sovereign Research.
If this occurs, the price hikes may be substantial, given that last year brand-name drug prices rose about 11 percent, up quite a bit from 9 percent in 2010, the Wall Street firm points out (see more here). Why might this year be different, though? For the simple reason that drugmakers appear more dependent than ever on hiking prices in order to generate needed revenue growth.
"Not only are pricing actions a whole number multiple of US revenue growth, the companies also are under rising sales pressure as (European Union) conditions weaken," Richard Evans writes on the SSR blog. "This level of need presumably explains the industry’s continued real price growth into the election season."
In making their case, the SSR analysts point to a chart (see the second chart here) showing that sales growth is at a trough, but reliance on real pricing power is at a peak, since volumes are down significantly.
To keep it simple, as long as the black line on the chart is greater than one, prices are growing faster than total revenues. For many years, through the 1990s and into the early part of the past decade, both prices and volumes were growing. But since 2007, volume has been a headwind to revenue growth, SSR analyst Ryan Baum explains.
"This argues that a deceleration in the real rate of US drug pricing could drop aggregate US sales growth well into negative territory, even before considering the effects of pending patent losses," he tells us. "Given the extraordinary need for real pricing gains to offset fundamental weaknesses elsewhere – as well as a broader common perception that pricing freedoms eventually will be lost – perhaps, it’s not so surprising that the price trend appears likely to accelerate this year, despite the historical aversion to incremental legislative risks in election years."
In other words, such a move would reflect a calculated bet by the brand-name pharmaceutical industry that the benefits of hiking drug prices - which would bolster the bottom line and presumably help to fortify stock prices - outweigh the risk of getting beaten up on the campaign trail and Capitol Hill.