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By Matthew Coffina, CFA and Jeremy Glaser | 01-11-2016 12:00 AM

Winners and Losers in the Drug-Pricing War

Major pharmacy benefit managers and pharma stocks with innovative pipelines should see the most upside, while companies that rely heavily on price increases for growth will likely suffer, says Morningstar's Matt Coffina.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. There's been a lot of talk about drug pricing recently. I'm joined today by Matt Coffina--he's the editor of Morningstar StockInvestor newsletter--for his outlook on drug pricing and who he thinks some of the winners and losers are going to be.

Matt, thanks for joining me.

Matt Coffina: Thanks for having me, Jeremy.

Glaser: Let's talk about why drug pricing has come to the forefront of discussion recently. Is it a political issue? Is it a true economic issue? Why are we talking so much about drug prices?

Coffina: The United States has always been an unusual market for pharmaceutical companies. Most other developed markets have very strict regulation about drug pricing, and the government is usually the main insurer. So, they can really dictate prices to pharmaceutical companies. In the U.S., it's much more of a free-for-all, and the drug companies have a lot of latitude in setting their prices. The main counteracting force is the pharmacy benefit managers. In order to get included in an insurance plan and to get included in a formulary, you need to usually offer concessions to the pharmacy benefit manager in the form of rebates. That's really how they hold down pricing.

The reason, I think, it's coming to the fore right now is that we've seen relatively rapid growth, especially in specialty drugs that meet high unmet medical needs. Things like new hepatitis C and cancer drugs are coming to market, and they are tending to come to market at very high prices. In the case of some cancer drugs, they can cost more than $100,000 a year. Then, we've also seen some very aggressive players like Valeant Pharmaceuticals (VRX) and Turing Pharmaceuticals--a much smaller company that's been in the headlines--that have really started to take advantage of that market power that they've had all along. But more mature and developed pharmaceutical companies like Novartis (NVS) and Johnson & Johnson (JNJ), I think, have been somewhat more responsible historically. They didn't want to attract negative political attention. They didn't want a reputation for jacking up prices on life-saving drugs. So, they take their price increases 10% or 15% a year, but they're not trying to raise prices 500% from one year to the next. Now, we've seen some more-aggressive companies come in and take those kinds of actions, and that's attracted some political backlash.

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