A market rotation is playing out across large pharmaceutical companies, with industry laggards such as Bristol Myers Squibb soaring in recent weeks and richly valued obesity plays Eli Lilly and Novo Nordisk sinking. But these moves are about more than just momentum: It is also helping that the industry seems to be weathering regulatory storms well. One of the biggest concerns for pharmaceutical companies in recent years has been drug-pricing pressure stemming from the Inflation Reduction Act (IRA), which for the first time empowered Medicare to directly negotiate how much it pays for some high-price therapies.
Last year, the U.S. government named the first 10 drugs that will be subject to the negotiations, taking aim at some of the most widely used medicines in America. But what has been unclear is just how steep a discount the government would seek.
Management teams will continue to bemoan the law’s alleged impact on innovation. But a close reading of industry earnings calls this month suggests executives are telegraphing to investors that the impact won’t be so bad. While negotiations are taking place privately and discounted prices won’t be announced until Sept. 1, companies whose drugs have been selected for the first round have received final offers. That means executives have more information to share with Wall Street.
And the message, says David Risinger, an analyst at Leerink Partners, is that their growth outlook is relatively intact, at least for now. “They are saying it’s not causing serious issues for their financials in the coming years,” he says.
Johnson & Johnson, so far the most exposed pharmaceutical company to the law given that three of its top-selling drugs—psoriasis drug Stelara, Imbruvica for blood cancer (in partnership with AbbVie) and blood thinner Xarelto—were selected for negotiations, kicked off earnings season earlier this month. Executives told analysts that despite the “net unfavorable impact” from the law in 2025, the company expects revenue to grow over 3% next year and then 5% to 7% through 2030.
“We have received the final numbers from the government,” J&J Executive Vice President Jennifer Taubert told analysts. “And while we are not in alignment with the IRA…those numbers have been included in the guidance that we provided last year…that still looks very good to us today.”
Bristol Myers, for its part, sounded upbeat about the impact on its top-selling blood thinner, Eliquis. “Now that we’ve seen the final price, we’re increasingly confident in our ability to navigate the impact of IRA on Eliquis,” Chief Executive Chris Boerner told analysts during their earnings call on Friday. And AstraZeneca said the impact on its diabetes drug Farxiga will be very limited.
Besides allowing Medicare to negotiate prices, another provision limiting what people on Part D plans pay out of pocket for medications at $2,000 annually starting in 2025 is also expected to negatively affect some manufacturers, because it forces them to offer more discounts once patient spending reaches a certain threshold. But AbbVie management sounded bullish in a note last week, telling analysts it expects robust revenue growth despite the headwinds from the Part D redesign.
The cautious optimism isn’t just about the IRA. Several large drug companies, most notably AbbVie and Bristol Myers, have delivered strong earnings beats, feeding into the momentum from the stock-market rotation to value. Since July 8, shares of Bristol Myers are up more than 20%, while AbbVie, Pfizer and J&J are each up more than 10%. Meanwhile, Lilly and Novo, whose stocks have skyrocketed in recent years because of the GLP-1 craze, are each down more than 10%.
To Jared Holz, a healthcare-equity strategist at Mizuho, the current rotation is reminiscent of the last time pharma broadly worked well for investors. That was during the second half of 2022, when anxiety over inflation and interest rates sent investors searching for value and away from growth stocks.
The rotation could have more room to run. Even after recent gains, most pharma companies are trading well below the S&P 500’s price-to-2025-earnings multiple of nearly 20, according to FactSet. After the rally, for instance, Bristol Myers trades at less than eight times 2025 earnings. The exceptions, of course, are the obesity winners: Lilly’s ratio is over 40.
Obesity hype aside, Big Pharma once again looks like good value for your money.
Write to David Wainer at david.wainer@wsj.com
