A small gesture on pricing is likely to have a big impact on the prescription drug industry.
On Tuesday evening, Pfizer PFE 0.03% said it would defer planned price increases on about 10% of its prescription medicines after President Donald Trump spoke with CEO Ian Read and criticized the company on Twitter. Pfizer had planned to raise the list prices of some drugs by as much as 9.4%, part of the annual price increases it and other drug companies impose every year on July 1. List prices are sticker prices, before rebates and discounts granted to middlemen in the supply chain for drugs.
Pfizer’s move is likely to have a modest direct impact on its profits. Middlemen like drug wholesalers and pharmacy-benefit managers will feel a bigger effect.
The medicines in question comprise only a small fraction of Pfizer’s total revenue, which reached nearly $ 13 billion in the first quarter. And any impact is likely to be temporary. Pfizer said the deferred price increases will still take effect by Jan. 1 or earlier if Mr. Trump implements his plan to reform prescription drug prices.
The fact remains that a pharmaceutical giant and highly influential force in Washington is pausing planned price increases after pressure from the president. That’s rare in this industry, for which raising prices has become a major source of earnings growth.
While Pfizer doesn’t pay rebates on most of their affected drugs, the fallout will likely extend beyond drug manufacturers, deep into industry supply channels. Manufacturers have already realized the diminishing revenue benefits of price increases in recent years. For example, Merck raised its list prices by 6.6% in 2017, according to a company report. After the rebates and discounts it paid to various supply chain companies, net prices actually fell by 1.9%. Rebates and discounts comprised 45% of Merck’s average list price last year; that figure was just 27.3% in 2010. Reports from other drug companies have shown a similar trend.
The benefits of list price rises have instead flowed more to supply chain companies, such as Express Scripts or McKesson . But while they tend to make money when drug prices go up, that has also forced them to face more pressure both from politicians in Washington and from new potential competitors like Amazon.com . Shares of Wholesaler AmerisourceBergen were down 1% on Wednesday, while McKesson shares closed nearly 3% lower.
Ahead of third-quarter earnings reports, that is one more piece of news supply-chain investors didn’t need to hear.
Write to Charley Grant at charles.grant@wsj.com
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