Who Gets Hurt When Drug Prices Don’t Go Up

The heavy scrutiny by Congress, payers, and the media on drug price hikes may be having its intended impact – giving manufacturers pause with respect to the frequency and/or magnitude of price increases. There’s another effect that bears keeping in mind, on the wholesalers that have long operated with a margin-dependent business model that factors price increases into revenue projections.

McKesson’s Q3 earnings call (and resulting 23% drop in share price) may be the canary in the coal mine for the wholesale industry. The company's CEO, John Hammergren explained that "[w]hat we have seen this year to-date, our fewer products with price increases, and those price increases are at lower rates than both prior year results . . . we now expect full-year branded pharmaceutical pricing trends to be meaningfully below those experienced in Fiscal 2016.” 

If manufacturers adopt more conservative price inflation strategies, wholesalers will have to adjust and adapt to survive. This may mean unbundling value-added services from their distribution role, and negotiating separate payment for these offerings. It could also involve the types of belt-tightening strategies McKesson has already initiated with its decision to sell its San Francisco headquarters facility and acquire a portion of that space through a lease. Manufacturers, providers, and payers may also find that wholesaler strategies toward a sustainable business model involve more aggressive and/or strategic adjustments to their customer, drug, and manufacturer mix. 

This reflects my own personal perspectives, not those of any Connect 4 Strategies’ clients.