McKesson Growth at Risk as Drugmakers Curb Price Increases

(Bloomberg) -- Drugmakers are tapping the brakes on price increases. For McKesson Corp. investors, that could mean lost sales.

The drug distributor earns a percentage of a given medication’s list price. If pharmaceutical companies continue to put off plans to raise prices amid pressure from the Trump administration, that could threaten San Francisco-based McKesson’s bottom line.

McKesson already faces several serious challenges. Over the past six months, its shares have fallen 28 percent, including a slide of 4.7 percent on Thursday. The company has been sued by numerous communities over its alleged role in fostering the U.S. opioid epidemic. And Amazon.com Inc. looms as a longer-term threat to middlemen in the health-care industry.

Now, the Trump administration’s war on drug costs could add another layer of uncertainty.

Analysts barraged Chief Executive Officer John Hammergren with questions on drug pricing on McKesson’s earnings call on Thursday, which came after announcements by Novartis AG and Pfizer Inc. this month that the drugmakers will hold the line on U.S. price increases for now.

“We don’t control what the manufacturers do,” Hammergren said on the call, but “if there is a significant reduction in the list price of these products...then we will be in discussions with manufacturers.”

To be sure, drug prices overall are still rising. Yet as the Trump administration continues to turn up the heat, the risks for McKesson could increase. For its distribution services, the company is paid a percentage of a drug’s list price. If prices sink, or even stay the same, McKesson likely won’t see much growth.

In July, branded drug-price increases were already lower than what the company expected, Hammergren said.

Hammergren also said McKesson supports the idea of Americans paying a “fair price” for their pills, but noted that “a system like this that has been developed over decades can’t be completely re-engineered in a matter of weeks and months.”

In the long run, McKesson hopes to shift its pricing system from a percentage-based model to a fee-based one, charging set prices based on the effort needed to transport the medicine, said Frixos Michael, the company’s director of investor relations.

The company later added that Michael was speaking broadly about how the drug distribution industry’s practices might shift, not specifically about McKesson’s plans.

Such a shift would affect pricing along the entire supply chain. “That has been done before,” Michael said, “but it takes a couple of years for something like that to happen.”

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