Profit Pregame

Here’s Why You Need to Be Wary of One of the World’s Top Industries

The Party Could Soon Be Over for Big Pharma

Members of Congress are maneuvering to curb the wildly growing price of drugs. What you need to know if you invest in pharmaceutical firms.

What’s happening?

It’s no secret on Wall Street that Big Pharma means big money.

In total, the global pharmaceutical market was values at around $1.27 trillion in 2020. And investors pour billions of dollars into pharmaceutical stocks every year.

That’s because over the last decade, revenue for the pharmaceutical industry has grown more than 220% over the last two decades.

Drug developers have enjoyed a wider profit margin than most other industries since the year 2000.

But that success has taken a large toll of many people that depend on the drugs that those companies make. Since 2014, the cost of prescription drugs has increased by 33% on average – leaving many with a hard choice between their health and paying the bills.

Members of Congress are now renewing interest in finding ways to lower drug costs for Americans.

And pharmaceutical investors need to be aware of the possible ramifications.

Where’s the money?

On Tuesday, the U.S. Health and Human Services Department (HHS) announced its intention to make a renewed push for drug pricing reform.

HHS secretary Xavier Becerra appeared with several senators to discuss lowering drug costs, citing the issue that “Countries around the world are providing medicine to their people for far less than we do.”

Their efforts focus on granting Medicare the ability to negotiate for lower drug prices, as well as offering pharmaceutical companies incentives to lower drug prices.

Proponents of these actions claim that the research and development cost for drugs is far less than the profits big pharmaceutical companies make from their sale, and that cost are too high for average American families.

While past efforts to curb drug costs have been met with little success, it seems those behind this effort are prepared to do anything in their power to bring about meaningful change for fair drug prices.

Becerra was quoted as saying, “I don’t want to see us in court, but we are going to do everything we have to do – dotting those ‘I’s, crossing those ‘t’s- so that if someone wants to take us on in court, we’ll be ready.”

Holder of pharmaceutical stocks, take note.

How do I get some?

The United States currently has the highest spending per capita in the world, mostly due to inflated drug costs.

Current projections estimate that by the year 2023, Americans will spend more than $650 billion on medicine.

But as public sentiment and Congressional interest in lowering drug costs grows, new regulations and legislation could start to eat into pharmaceutical revenue in a big way.

If your portfolio is currently overweight on some of the top U.S. drug makers, now may be a good time to consider taking profits and limiting your exposure to the industry.

Companies like Johnson & Johnson (JNJ), Pfizer Inc. (PFE), and Moderna, Inc. (MRNA) are likely relatively safe for now due to their widely used COVID-19 vaccines. But I am wary of investors selling off other top U.S. producers like Merck & Co., Inc. (MRK) and AbbVie Inc. (ABBV) should the measures to lower drug prices gain traction in the near future.

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In the Spotlight: The Oracle of Omaha is bailing on drug stocks

If you needed any more evidence that now is a good time to take the money and run on pharmaceutical stock, look no further than perhaps the worlds’ most famous investor.

A recent regulatory filing from Warren Buffett’s Berkshire Hathaway revealed that the firm is decreasing its holdings of several pharmaceutical companies.

Berkshire reportedly sold 49% of its Merck & Co., Inc. (MRK) shares, 15% of its Bristol-Myers Squibb Company (BMY) holdings, and another 10% of the firm’s AbbVie Inc. (ABBV) stock.

Warren Buffett is maybe the most celebrated investor in modern history, and the moves he makes are often mirrored by a lot of investors, both retail and big institutional money.

The fact that he is seemingly moving out of pharmaceuticals in a big way, coupled with the issues we discussed above, may lead to a selloff in the industry in the days and weeks ahead.

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