Estrategia y temas
July 3, 2023
The major pharmaceutical companies are facing a number of headwinds
Inflation Reduction Act (IRA) could weigh on future earnings growth
With a number of drug patents due to expire in the next few years
Mergers and acquisitions could be their only source of growth

CHART OF THE WEEK: "Can the healthcare sector outperform as it did in 2020?"


The pharmaceutical sector, like other defensive sectors, has posted negative stock market performances since the start of the year. The craze for technology companies that stand to benefit from the development of artificial intelligence and the resulting bull market, is one explanation for this underperformance, but other dark clouds have gathered over the sector without compromising its long-term added value.

The major pharmaceutical companies are facing a number of headwinds

Pharmaceutical companies are entering a delicate period. The race for the US presidency is just getting started, and one of the key campaign issues remains the cost of healthcare. Visibility for companies in the sector tends to diminish, weighing on share prices during the election year, the next one being in 2024 (see Fig. 2).

With the implementation of the Inflation Reduction Act (IRA), initiated by President Biden, the goal is to reduce healthcare costs by nearly $173 billion by 2031. A large part of these savings should come from a reduction in the price of medical treatments.

Finally, a large number of drugs will see their patents expire over the next few years. The big pharmaceutical companies are therefore on the lookout for new drugs to support revenue growth... especially if drug prices are under government control.

Inflation Reduction Act (IRA) could weigh on future earnings growth

The Inflation Reduction Act contains $500 billion in new spending and tax cuts aimed at stimulating clean energy, reducing healthcare costs and increasing tax revenues.

In terms of its impact on the US healthcare system, the IRA aims to reduce costs for patients. For example, out-of-pocket costs will be capped at $2,000, which, combined with the negotiation of Medicare prices, will save seniors almost $288 billion by 2030.

The IRA will extend subsidies under the Affordable Care Act (ACA), passed under Barack Obama, for three years. The price of certain drugs will be capped. For example, the price of insulin will be capped at $35 per month. Finally, manufacturers will not be able to increase drug prices faster than inflation.

From 2026, the top-selling drugs in the Medicare program that have been on the market for more than ten years without generic or biosimilar competition will be subject to a discount of between 25% and 60%, to be negotiated with the Department of Health and Human Services (see Fig.3). Combining the new Medicare inflation rebates with existing price protections could significantly reduce manufacturers' revenues for a given product.

The IRA is expected to have a greater impact on US-focused, short molecule pharmaceutical companies and those with greater exposure to Medicare. They should begin to reposition themselves to adapt to the IRA by reassessing their revenue projections, revising their research and development (R&D) investments and reconsidering their long-term pipeline.

Pharmaceutical companies are therefore worried about the impact of the IRA on their sales. Amgen and Eli Lilly are already anticipating negative consequences. Gilead and AbbVie are expecting pressure on financial results. Early June, Merck announced its intention to sue the US government, arguing that the new drug pricing program violates the First and Fifth Amendments of the US Constitution. The US Chamber of Commerce is also suing the US government, claiming that the initiative is unconstitutional. Drug manufacturers are also warning that the legislation could negatively impact R&D expenses.

Analysts estimate a 2% fall in the value of the industry following the implementation of the IRA, but negative public perception of rising drug prices and the 2024 US presidential election could increase pressure on the pharmaceutical sector. Regardless of who wins the next presidential election, the high cost of medical care in the US compared to other countries will remain an issue that requires a proper response from the government.

A number of measures have already been implemented to reduce the income of generic manufacturers. Through the IRA and more effective means of controlling new patents, pressure will be on brand-name drug manufacturers. Companies whose drugs face strong competition will suffer a heavier burden, and this also applies to the more financially intensive market segments, such as oncology and diabetes.

A large number of drug patents are due to expire in the next few years

Patent expiry means the end of intellectual property protection for a drug that has enjoyed market exclusivity since its launch. When a drug loses patent protection, generic competitors appear on the market, reducing the original manufacturer's margins and putting its sales at risk (see Fig.4).

Between now and 2030, a large number of drugs will enter the public domain and face competition from biosimilars and generics such as Humira (AbbVie), Stelara (Johnson & Johnson), Revlimid (BMS), Trulicity (Lilly), Ibrance (Pfizer) and Cosentyx (Novartis), to name but a few (see Fig.5).

Companies try to minimise the impact of price erosion when a patent expires through:

  • innovation and the development of new products that still enjoy commercial exclusivity,
  • transactions, strategic partnerships and other alliances between companies, and
  • strategic management of the life cycle of intellectual property in order to extend protection wherever possible.

Faced with the expiry of a large number of patents, big pharma is having to rebuild its product portfolio, through internal R&D or new partnerships and acquisitions.

Mergers and acquisitions could be the only growth driver

Pharmaceutical giants spent $85 billion on transactions in the first five months of the year. Mergers and acquisitions in the sector are set to accelerate (see Fig.6), as companies seek to fill the growth gap created by expiring patents.

Particular attention should be paid to medium-sized biotechs (worth between 5 and 15 billion dollars), which can fill existing product portfolios. They account for two-thirds of new active substances. It is therefore M&A, and not the big-pharma R&D excellence, that explain their performance.

Cash balances are high, with the top 25 pharmaceutical, biotech and medtech companies all having at least 15% of their sales over the last 12 months in the form of cash, or nearly 130 billion dollars. On the other hand, alternative routes to cash have become tighter for biotech companies, as initial public offerings have all but dried up (see Fig. 7).

At the same time, the FTC, the authority responsible for regulating mergers and acquisitions, has hardened its stance. Last month, it tried to block Amgen's $28.3 billion takeover of Horizon Therapeutics, despite the fact that the two companies treat different diseases. The FTC's intervention came as a shock to the industry, which relies on such deals to rebuild their drug portfolios.


The sector retains solid balance sheets and resilient fundamentals in the event of an economic slowdown. The ageing of the population and the growing affluence of the middle classes in emerging countries should support the sector's long-term growth. However, it is still difficult to quantify precisely the negative impact of the Inflation Reduction Act on the growth of pharmaceutical groups whose drugs are covered by the Medicare program. The environment is likely to be hostile on a number of fronts in the US over the next two years.