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Drug pricing reform could be huge for big pharma -- here is who has the most to lose

Martin ShkreliBloomberg TV screenshot

It has been a rough few months for pharmaceutical and healthcare companies.

The overnight price hike of Daraprim, a drug to treat AIDs, cancer, and malaria, by a biotech company led by Martin Shkreli in mid-September garnered public outrage and political backlash.

Presidential candidate Hillary Clinton later described the move as ‘outrategous’, and the Democratic members of the House Oversight Committee have subsequently requested a hearing regarding the outsized price hikes.

A sharp selloff in pharmaceutical shares followed. Valeant shares fell from $US229 on September 21 to $US178.38 on September 30. They closed Friday at $US175.99. Mallinckrodt shares fell from $US73.87 on September 21 to $US63.94 on September 30. They closed on Friday at $US66.73.

Earnings for the sector as a whole aren’t expected to fall all that much globally, according to an October 1 note from analysts at Morgan Stanley focused on the health care industry. That is because the issue only really impacts a handful of US drug companies.

The base case for the industry, according to the note, is that all this attention will have very little impact on the vast majority of pharmaceutical companies: there will be no new laws passed in the short term, and there will be little impact on pharmaceutical companies’ earnings.

“We expect scrutiny of US drug pricing to persist, including political criticism going into the November 2016 elections. But we do not expect new laws to be enacted anytime soon,” the note said.

“Although such actions have recently been very negative for drug industry public relations (and stock valuations), we estimate they only relate to drugs that represent, in aggregate, a single-digit percentage of the overall US drug market,” the analysts added.

There are, however, a number of companies especially at risk.

Specialty pharmaceuticals and biotech companies that rely on drug pricing rather than research and development, as well as companies with a high percentage of sales in the US are likely to feel the heat.

The potential earnings per share impact from pricing risk is highest at Eli Lilly, at 9%, Mallinckrodt, at 8%, and Valeant, at 7%.

Here is a table detailing the potential impact on various healthcare companies.

Healthcare companies at riskMorgan Stanley

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