US drug prices poised to increase due to DOJ investigation The Department of Justice has launched a probe into the contracts between pharmaceutical companies including Endo International(ENDP - Get Report) , Johnson & Johnson (JNJ - Get Report) and Merck & Co. Inc. (MRK - Get Report) and pharmacy benefit managers (PBMs).
While Endo's share price declined 3% Wednesday morning following the news, Merck and Johnson & Johnson's prices were virtually unaffected.
"There's so many of these investigations going on," said analyst Donald Ellis of JMP Securities Inc. "I don't think any single one will cause investor concern."
The three companies that have disclosed the government reviews so far (it's unclear if pharmaceutical companies or PBMs may be investigated) noted in 10-Q filings this week that they received civil investigative demands from the United States Attorney's Office for the Southern District of New York. There is the potential that as a result of this investigation, both PBMs and the pharmaceutical companies could face large fines.
Johnson & Johnson noted in its 10-Q from May 10 that its Janssen Pharmaceuticals division, which focuses on oncology drugs, was under investigation. Merck noted on May 9 that its drugs Maxalt, which is used to treat migraines, and Levitra, which is used to treat erectile dysfunction, are under investigation. Endo said its migraine drug, Frova, was also under investigation.
"We are unable to predict the outcome of these matters or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss, if any, for these matters but will explore all options as appropriate in our best interest," Endo wrote in its form 10-Q filed on May 6.
Ellis said he sees the investigation as par for the course.
"There's been a lot of investigating into the relationship drug companies have with PBMs and insurers," Ellis said. "I'm not overly concerned that they did something illegal."
Pharmacy benefit managers are an entity unique to the United States healthcare system. These companies, which include Express Scripts Holding (ESRX - Get Report) , CVS's Caremark division (CVS - Get Report) and UnitedHealth (UNH) , negotiate drug prices with pharmaceutical companies on behalf of pharmacies and insurance companies, often getting cheaper drug prices for consumers.
If their relationships are determined to be illegal by this investigation, Ellis said drug prices could soar, which would be a boon to the share prices of these pharmaceutical companies. However, this is contradictory to fears that the companies could face large fines and forced to change some of their practices following the investigation.
"The relationship between pharma and PBMs typically results in a reduction in drug prices," Ellis said. "If the relationship with PBMs is deemed to be inappropriate or illegal, drug prices will likely go up and it will benefit the companies."
Ellis noted that PBMs focus on reducing the price of drug costs. Though there is some concern that PBMs could be cutting deals with the pharmaceutical companies, favoring brand names over generics, Ellis said there could be legitimate reasons PBMs go for the brand names.
"The PBM wouldn't agree to use a more expensive drug versus a generic, certainly," Ellis said. "It's only where there's a branded drug and a generic similar...If the branded drug combination has two different drugs in one pill, those individual drugs could be available in a generic form. There's improved compliance taking one pill versus two. That may be something a branded company could be pushing."
He added that the only risk he could see would be that a drug company could be providing a lower price to a PBM than the one they provide to Medicare. While this has happened in the past, Ellis said he thought it was unlikely that it could happen again.
No PBMs have publicly said they're under investigation.
Express Scripts is already embroiled in a legal battle with insurance provider Anthem (ANTM) , which filed a suit against the company in March, claiming $15 billion in damages, because it said Express Scripts wasn't passing its savings on drug prices back to Anthem.
Express Scripts filed counterclaims, saying the suit is a breach of contract and that it paid Anthem $4.67 billion back in 2009. According to analysts, this showed that the PBM was getting much higher than average rates from Anthem.
There are concerns among antitrust groups like the American Antitrust Institute that there is little competition in the PBM industry. Express Scripts in the past has been a focus for the institute, as it purchased Medco Health Solutions Inc. in 2012 and other smaller specialty drug companies. AAI said Express Scripts had a history of "rapidly increasing" the prices of drugs after making acquisitions. The institute could not immediately be reached for comment on the recent case.
Johnson & Johnson, which has a market cap of $315.8 billion, was trading at $114.49 Wednesday morning.
Endo, which has a market cap of $3.34 billion, was trading at $14.98 per share Wednesday morning, down 3.4% from market's open.
Merck, which has a market cap of $151.1 billion, was trading at $54.55 per share Wednesday morning.
Both Merck and Johnson & Johnson said they were cooperating with the investigation, and that at this time, they would not be commenting further on it.
The Department of Justice could not be reached for comment Wednesday