How controversial drug pricing affects healthcare

Over the past year, the U.S. healthcare sector has suffered due to issues such as controversial drug pricing. But there are still ways to find yield in the sector.

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So says Ann Gallo, senior vice-president and partner at Wellington Management Company in Boston, Massachusetts. She explains, “Drug pricing has been in the news, beginning really with a tweet that [U.S. presidential candidate] Hillary Clinton sent last fall [about releasing a plan to combat high prices]. The most recent example of course is the EpiPen controversy: the fallout has been fairly significant in the short-term as it relates to healthcare stocks.”

Gallo, who’s also co-manager of the Renaissance Global Health Care Fund, adds that when healthcare companies spend a lot on a product, “the only way […] to be rewarded with attractive reimbursement is to focus on […] innovative products and services, and when we look at the stocks in our portfolio, it’s that which we keep in mind first and foremost.”

Read: 2 ways to invest in U.S. healthcare

But in a world where cost isn’t an issue, she says, “you can see companies getting away with raising prices on drugs that aren’t truly innovative, or companies getting away with exploiting loopholes in reimbursement rules.”

With the controversy surrounding the EpiPen in mind, Gallo foresees drug price exploitation getting worse, especially since society is generally willing to pay for products and services that prolong and improve quality of life.

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“But to be able to afford [more expensive products], we need to find areas of saving elsewhere. Going forward, that is going to create greater bifurcation in performance of healthcare companies,” says Gallo.

Such savings can come from biosimilars, or generic-brand drugs, she suggests. “Just like we saw when the branded drugs experienced the patent cliff — when a number of [drugs] went off-patent — we’re going to see a similar thing happen to many of these biotech drugs in the form of biosimilars.”

Read: What’s driving the healthcare sector?

Consider that over the past few years, big drug companies like Pfizer saw billions of dollars in losses when many of their branded drugs had patents expire. As a result, generic drugs were finally able to enter a previously monopolized market.

Now, Gallo suggests the same thing may happen in the biotechnology sector. “That’s one example of where we will find savings in the system that will enable us as a society to reward and reimburse for innovative products and services. And that is how we think about picking stocks.”

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