In Reversal, Investors Rush to Health Care Stocks : Securities: Pessimists turn into optimists as White House appears to have second thoughts on price controls.
After weeks of dumping health care issues, investors have been aggressively buying health care stocks in the last two days on hopes that the industry may avoid harsh government imposed price controls.
In addition to signs that at least one influential member of the Clinton Administration has deep reservations about price controls, the market also reacted favorably to news that the world’s largest pharmaceuticals concern, Merck & Co., has proposed a plan for limiting increases in drug prices that may be agreeable to the Clinton Administration.
Merck Chief Executive Dr. P. Roy Vagelos has suggested limiting price increases for each of Merck’s drugs to no more than the rise in inflation, plus 1%. Previously, Merck and nearly a dozen other drug companies had pledged to freeze or limit increases in the average price of all of a company’s drugs.
On Wednesday, health care stocks finished mixed after trading higher for most of the day. Merck fell $0.50 to $35.375 after rising $1.375 on Tuesday. Glaxo rose $0.25 to $18.25, and Johnson & Johnson finished $0.625 higher at $42.625. American Home Products added $0.50 to 66.125. But Abbott Labs fell $0.25 to $25.75.
The health care industry has been bracing for inclusion of some kind of price controls or government review in the Administration’s health care reform package due out in early May. Clinton has singled out drug companies’ excessive profits for special criticism in recent weeks, causing drug stocks to fall precipitously.
But Ira Magaziner, the Administration’s chief health care adviser, acknowledged in a speech Monday that price controls are “unpleasant policies . . . fraught with difficulties” and termed efforts to use them during the Nixon Administration ineffective.
Although drug companies are constrained by antitrust laws from agreeing among themselves to cap prices, many industry observers expect other manufacturers to come forward with proposals similar to Merck’s because of Merck’s influence and the desire to avoid government-imposed price reviews or controls.
“That’s a reasonable assumption because drug companies are scared enough of punitive government action that they would want to head it off by some voluntary pricing move,” said Kenneth S. Abramowitz, a health care analyst with Sanford C. Bernstein & Co.
Officials at several drug companies, as well as the Pharmaceutical Manufacturers Assn. in Washington, declined to comment on the Merck proposal, fearing that it would put them afoul of antitrust laws that prohibit price-fixing.
But one major drug company official who asked not to be identified described the Merck proposal as “very interesting. . . . A lot of companies might look at that kind of cap and find it a very interesting place to go with all of this.”
PMA spokesman Dave Emerick said the proposal conforms to the industry’s preference for “self-imposed price controls.”
Merck first presented its proposal to Sen. David Pryor (D-Ark.), who as chairman of the Senate special committee on aging has made an issue of drug costs because many elderly citizens’ Medicare policies do not cover prescription drugs. A spokeswoman for Pryor said the senator believes that the Merck offer was a “sincere effort” but that he was withholding further comment until the Clinton health care package is out in May.
Price cap pledges such as Merck’s do not address the issue of how new drugs are priced. Those prices have become a sensitive political issue, particularly when the drugs are developed with the aid of government grants, said U.S. Rep. Ron Wyden (D-Ore.), chairman of the oversight House subcommittee on regulation, business opportunities and technology.
Wyden introduced a bill last month that would force drug companies to disclose “pricing formulas” to Congress on drugs developed with grants from U.S. government agencies.
