CAH Cardinal Health Inc

The backlash against the high and rising cost of medicines may be cracking the foundation of the convoluted U.S. drug-pricing system, hitting the bottom lines of manufacturers and industry middlemen that have benefited from increases.

Shares of many drugmakers, wholesale distributors and pharmacy-benefit managers were battered Friday on new evidence in corporate earnings reports that drugmakers' ability to raise prices has weakened. McKesson Corp., one of the largest wholesale drug distributors, shed a quarter of its market value after disclosing that competition and a slowdown in price inflation for brand-name drugs would reduce its profits for its current fiscal year.

Amgen Inc. shares dropped 10% after the company late Thursday flagged diminished pricing power next year for its blockbuster rheumatoid-arthritis treatment Enbrel, after several years of sales gains fueled by repeated price hikes. The Nasdaq Biotechnology Index fell 2% Friday.

The prospect of price moderation—while good for patients and insurers—spooked analysts and investors concerned about the profits of drug companies and middlemen. "There is tremendous concern in the marketplace about structural change to pricing," Goldman Sachs analyst Jami Rubin said on a conference call with executives of drugmaker AbbVie Inc. on Friday.

Drugmakers in recent years have repeatedly boosted prices for many drugs at rates well above the broader rate of inflation, and have introduced new drugs at prices that can top $100,000 a year per patient.

The rising cost burden has triggered a backlash from patients, doctors and insurers, who say the costs put drugs out of reach for some patients and strain health-care budgets. High-profile actions including Mylan NV's repeated price hikes for the emergency allergy treatment EpiPen have triggered investigations by members of Congress and the Justice Department.

Companies and organizations that pay for portions of their employees' health care have become emboldened by the public backlash and are pushing back against drug-price increases via the pharmacy-benefit managers, or PBMs, that administer employee benefits, said Ronny Gal, an analyst with Sanford C. Bernstein. "There's just less money to go around," he said.

McKesson said it has been forced to lower the prices it charges to independently owned pharmacies to match the prices charged by competing wholesalers aiming to steal market share. "We have made a very significant change in our pricing practice to match where the market is today," McKesson Chief Executive John H. Hammergren told analysts on a conference call on Thursday.

McKesson contracts with manufacturers to distribute drugs to customers including retail pharmacies and hospitals. Some of its contracts allow McKesson to benefit when manufacturers increase prices, by selling its inventory of a drug at the new, higher price. A slowdown in price increases is beginning to hurt its profit margins.

McKesson's stock plunge on Friday erased about $9 billion in market value, while shares of the company's main rivals, AmerisourceBergen Corp. and Cardinal Health, declined 13% and 12% respectively.

Drugmakers say they are facing more intense pricing pressure in the U.S. this year in certain treatment areas. Novo Nordisk A/S's American depositary receipts tumbled 13% after the Danish company cut its 2016 sales and profit forecast, citing U.S. pricing pressure primarily for its insulin drugs for people with diabetes.

"The competitive environment in the U.S. within both diabetes care and biopharmaceuticals has become more challenging, negatively impacting the price of our products," Novo Chief Executive Lars Rebein Sorensen said on a conference call with analysts.

Companies including Novo have actually boosted list prices for insulin in the U.S. in recent years, but much of it has been funneled back in the form of rebates to PBMs. Still, the increased prevalence of high-deductible health plans means that some patients must pay the full list price themselves for at least part of the year.

The pricing pressure may now be hitting another lucrative class: so-called TNF inhibitors, which treat rheumatoid arthritis and other autoimmune diseases.

Amgen blamed softer pricing for Enbrel next year on the need to pay higher rebates to the PBMs. Amgen said the higher rebates would help ensure that drug plans continue to reimburse for patients' use of Enbrel. "We'll be driving the business on volume, not on net selling price next year," said Anthony Hooper, chief of Amgen's commercial operations Thursday.

The concerns spilled over to Amgen's rival, AbbVie, whose drug Humira is in the same category as Enbrel. AbbVie on Friday reported lighter-than-expected sales of Humira for the third quarter. AbbVie Chief Executive Richard Gonzalez told analysts there was little change in the net price of Humira—after rebates and discounts—in the supply contracts that AbbVie has negotiated with payers for 2017 and 2018, compared with this year.

AbbVie shares dropped 6.2%.

Jonathan D. Rockoff and Joseph Walker contributed to this article.

Write to Peter Loftus at peter.loftus@wsj.com

(END) Dow Jones Newswires

October 28, 2016 16:25 ET (20:25 GMT)

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