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Drug pricing showdown: Pharma CEOs set to testify before Congress on Capitol Hill Tuesday

Key Points
  • Top pharmaceutical executives are set to face the Senate Finance Committee on Tuesday.
  • CEOs from AbbVie, AstraZeneca, Bristol-Myers Squibb, Merck, Pfizer and Sanofi will testify. J&J will send its group chairman of pharmaceuticals.
  • The hearing sets up a showdown between Washington and drugmakers, who face the threat of legislative action.
Health and Human Services Secretary Alex Azar listens as U.S. President Donald Trump delivers a speech about lowering prescription drug prices from the Rose Garden at the White House in Washington, U.S., May 11, 2018.
Jonathan Ernst | Reuters

Top executives from seven of the largest pharmaceutical companies are set to testify Tuesday before the Senate Finance Committee.

The congressional hearing, called "Drug Pricing in America: A Prescription for Change, Part II," sets up a potentially hostile showdown between Washington and drugmakers, who face the threat of legislative action after years of setting drug prices in the U.S. without serious repercussions.

Congress and President Donald Trump's administration have made lowering drug prices one of their top priorities. The committee, led by Sen. Chuck Grassley, R-Iowa and Ron Wyden, D-Ore., argue prescription drug costs, which totaled more than $333 billion in 2017, are too high and the pace of drug price increases is "unsustainable."

Meantime, pharmaceutical companies have placed blame on pharmacy benefit managers, the so-called middlemen, who negotiate discounts with the manufacturers, for rising prescription drug costs. They also argue any cuts to their high profits could hinder research and development of new and innovative treatments.

The hearing already looks to be contentious with Grassley tweeting his hope that drug company executives "don't try to blame everyone but themselves/take no responsibility for their role in fixing the problem."  He said he expects there is room for more transparency and improvement in the supply chain. 

Drugmakers get 'Big Tobacco' treatment

AbbVie, AstraZeneca, Bristol-Myers Squibb, Merck, Pfizer and Sanofi will send their CEOs to testify before Congress on Tuesday. Johnson & Johnson CEO Alex Gorsky will not make an appearance. Instead, Jennifer Taubert, the company group chairman for pharmaceuticals in the Americas, will attend the hearing.

Ian Spatz, a former executive at Merck who is now a consultant at Manatt, Phelps & Phillips, said the setup for the hearing Tuesday has similarities to one two decades ago in 1994 when Congress pressed tobacco companies about the dangers of smoking cigarettes.

At the time, seven of the largest American tobacco companies sat together before the House Energy and Commerce Subcommittee on Health and the Environment, led by then-Democratic chairman Henry Waxman and Wyden, who is now a ranking member on the Senate Finance Committee.

"Pharmaceutical companies are not tobacco companies, and they have a lot of value to society," Spatz stressed. "But many people's impressions of CEOs testifying is shaped by that event."

Spatz said the pharmaceutical CEOs are likely to get tough questions, and their answers may not satisfy lawmakers. Drugmakers do not negotiate drug prices with the federal government like in other countries, and some believe that has led to "sky high" prices.

"I would recommend that [the CEOs] just be as straight forward as they can be," he added. "Explain their business as clearly as they can."I would recommend that [the CEOs] just be as straight forward as they can be," he added. "Explain their business as clearly as they can. Credibility is the most important thing."

Industry impact

The hearing, which Spatz said will likely involve some "political theater," could also move large-cap pharmaceutical stocks, which have underperformed the broader S&P 500 Index so far this year.

Wells Fargo senior analyst David Maris said that he expects the hearing to be negative for the group, arguing "investors are under-pricing the risk."

"We note that unlike some committees where the Republican and Democratic leads are adversarial, in this case, we believe Grassley and Wyden have a good relationship," Maris told clients on Monday.

Grassley said he wants to hear from the drugmakers on how they arrive at certain prices for drugs and whether there is a need for industry secrecy, including "backdoor deals" that pharma companies cut with middlemen who get preferred status for their drugs in Medicare's prescription drug plans. (The Trump administration has called on Congress to ban these so-called backdoor deals.)

High insulin prices are also a very big area of bipartisan concern, which could mean tough going for the CEO of top insulin producer Sanofi.

—CNBC's Bertha Coombs contributed to this report.