Inflation Reduction Act a Blessing in Disguise for Drug Stocks?

At first glance, the measures to curb drug price increases in the Inflation Reduction Act seem like negatives for pharma and biotech stocks. If passed, as expected, Medicare would be allowed to negotiate the price it pays for a limited number of drugs. Beginning in 2026, up to 10 of Medicare’s highest-cost drugs would be included in negotiations, rising to the top 20 by 2029. In 2025, an annual $2,000 cap would be introduced on Medicare beneficiaries’ out-of-pocket prescription drug costs. But strategists at UBS Securities see some silver linings.

“We think the news is supportive,” says Mark Haefele, global wealth management chief investment officer at UBS. By reducing uncertainty and establishing a more predictable pricing outlook, the legislation could remove a long-standing overhang on the sector.

Other provisions in the bill will partially offset the negative financial impact. Expanded health-insurance subsidies that this legislation funds would enable more people to afford prescription drugs and potentially increase overall sales. And the proposal to cap out-of-pocket spending should make prescription drugs more affordable for Medicare’s high-use elderly population. Overall, according to UBS estimates, the impact equates to less than 3% of global biopharma industry earnings over a 10-year time frame.

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Meanwhile, health care stocks are especially attractive now, according to UBS. Large-cap pharma companies typically offer steadily growing dividends. "We think investing in income stocks like these can help investors during an economic slowdown," says Haefele. UBS notes that during the early 2000s downturn, earnings per share for the MSCI World Index fell 50.7% peak-to-trough; dividends per share declined just 11.9%.

Because of the sector’s defensive characteristics and its ability to reduce volatility in your portfolio, UBS rates health care as “most preferred” in their global equity strategy. Other parts of the sector, such as medtech, also offer attractive long-term growth.