Drug Pricing Debate in Washington Is a Headache for Pharma

But West Virginia’s Democratic Sen. Joe Manchin, who doomed the $1.7 trillion spending bill in December, is now giving advocates of reform a smidgen of hope by lending his support to a slimmed-down version of the legislation that could include provisions to lower drug prices. Mr. Manchin may be no fan of big spending bills, but he can’t ignore retirees in West Virginia who pay 10 times more than their counterparts in other rich countries for insulin.

Drug pricing “is something we all agree on,” Mr. Manchin said at an AARP event, adding “if we do nothing more this year, that’s the one thing that must be done.”

Mr. Manchin has been quietly negotiating with Senate Majority Leader

Chuck Schumer

(D., N.Y.), and the talks are serious enough to alarm Wall Street. Brian Abrahams, an analyst at RBC Capital, thinks the risk of “drug pricing legislation making a comeback is highly underappreciated on the Street.’’ A group of Morgan Stanley analysts, including

Matthew Harrison

and Terrence Flynn, noted that with “midterm elections nearing, Democrats appear ready to take one more serious shot’’ at lowering prescription drug prices.

A lobbyist representing large healthcare providers estimates the chance of a bill passing at 50%. Still, he warned that while Arizona’s Sen.

Kyrsten Sinema

—another pivotal Democrat—ultimately agreed to drug-pricing provisions in the original Build Back Better legislation last year, she might not be a fan of a stripped-down version of the legislation that solely goes after the drug industry. Mr. Manchin, on the other hand, is signaling that he would be up for that.

He has said that the deadline to pass a spending bill is Sept. 30, the end of the federal government’s fiscal year. Any progress in negotiations this summer could put some pressure on sector stocks—especially those with the most exposure to the bill, such as big biotechs

Regeneron

REGN 4.35%

and

Amgen.

AMGN 1.74%

Direct Medicare negotiations for Regeneron’s Eylea could trim the company’s revenue by 5% to 15%, according to Morgan Stanley estimates.

While details of a slimmed-down version of the Build Back Better bill aren’t known, the measure would likely address climate change and drug pricing, borrowing elements from last year’s bill. That means direct Medicare negotiation for a list of drugs and capping out-of-pocket costs could make it in. Support from all 50 Democratic senators would be crucial to bypass a GOP filibuster in the Senate via the reconciliation process.

There is a good amount of skepticism. Mr. Manchin told Axios that, while the talks are respectful, there “could be nothing” there. “Manchin and Schumer have been down this road several times without success,” Rick Weissenstein from Cowen wrote in a note last week.

If nothing is passed by the time the Senate goes into recess in August, investors will start feeling more comfortable upping their pharma and biotech bets in anticipation of a poor showing for Democrats in the fall. And even if a bill does pass, it will chop at most a few percentage points from industry sales as a whole, so executives aren’t in panic mode.

For now, though, Joe Manchin is one of the most powerful men in Washington and one to watch on Wall Street as well. Until it is clear where he stands, healthcare investors shouldn’t let their guards down.

Write to David Wainer at david.wainer@wsj.com