At first blush, Washington’s tough talk about fiscal austerity doesn’t look good for drug makers. Government programs including Medicare and Medicaid spend $99 billion each year on prescription medicines, according to Washington consulting firm Avalere Health, making for a ripe cost-cutting target. Not surprisingly, drug stocks have dropped with the rest of the market recently. As the WSJ reports , pharma companies have ramped up their lobbying, warning that cuts to the drug prices paid by Medicare’s drug benefit, for example, could mean loss of some of the industry’s 675,000 jobs and investment in new lifesaving treatments. Yet pharma’s prospects aren’t necessarily so dire, say experts like Avalere’s CEO Dan Mendelson, a former Clinton administration health budget official. The first round of cost-cutting mandated under last week’s debt-ceiling pact, he says, doesn’t affect drug makers. Pharmaceutical companies could face reductions in the second stage, either by recommendation of a bipartisan congressional commission or, if it fails, mandatory

cuts to Medicare payments, Mendelson adds. Yet whether they’ll face such reductions, and how severe they would be, remain up in the air. The industry has been smart about positioning itself to be a step away from a lot of direct government spending, Mendelson says. Take one potential health cut target, Medicare reimbursement of cancer drugs. Medicare pays cancer doctors, which use the money to pay for the drug and other costs. So the doctors, not the manufacturers, would feel the immediate pinch, though they might push manufacturers for better prices. Certain drug makers could still be good defensive bets in a down market, Sanford C. Bernstein analysts wrote in a note today. Among the companies that the Bernstein analysts say aren’t too exposed to government cuts are Roche and Novartis, and possibly Merck, Sanofi and Pfizer. Photo: alykat via Flickr

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How Vulnerable Are Pharma Stocks to Fiscal Austerity?