Why Lower Drug Prices Benefit Institutional Investors: an application of universal ownership theory

Abstract

Changes in prescription drug prices have broad ripple effects across the diverse portfolios that most institutional investors hold. Lower prices cut into pharmaceutical company profits, but improve the overall productivity and profitability of other investable sectors of the economy. This paper considers the net impact of cuts in drug prices on investor portfolios. We find that falls in pharmaceutical company profits resulting from price cuts would be largely if not fully offset by a combination of health plan cost‐savings and increases in consumer spending power. Furthermore, falling drug prices benefit investors through the dynamic benefits from a healthier workforce with greater access to prescription drugs. We conclude that, from the perspective of the broadly diversified “universal investor”, support for lower drug prices is consistent with a fiduciary duty to seek attractive long‐term returns at the portfolio level. Strategies for shareholder activism should be expanded, including engagement with corporate health care purchasers and advocacy for public policy reform.