Large Cap Pharma’s Dependence on US List Price Growth is Unsustainable

Richard

List price increases account for 48% of real US pharma sales growth since 1980, and roughly ½ of global returns to R&D spending since 1990. More recently eroding mix has compounded reliance on real pricing, which drove 145% of real US sales growth over the last half decade

Despite the average real price of a US Rx having grown nine-fold since 1980, because 3rd-party payors absorbed all drug inflation the average household’s out-of-pocket (OOP) spending on prescription drugs has remained constant

Because drug consumption is highly concentrated, 20% of total spending is accounted for by only 1% of persons, and 70% of drug spending by 10% of persons, who spend as much OOP on drugs as on housing (top 1%) or groceries (top 10%) respectively

Fixed dollar co-pays have grown much more slowly than drug list prices, but co-insurance forces OOP expense to grow at the faster rate of drug list price. 34% of employers offered co-insurance based drug benefits in 2011, up from 13% in 2008

Also, where beneficiaries with fixed dollar co-pays are agnostic to list price differences across more or less interchangeable brands, beneficiaries with percentage co-insurance are sensitive to these differences. We show that brand prices within therapeutic categories are fairly diverse, and that this spread of prices should narrow toward the low end of each therapeutic category’s range as co-insurance becomes more prevalent

Large cap pharma share prices imply a return to (albeit modest) growth following the near-term period of intense loss-of-exclusivity (LOE). This implies real pricing power is as available going forward as in the past; and/or, that volume / mix gains can offset weakening real pricing power. We believe real pricing is simply too large a growth driver to be replaced by any foreseeable combination of volume / mix, and accordingly believe mid-term (+/- 2014) estimates and share prices are too high. AZN, BMY, and LLY are more at risk than their average peer; Roche, SNY, GSK, and ABT are less at risk

We continue to prefer volume-sensitive healthcare sub-sectors, particularly hospitals and non-Rx consumables; and, we continue to be bearish on the drug trades generally and PBMs specifically

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