US Drug Pricing Stalls. Uh-Oh …

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Richard Evans / Scott Hinds / Ryan Baum


203.901.1631 /.1632 / .1627 richard@ / hinds@ /


June 2, 2015

US Drug Pricing Stalls. Uh-Oh …

  • Growth in US brand pharmaceuticals’ list prices has accelerated – but discounts are growing even faster. As a result, on average US brands’ net price growth is very nearly zero
  • Net price growth is negative in 6 of the 10 therapeutic areas where we have detailed price tracking. In all cases, falling net price is the result of sharp increases in average discounts
  • Unsurprisingly, each of the markets with falling net prices have 2 or more products that are at least somewhat interchangeable. But this is nothing new – the existence of multiple viable alternatives has been a feature of most therapeutic areas in the US drug market for decades. With only two exceptions (multiple sclerosis and HCV) the acceleration in discounting has occurred among entrants that have all been in the market for at least 3 years. We see two overlapping explanations – both of which point to continued US price weakness
  • First, the proportion of US beneficiaries subject to co-insurance instead of co-pays is rising; this means beneficiaries newly prefer drugs with lower list prices, and in particular this means that manufacturers’ co-pay card programs must offer these beneficiaries’ larger subsidies in order to keep out-of-pocket (OOP) costs at manageable levels. Co-pay card subsidies, quite obviously, reduce net prices
  • Second, with the apparent blessing of plan sponsors, it appears that US formulary managers are more frequently excluding non-preferred brands, rather than simply relegating them to higher tiers. This obviates the utility of manufacturers’ co-pay card programs, and intensifies the need for manufacturers to have their brands in preferred formulary positions – for which higher rebates must be paid

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. VRTX, BMY, SNY, ROCHE); Biopharma companies with pending major product approvals (e.g. ALIOF, ALKS, AMGN, BDSI, ENDP, HLUYY, HSP, ICPT, JAZZ, NVS, PTCT, RLYP, RPRX, TSRO, UCBJY, VRTX); ABBV and ENTA on sales prospects in Hep C; SNY on undervalued basal insulin franchise and sales potential for Praluent (alirocumab), in addition to its undervalued pipeline; AZN and LLY on the likelihood that excess SG&A/R&D spending must be reined in, in addition to pending major product approvals; CFN, BCR, CNMD and TFX on rising hospital patient volumes; XRAY and PDCO on rising dental patient volumes and rising average dollar values of dental products and services consumed per visit; CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: Biopharma companies with overvalued pipelines (e.g. GILD, ALXN, SHPG, REGN, CELG, NVO, BIIB); PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX, CTRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WBA, CVS, RAD); Research Tools & Services companies as growth expectations and valuations are too high in an environment of falling biopharma R&D spend (e.g. CRL, Q, ICLR); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE)

Despite Rapid US List Price Growth, US Net Price Growth is Flat

US list (aka ‘WAC’)[1] prices continue rapid real growth (Exhibit 1, black line); however average discounts are rising (Exhibit 2), thus real net pricing gains recently have decelerated sharply over the last year (Exhibit 1, green line)

Drilling down to separate the trends for small and large molecules, real WAC pricing for both classes is generally accelerating, with large molecule WAC price growth recently passing the small molecule rate – which is somewhat unusual (Exhibit 3). Discount rates however also are accelerating; average small molecule discounts are substantially greater than large molecule discounts (though the gap is narrowing, Exhibit 4). The net effect is a moderation of net pricing growth in both settings (Exhibit 5), with much more profound net price deceleration for small molecules

The obvious question is whether the fall-off in net pricing growth is temporary, or permanent. In reality, the recent trend is a mix of both temporary and permanent effects

Notable Company-Level Trends

Drilling down to the company level, companies with net pricing well below the recent market trend include AZN, GSK, PFE, SNY, AMGN, and GILD (Exhibit 6). Only LLY has large implied recent net price gains (Exhibit 7); however we believe these implied gains are driven almost entirely by wholesaler inventory shifts for products losing exclusivity, specifically Cymbalta in 4Q14 and Evista in 1Q15

AZN’s implied discounts are accelerating on Crestor, Nexium, and Symbicort (Exhibit 8); however some of the apparent discount may be a consequence of a 4Q14 inventory load-in (which tends to lower implied discounts) followed by a 1Q15 inventory load-out (which tends to raise implied discounts)[2]. Crestor net sales have stalled (and pricing power presumably has been lost) as the brand has struggled to deal with much cheaper alternatives in the form of Lipitor and Zocor generics; Nexium is losing US patent protection and apparently is further raising discounts in an effort to preserve volume; and, Symbicort is caught in the broader collapse of prices in the COPD market (Exhibit 9). GSK’s Advair is more than a fifth of the company’s US net sales, and the pricing collapse in the COPD market explains GSK’s falling average US net prices

PFE’s net pricing declines are driven by a large drop in Celebrex net pricing, offset by moderating but still large net pricing gains for Viagra, Premarin, and Lyrica (Exhibit 10). Celebrex has lost US exclusivity and is falling out of the US sales weight (Exhibit 11); however because sales weighting is based on trailing (year prior) sales, the Celebrex net pricing declines had a major effect on the calculated net pricing for PFE. We expect continued strong net pricing gains for Viagra, Premarin, and Lyrica; thus with Celebrex moving out of the sales weighting PFE’s calculated net pricing is likely to return to positive territory

Nearly half of SNY’s US net sales are from Lantus (Exhibit 12). SNY and NVO have been moving list prices cooperatively since 2008, with cumulative list price growth peaking at more than 45% (spread across three separate pricing actions) in 2013 (Exhibit 13). Several payers took their frustrations out on Lantus – by far the market leader – in 2014, forcing Lantus’ to move its discount – and thus its net price – in line with Levemir (Exhibit 14)[3]

At the very least this means net pricing growth in SNY’s largest market is very likely to moderate; compounding this is the need for SNY to switch Lantus patients over to Toujeo before Lantus biosimilars emerge. And, because Toujeo’s label is not differentiated v. Lantus’, there are no realistic options other than to discount Toujeo relative to Lantus. Whether this can be accomplished more by raising Lantus price relative to Toujeo than by discounting Toujeo relative to Lantus remains to be seen

AMGN’s net pricing decline is driven by Neupogen (Exhibit 15), which faces the immediate prospect of follow-on biologic competition and so is likely to see continued price declines. GILD’s net price declines are largely driven by discounts being offered on Harvoni, in response to ABBV’s aggressive pricing of Viekira Pak. GILD’s implied net price calculation is almost certainly also affected by inventory shifts associated with declining US Sovaldi demand and the launch of Harvoni

Notable Therapeutic-Area Level Trends

Drilling down by therapeutic area, we find significant net pricing deceleration in six of the ten markets where we’re tracking prices. Collectively, these ten markets account for approximately 30% of US brand sales, and the six markets with net pricing deceleration account for approximately 20% of US brand sales

As explained above under SNY, net prices are declining in the LA insulin market (Exhibit 16) as a gradual deceleration in WAC (Exhibit 17) has been outpaced by a sharp jump in average discounts (Exhibit 14, again)

The SA insulin market is in some ways a slow-moving version of the LA insulin market: a more gradual deceleration in WAC (Exhibit 18) and a more gradual acceleration in discounts (Exhibit 19) have led to a steady and significant decline in net price (Exhibit 20)

In multiple sclerosis (MS), WAC price growth generally is decelerating and average discounts generally are rising, resulting in net price declines particularly for Copaxone, Betaseron, and Rebif (Exhibit 21). Drivers include the introduction of four new treatment options in as many years (Rebif, Gilenya, Aubagio, and Tecfidera, Exhibit 22). Given the large number of options and the apparent effect this is having on net price growth, we would expect to see mean-reversion in the annual costs of therapy, which implies a significant likelihood of upcoming net price erosion for BIIB’s Tysabri and Avonex (Exhibit 23)

In the COPD/long-acting inhaler market, net prices are falling (Exhibit 24) as Symbicort, Dulera, and now recently-launched Breo (marketed by GSK, as is Advair) capture share in exchange for annual net regimen costs below those of market leader Advair (Exhibit 25)

In the DPP-IV market, net prices are declining (Exhibit 26) as the result of rising discounts that apparently began with very aggressive discounting by the most recent entrant (Tradjenta, Exhibit 27), which has forced correspondingly higher discounts from the incumbents (Januvia and Onglyza, also Exhibit 27)

And finally in HCV, we know that ABBV’s Viekira Pak launched in 1Q15 at a substantial discount to GILD’s HCV regimens, and that GILD’s net pricing is down as much as 40% as a result

Our Thoughts on Why Net Pricing Has Stalled

With the exception of patent expirations on Celebrex (PFE) and Neupogen (AMGN), formulary pressure is the common denominator across the company-level and therapeutic-area level instances of price deceleration (Exhibit 28). Obviously, in all events formulary pressure is at the very least enabled by the existence of more than one suitable alternative. In the DPP-IV and HCV examples it’s fairly clear that formulary pressure was not only enabled, but was also catalyzed by a new entrant. In the DPP-IV example Boehringer Ingelheim launched Tradjenta at a very high discount relative to incumbents Januvia and Onglyza. Because Tradjenta lacks positive differentiation v. either incumbent, Boehringer arguably had no other choice. The circumstances are similar in the HCV example – ABBV’s Viekira Pak is very nearly as good as, but is no better than, GILD’s Harvoni – thus ABBV’s only realistic option for gaining market share is pricing

The trick here is deciding which variable’s influence – product mix or formulary power – has changed the most. We believe the answer is formulary power. There’s nothing unusual about large products losing patent protection, or about therapeutic areas gaining new entrants. What’s unprecedented is that the entry of new products into existing therapeutic areas is leading to large jumps in average discounts – but why now, and not before?

We believe the increase in average discounts reflects two related trends – a higher prevalence of co-insurance, and greater willingness on the part of formulary managers to simply exclude non-preferred drugs outright

Under co-insurance, patients’ out-of-pocket costs are a percentage[4] of the drug’s list price. Thus patients’ out-of-pocket costs are higher for drugs with higher list prices; and, out-of-pocket costs rise as prices rise. This contrasts with fixed dollar co-pays, under which patients’ out-of-pocket costs are independent of drugs’ list prices

Patients subject to co-insurance instead of co-pays plainly – all else equal (e.g. comparing 2 or more drugs on the same tier) – will prefer drugs with lower list prices. And, because patients who are subject to co-insurance face higher average out-of-pocket dollar costs (Exhibit 29), these patients are more likely to use manufacturers’ co-pay cards (whose subsidies reduce net pricing), and the co-pay cards these customers use must on average offer larger subsidies than to patients with fixed dollar co-payments. Because more beneficiaries are subject to co-insurance (Exhibit 30), the impact of co-insurance obviously is rising, and the subsidies delivered by manufacturers’ co-pay card programs are representing an ever-larger deduction to net price

Perhaps more important than the steady expansion of co-insurance is the somewhat sudden expansion of formulary managers’ willingness to throw brands off formulary altogether. When we first wrote about co-pay cards in 2012[5], we argued that a manufacturer would be nearly indifferent to having a product on the preferred tier at a co-pay of $30 and having a product on the non-preferred tier at a co-pay of $55, if the added rebate necessary to be on the preferred tier was $25. The reason (ignoring transaction costs and other frictions) is that co-pay cards make the two scenarios basically equivalent – by avoiding the added rebate and landing on the non-preferred tier the manufacturer can deliver a $25 subsidy with the co-pay card, which keeps the patient’s out-of-pocket (OOP) costs at the tier 2 level ($30), and costs the manufacturer the same as the rebate for preferred status

The problem is that we can no longer ignore ‘other frictions’. The above example assumes the formulary manager will allow the brand onto the formulary in the non-preferred tier – and the validity of this assumption arguably has been lost. With the apparent blessing of plan sponsors, formulary managers have been barring brands from formularies with ever greater frequency. This makes the strategy of getting on the non-preferred tier and using co-pay cards less viable, and makes the goal of getting on the preferred tier more essential – and thus worthy of a greater discount


  1. WAC = ‘wholesale acquisition cost’. WAC is synonymous with list pricing, and in the case of brands is reflective of the price (before minor prompt pay adjustments) that US wholesalers and other direct US buyers pay pharmaceutical companies for their products
  2. We calculate implied discounts by comparing third-party reported sales (gross) to company reported sales (net). Because third-party reported sales reflect end-user (generally retail prescription) demand, and company reported sales reflect shipments to wholesalers’ and/or retailers’ inventories, changes in inventories affect the implied discount calculation. Rising inventories make discounts appear smaller, and vice versa
  3. For more information, please see “The Bull Case for SNY’s Diabetes Franchise – Update”, SSR Health LLC, January 23, 2015
  4. The percentage is often, but not always, subject to minimum and/or maximum dollar limits. E.g. a given formulary tier might call for a 30% co-insurance rate, but might also require that the resulting out-of-pocket cost be at least $30, but no more than $200
  5. “Co-Pay Cards: A Bottle for the Drug Pricing Genie”, SSR Health LLC, August 8, 2012
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