US Rx Brand Pricing: Trailing analysis of net price growth; forward look at brands / companies facing greatest risks

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Richard Evans / Scott Hinds / Ryan Baum / Hardy Evans

203.901.1631 /.1632 / .1627

revans@ / shinds@ / rbaum / hevans@ssrllc.com

@SSRHealth

May 25, 2016

US Rx Brand Pricing: Trailing analysis of net price growth; forward look at brands / companies facing greatest risks

  • List prices for US prescription brands grew 11% (sales weighted average) in 4Q15; net prices grew just 2.1%. List and net US pricing trajectories are the product of three major influences: 1) specialty pharmaceuticals; 2) formulary exclusions; and 3) price protection clauses
  • Net price gains from select spec pharma companies’ (e.g. VRX, HZNP, ENDP) aggressive pricing and reimbursement practices have stalled, and are beginning to reverse as payors force prices of these companies’ products down to the level of feasible alternatives
  • The practice of excluding one or more key brands from formulary (e.g. as has been done in COPD combos, long- and short-acting insulins, and HCV) has produced steady net price declines in these categories over multiple quarters. COPD combo pricing levelled off in 4Q15 (exclusions began in 1Q14); net prices continued falling in 4Q15 for the insulins and HCV
  • Formulary exclusions are likely to be rolled out in other categories where conditions are suitable (2 or more reasonably interchangeable brands); potential categories at near-term risk are DMARDs, multiple sclerosis (orals), wet AMD, oral anti-coagulants, SGLT2 inhibitors, and inflammatory bowel disease (IBD). We see potential exclusions in both the DPP4 and GLP-1 agonist categories if and when the competing brands prove their CV safety (circa 2019)
  • Companies most at risk from likely near-term formulary exclusions are UCB (Cimzia), AMGN (Enbrel), ABBV (Humira), BMY (Orencia), BIIB (Tecfidera), SHPG (Pentasa/Lialda), and REGN (Eylea)
  • Price protection clauses agreed between brand manufacturers and formulary managers may have the paradoxical effect of accelerating list prices. A considerable portion of PBM contracts have fixed per-Rx rebate commitments to plan sponsors; if rebates paid to honor price protection clauses (i.e. rebates that bring list price gains down to the price protection ceiling) grow faster than PBMs’ fixed per-Rx rebate commitments to plan sponsors, PBMs pocket the difference. Knowing this, manufacturers are reluctant to allow competitors’ products to become more profitable to PBMs, thus paradoxically companies are likely to err on the side of faster list price inflation

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. ABBV, BMY, GILD, SHPG, SNY, VRTX); Biopharma companies with pending major product approvals (e.g. ABBV, ACAD, ADMA, ALIOF, BIIB, CHMA, CLVS, CPRX, CTIC, GILD, ICPT, JAZZ, LLY, LPCN, MRK, NVO, OCUL, PTCT, SRPT, TEVA, ZSPH); SNY on sales potential for Praluent (alirocumab); 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: PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WBA, CVS); ENDP on risks to branded Rx price premia; 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)

Where pricing is likely to change

Specialty pharma

Aggressive pricing and claims submission practices from specialty pharmaceutical companies (e.g. VRX, HZNP, ENDP) are unlikely to continue, and much of the accrued gain is likely to reverse as payors force prices for these companies’ products back toward the level of feasible substitutes. Details on why we believe this will occur, to whom and to what degree, are covered in earlier publications[1]

Therapeutic areas

We believe that the practice of excluding one or more brands from formulary outright, rather than including all brands on formulary across more or less generous tier levels, explains much of the difference between aggregate list and net price gains since roughly 1Q14. Major categories in which this strategy has been applied include COPD/bronchodilators (Advair (GSK) v. Symbicort (AZN)), long-acting insulins (Lantus (SNY) v. Levemir (NVO)), short-acting insulins (Humalog (LLY) v. Novolog (NVO)), HCV (Sovaldi / Harvoni (GILD) v. Viekira Pak (ABBV)), and erectile dysfunction (ED, Viagra (PFE) v. Cialis (LLY))

The only necessary pre-condition for this ‘musical chairs’ strategy to work is a category with at least one more brand than is truly needed. In Exhibit 1a, we list major therapeutic categories in descending order of US net sales, show the rate of net price change by category (and each category’s contribution to total market net price change), and identify which categories either have been subjected to aggressive formulary exclusions, or are likely to be. In Exhibit 1b we identify the brands whose US pricing is at risk, and show the relevance of these brands’ trailing net pricing gains to companies’ revenue growth. HCV, insulins (long-, short-, and rapid-acting), COPD combination therapies, and erectile dysfunction (ED) all have been subjected to outright formulary exclusions; and, in the cases of HCV and long- and short-acting insulins, real prices continue to fall

We believe the DMARD category is at risk of seeing outright formulary exclusions for newly diagnosed patients[2]; until recently Humira (ABBV) was preferred for the newly diagnosed in part because it was expected to be the first DMARD with a biosimilar alternative. Now that biosimilars to Humira are unlikely to appear any earlier than biosimilars to other DMARDs, payors have little or no reason to favor Humira for the newly diagnosed. Successful defense of the new Humira US patents against inter partes review challenges is a prerequisite to significant DMARD price pressure

Oral MS agents (Aubagio (SNY), Tecfidera (BIIB), Gilenya (NVS)) are reasonably interchangeable, giving payors the option of excluding, or at least highly restricting, at least one of these options. The Wet AMD (Lucentis (Roche) v. Eylea (Bayer)) and Factor Xa (Eliquis (BMY) v. Xarelto (JNJ)) categories both have two large, reasonably interchangeable brands, and accordingly are at risk of more restrictive formulary exclusions. The DPP-4 category is unlikely to see forced exclusions until and unless Tradjenta (LLY) outcomes trials (due to complete late ’18 / early ’19) prove Tradjenta’s CV safety; after this point formularies should be able to exclude either Januvia (MRK) or Tradjenta. The GLP-1 agonist category also is dominated by two long-acting brands (Victoza (NVO) and Trulicity (LLY)) that are reasonably interchangeable; CV outcomes data should be available for Victoza later this year, and for Trulicity by 2019

The SGLT-2 category is dominated by Invokana (JNJ), with Farxiga (AZN) in a relatively distant second position, but still close enough to Invokana to be a feasible substitute. Price inflation in the category is modest and the category is young and small enough that brand preferences are still evolving and overall pressure on benefit costs remains modest. As such we don’t expect SGLT-2 category exclusions in the immediate future

The IBD category’s three major brands (Delzicol (AGN), Pentasa (SHPG), and Lialda (SHPG)) are all mesalamine-based treatment options and thus arguably interchangeable. Price competition is limited – but not obviated — by the fact that SHPG controls two of the brands

Testosterone therapies are all highly interchangeable; however, falling unit demand limits the odds of restrictive formulary changes

Discounts largely offsetting list gains; pricing patterns vary greatly by company

Net pricing for US Rx brands grew 2.1% in real terms in 4Q15, as compared to WAC gains of 11% (Exhibit 2); the large difference between WAC and net is explained by rising average discounts (Exhibit 3). Large and small molecule net pricing trends are roughly similar (Exhibit 4), though average small molecule discounts remain substantially greater than average large molecule discounts (Exhibit 5)

The variance in net price change across companies is extreme (Exhibits 6a thru 6c); this variance reflects companies’ relative exposures to therapeutic areas with greater or lesser degrees of pricing power, and also marked disparities in companies’ pricing strategies (e.g. spec pharma v. traditional large caps). It should be noted that this variance in pricing power by sector, company, and therapeutic area is a departure from long-term historic trends in which pricing gains were more uniform. The obvious implications are that understanding company-specific pricing trends is crucial to informed stock selection, and anticipating therapeutic area level pricing developments is at least as important as anticipating theoretical pricing pressures (e.g. perceived risks of US federal pricing actions) at the macro level

We expect the net pricing gains seen by more aggressive specialty pharma companies (e.g. VRX, HZNP, ENDP) to stall at the very least and in all likelihood to reverse; and we do not expect similarly aggressive pricing strategies to succeed in the future. At the therapeutic area level, we expect the pattern of formulary exclusions to continue – i.e. where possible in larger and/or faster growing categories we expect formularies to eliminate one or more brands entirely, rather than simply covering all brands at differing tier levels

N.B.: Our estimate of US net pricing growth for 2Q15 is now 2.1%, up significantly from the 0.7% estimate we published in September of last year. The revision to our estimate is entirely driven by changes to underlying volumes as reported by our third party data vendor. The data stream we relied on in last September’s note was under-reporting volume for specialty products, over-reporting volume for more traditional products, and thus over-reporting units in the aggregate. Because third-party reported volumes were too high, our estimate of net price (which we solve for by backing volumes out of company-reported net sales) was too low. Our conclusion that US net pricing power is under increasing pressure as a result of formulary exclusions is unchanged, as is our conclusion that aggregate US net pricing gains will decelerate

Trailing price patterns

Largest contributors to net pricing gains by company

AMGN was the largest contributor to US net pricing gains in the trailing four quarters ending 4Q15, followed by ABBV, JNJ, Roche and VRX (Exhibit 7); together these five companies account for just less than two-thirds (62%) of US brand net price inflation for the period

Enbrel accounts for more than 2/3rds of AMGN’s net pricing gains; Enbrel net pricing has accelerated along with the broader DMARD category; however, we expect pricing in this category to decelerate, largely because of the weakened outlook for Humira’s US patent estate

Humira accounts for more than 2/3rds of ABBV’s net pricing gains. Until 4Q15 payors expected Humira to be the first DMARD product to have a US biosimilar; however, in 4Q ABBV disclosed additional patents on Humira that have clouded the question of which DMARD will be the first to have biosimilar competition. We believe payors’ expectations of pending biosimilar competition for Humira had much to do with their willingness to accept Humira’s rapid pricing gains; now that the timing of Humira biosimilars is less certain, payors are more likely to organize price competition among the DMARDs, at least for newly diagnosed patients. Accordingly, we see price and/or volume pressure on Humira as likely in 2016, particularly if and when the newly issued patents clear inter partes review

Zytiga (24% of trailing four quarter gains) and to a lesser degree Stelara (17% of trailing four quarter gains) have dominated US net pricing gains for JNJ. Zytiga (with or without Xtandi) is cornerstone therapy for castration-resistant prostate cancer, and because of this has substantial continued pricing power. Stelara’s indications (psoriasis, psoriatic arthritis, Crohn’s) are a subset of the broader DMARD category; because of likely decelerating prices in the DMARD category, Stelara’s pricing also is likely to decelerate in subsequent quarters

Avastin accounts for 30% of Roche’s 4Q15 US net pricing gains, followed by Rituxan at 25%. Neither product shows especially rapid net pricing gains (9.6% and 6.5% respectively for 4Q15), thus these products’ contribution to overall market net price movement has much to do with their large sales totals. Avastin’s US patents expire in 2019, at which point biosimilars are likely to be in, or through, FDA review. Rituxan’s US patents expire in September of this year; however follow-on versions are only in phase 3 trials

Valeant’s net pricing gains are spread across a relative large number of relatively small products. As we’ve described elsewhere[3], we expect a considerable portion of Valeant’s US net pricing gains to reverse in 2016

Largest contributors to net pricing gains by category

The DMARD category drove more than one-third of total US Rx net pricing gains in 4Q15; the next closest category (multiple sclerosis) drove roughly 14%. The top ten contributions by product category are provided as Exhibit 8

Humira has been setting the pace for net pricing gains in the DMARD category for more than two years (Exhibit 9). As previously mentioned we believe Humira benefitted from payors’ belief that the drug would be the first in the category to see follow-on biologic competition. Because switching patients from one DMARD to another is impractical, having as many patients as possible on Humira before its follow-ons arrived was an obvious priority for payors. Now that Humira follow-ons may arrive no sooner than follow-ons for other DMARDs, we doubt Humira can continue both its dominance of newly diagnosed patients and its rapid net pricing gains. Accordingly, we expect to see a decelerating rate of net pricing gains in the category from here forward

The multiple sclerosis category has seen relatively dramatic US net pricing gains over the past four years (Exhibit 10), led most recently by Tysabri (BIIB), Avonex (BIIB), and Aubagio. We see some risk that formularies could reduce the number of oral options (Aubagio, Tecfidera, Gilenya) carried from 3 to 2, or at the very least believe formularies are likely to require patients to fail a preferred first-line oral (presumably either Aubagio or Tecfidera) before granting coverage for either of the remaining orals

Largest contributors to net pricing gains by product

The 10 largest product-level contributors to US net pricing gains over the trailing four quarters ending 4Q15 are listed in Exhibit 11. Enbrel (1st), Humira (2nd), Rituxan (5th), Avastin (8th), and Zytiga (10th) are discussed under their respective companies in an earlier section

Both Avonex (3rd) and Rebif (Merck KGaA), the two forms of interferon beta-1a used in multiple sclerosis, have been accelerating price in an apparent attempt to keep sales relatively stable in the face of large volume declines (Exhibits 12a, 12b)

Lyrica (4th, PFE) dominates its category; since 2012 pricing growth has been relatively rapid in an apparent attempt to offset flat unit demand (Exhibit 13). In the absence of close substitutes and with generic entrants due in late 2018, net pricing gains are likely to continue until the LOE

Neulasta (6th, AMGN) had the lowest rate of net pricing gain (6.7%) among the major contributors, and ranks among the larger contributors mainly because of its relatively large sales base

Cialis (7th, LLY) / Viagra (9th, PFE) both accelerated pricing as Levitra began losing relevance (Exhibit 14). Some payors (e.g. CVS/Caremark) are responding by excluding one of the two brands, and this is likely to stall net pricing gains. Generic forms of both products are due in December of 2017

Largest negative contributions to pricing trend by company

Only GILD, SNY, and GSK made substantial negative contributions to the overall pricing trend; in aggregate these three names’ net pricing declines are approximately one-third the size of the total market’s (positive) net price change

GILD’s US net pricing declines are driven entirely by Harvoni and Sovaldi, as a direct result of price competition initiated by ABBV’s Viekira Pak in 1Q15 (Exhibits 15a, 15b)

SNYs’ US net pricing declines are driven entirely by falling average net price for Lantus (Exhibits 16a, 16b)

Just over half of GSK’s US net pricing declines are explained by Advair; net pricing declines for Flovent and Ventolin each explain about one-quarter of GSK’s overall net pricing decline (Exhibit 17)

Largest negative contributions to pricing trend by category

Long-acting insulins, HCV antivirals and DPP-4 inhibitors were the major negative contributors to net pricing in 4Q15 (Exhibit 18)

List price gains in the long-acting insulin category have stalled (Exhibit 19), and average discounts have risen sharply (Exhibit 20), the result being a drop in average net costs across the category (Exhibit 21). These patterns represent the continuing effects of formulary managers’ decisions to narrow their formularies to a single long-acting insulin, forcing a reversal of the cooperative pricing that had until 2014 prevailed between SNY (Lantus) and NVO (Levemir). Average net prices for an annual treatment course are now back to mid- / late-2013 levels (Exhibit 22), and could easily fall further

All indications are that average discounts continue to increase in the HCV category (Exhibit 23), bringing average annual treatment costs steadily lower (Exhibit 24). We believe MRK’s Zepatier will effectively displace ABBV’s Viekira Pak in the US because of the latter drug’s safety concerns, and early evidence suggests this is beginning to play out (Exhibit 25). Thus pricing is more likely to reflect competition between GILD and MRK; and, because MRK has shown a willingness to price Zepatier aggressively[4], and also because lower prices will be necessary to reach less clinically severe patients, we expect net pricing in the category to continue falling. Elsewhere[5] we’ve argued that US net pricing will need to approach the $30,000 per treatment course level to reach patients who are HCV positive, but who do not yet have clinical evidence of significant liver damage. As of 4Q15 we estimate average US net pricing was roughly $39,000

Average net prices in the DPP-4 category have begun to fall, and this appears to be the result of the race for second place (between Onglyza (AZN) and Tradjenta (LLY)) heating up. All of the main brands in the category produce similar blood glucose and diabetes surrogate marker (e.g. HbA1c) effects. However only Januvia (MRK) has cleanly separated itself[6] from cardiovascular safety concerns that have followed the category since its birth. The CV safety evidence is mixed for Onglyza, with at least one major trial[7] indicating Onglyza increases risks. There is no direct link between Tradjenta and CV risks, and Tradjenta’s pivotal CV outcomes trial[8]is ongoing, with results expected in early 2019. Tradjenta relies primarily on enterohepatic clearance, where both Januvia and Onglyza rely on renal excretion. As a result, Januvia and Onglyza require dose adjustment in the frequent event that patients have impaired renal function, but Tradjenta does not. This gives Tradjenta a potential clinical edge over Onglyza in the race for second behind Januvia, and all evidence suggests Tradjenta added more aggressive discounting to its bid for second place in late 2014 (Exhibit 26), putting Onglyza’s net pricing under pressure (Exhibit 27). It’s possible – but by no means guaranteed – that Januvia’s pricing can remain stable while Onglyza and Tradjenta fight for second, at least until Tradjenta’s CV outcomes data appear in early 2019

Largest negative contributions to pricing trend by product

Sovaldi (GILD), Lantus (NVO), and Prevnar (PFE) all made significant negative contributions to the net pricing trend ending 4Q15 (Exhibit 28). Sovaldi’s net price decline is the result of price competition in the HCV space which is covered earlier in this note; similarly, Lantus’ negative contribution is the result of price competition in the long-acting insulin space which is also covered earlier

Prevnar’s negative contribution is almost certainly a mix-shift toward the adult dosage form following recent recommendations for adult vaccination. Prevnar’s US list price is $159.58 per dose for both pediatric and adult use; however, CDC’s contract price for adult use ($96.13) is well below the contract price for pediatric use ($120.39)

 

  1. “While Gulliver Slept: The Rapid Pace and Fragile Pre-Conditions of VRX’s US Pricing Power”, SSR Health LLC, October 14, 2015; “VRX: Belt & Braces Analysis of US Rx Price / Volume. Price Still Wins”, SSR Health LLC, October 22, 2015; “VRX: The Balance of Power Between Valeant and Formulary Managers”, SSR Health LLC, January 5, 2016; “HZNP/MNK: The Balance of Power Between HZNP / MNK and Formulary Managers”, SSR Health LLC, January 12, 2016; “VRX, ENDP, HZNP, and MNK – A Comparison of US Pricing Risks” SSR Health LLC, March 28, 2016
  2. Switching patients from one DMARD to another is so difficult as to be impractical; thus formulary changes are likely to be limited to the newly diagnosed
  3. “The Balance of Power Between VRX and Formulary Managers – An Empiric Framing”, SSR Health LLC, January 5, 2016; and, “VRX, ENDP, HZNP, and MNK – A Comparison of US Pricing Risks”, SSR Health LLC, March 28, 2016
  4. For example, the Department of Veterans Affairs (VA) agreed to cover HCV antivirals for HCV+ veterans, regardless of disease stage, immediately after MRK disclosed its US pricing
  5. “GILD/MRK/ABBV: Why Everyone Wins if US Pricing Falls (In a Certain Way)”, SSR Health LLC, February 3, 2016
  6. TECOS trial
  7. SAVOR-TIMI 53 trial, October 2013
  8. CAROLINA trial; late 2018 / early 2019 completion

 

©2016, SSR, LLC, 1055 Washington Blvd, Stamford, CT 06901. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. In the past 12 months, through a wholly-owned subsidiary SSR Health LLC has provided paid advisory services to Pfizer Inc (PFE) and to Merck (MKGAY) on both securities-related and non-securities-related topics

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