BIG Monkeys & a Looming Intervention: Pharma’s US Pricing Addiction


US real pricing gains for drugs sold in the US are driving nearly all of the traditional large cap pharmaceuticals industry’s growth. Only Roche and JNJ have US sales growth that exceeds the rate of US price growth, i.e. every other company gets more than 100% of its US (and in many cases global) growth from US pricing gains

Obviously if US pricing power weakens, these companies cannot sustain anything approaching their current growth rates (or in many cases current rates of decline would sharply increase)

We believe co-pay cards are a serious and generally under-appreciated risk to US pricing power. Because manufacturers appear willing to keep patients’ out-of-pocket costs at manageable levels with co-pay subsidies, payors are likely to begin raising patients’ out-of-pocket Rx costs under the very reasonable expectation that manufacturers will respond by offering more generous co-pay subsidies. The extension of more generous co-pay subsidies (as are currently being provided to health insurance exchange beneficiaries) to the far larger population of employer sponsored beneficiaries has the potential to very nearly eliminate US real pricing gains. The only question is whether this will happen, and if so when (pls see our May 8, 2014 note for details)

Some companies clearly are more susceptible than others. Rapid and/or accelerating rates of price growth that account for very large percentages of US sales gains, pending major patent losses, high relative valuations, relative lack of cost offsets, and high dividend to gross profit ratios are key indicators of risk

We believe ABBV, LLY, NVO, and SNY are most susceptible to secular declines in US real pricing power, followed to a lesser degree by MRK

No companies are immune to the risks, though BAYR.Y, CELG, GILD, JNJ and Roche appear least at risk

N.B.: This note deals narrowly with companies’ ability to increase the price of a constant basket of goods over time, i.e. we’re not addressing the (also important) ability of companies to bring new products to market at higher and higher prices (e.g. Sovaldi), though we will address this in a later note. We believe companies’ ability to raise price on a constant basket of goods is very much at risk in the near- to mid-term; conversely we believe companies’ ability to launch innovations at current high prices is relatively secure in the near- to mid-term

For our full research notes, please visit our published research site

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