US Drug Pricing in 2012 – The Slowing Crowd

Print This Post Print This Post

We expect US brand drug pricing to decelerate in 2012. Whether we’re right or wrong should soon be known; much of the industry’s annual pricing actions fall in January, and we believe the January actions of the early companies influence the tempo of those that follow. Three companies have reported thus far; as yet there’s no clear trend, but we’ll update regularly on this blog as January pricing actions occur

For obvious reasons, the rate of growth in US brand drug prices typically decelerates into presidential election years, particularly when prices grew in real terms the year prior (Exhibit 1). Brand drug pricing has been accelerating in recent years (Exhibit 2); accordingly the typical conditions for an election-year deceleration in real pricing have been met

Despite the consistent historic trend whether, and to what extent, brand drug prices may decelerate in 2012 is an inherently subjective call. To begin with drug pricing is a balance of risk and need – political risks presumably are at least very slightly lower than in other election cycles for the simple reason that the health care ‘channel’ of the broader electoral ‘bandwidth’ is dominated by the binary question of whether the Affordable Care Act (ACA) should be repealed. And, the need for US real pricing gains is substantially higher than in past election cycles both because US revenue growth is far more reliant on real pricing than perhaps ever before (Exhibit 3), and because ever-tightening EU budgets continue to force global sales forecasts lower. Continuing on the subjective theme, we believe that in any recent (past 2 decades) year brand drug pricing behavior follows a crowd dynamic governed by a collective sense that double-digit increases are somehow ‘too high’, and by an individual sense of not wanting to post the highest rate of increase, or even to be among the top three – and in our experience this crowd dynamic – and its slowing effect on pricing — is particularly acute in election years

It follows that the pricing behavior of larger companies that tend to take much of their total annual price increases in January / February may be predictive of pricing actions by the companies who follow, and thus also predictive of the price trend for the full year

Over the last five years the large capitalization brand manufacturers have generally followed a January / July pricing rhythm (Exhibit 4), with the majority of the year’s total effective price increase falling in January. Exhibit 5 gives detail by company, showing the average percentage of total annual pricing action falling in any given month during the last five years

As of today only 3 of the large cap manufacturers have announced pricing actions (AZN, BMY, PFE, Exhibit 6). AZN’s January 2012 pricing action was on par with January 2011’s. BMY’s January 2012 action was much larger than the January 2011 increase, though this may simply signal that BMY is returning to its longer term habit of taking major actions in January instead of February (in 2011 BMY took its largest increase in February (6.8%) on its way to a cumulative annual increase of 10.1%). PFE’s January action of 7.0% is substantially below its year prior January increase of 9.2%

On net it’s simply too early to project the 2012 pricing trend from three January actions, though as January and February unfold we expect the 2012 pricing trend to become quite clear. We will update Exhibit 6 as each company takes its first 2012 pricing actions, and will post these updates on this blog. We hope to see you back here


Print Friendly, PDF & Email