As the presidential race enters the final lap, rhetoric around political drug pricing remains high and the pharmaceutical and biotech sectors are lagging the broader market year-to-date. However, in my opinion, US political drug pricing fears are overstated and investors should be more concerned about commercial drug price and market access pressures when deciding whether to invest in pharmaceuticals and biotechnology companies.
I am sceptical about the likelihood of political legislative change. Any kind of joint agreement on drug pricing seems highly unlikely given the decline in bipartisanship between Republicans and Democrats in the last eight years. Also the ability of any president to act unilaterally will be constrained by the inability of either party to impose its plans unless it controls the Presidency, 60% of Senate (required to take any proposed bill to a Senate vote, even though only a majority vote is required if a bill does come to a vote in Senate) and more than 50% of Congress.
Furthermore, noise about controls on drug pricing from the two US presidential candidates Hilary Clinton and Donald Trump has moderated very recently. Trump’s updated proposals on his website (5 October) removed priorities previously listed that related to drug pricing, specifically about allowing parallel imports of drugs from “trustworthy” countries. Clinton’s article in a medical journal (Journal of the American Medical Association) on 30 September focused on streamlining approval of biosimilar and generic drugs and addressing price spikes in older drugs. However, it was explicit about not penalising real innovation.
What are Pharmacy Benefit Managers? Pharmacy benefit managers (PBMs) process prescriptions on behalf of payers i.e. insurers/employers and use their size to negotiate with drug makers and pharmacies making money (typically a mid-single digit EBIT margin) through services fees for processing prescriptions, operating mail order pharmacies and negotiating rebates from drug manufacturers and pharmacies, taking advantage of their scale.
A formulary is a list of drugs approved for reimbursement by a PBM in order to encourage clinically appropriate and cost-effective prescribing. The big PBMs have their own formularies which payers can sign up to, typically covering approximately. one third of the total lives a PBM covers or they can ask the PBM to develop a formulary specific for their plan.
Commercial pressures are increasing in terms of pricing of older drugs and market access to newer drugs, at least in high volume classes of drugs such as cardiovascular/metabolic and in respiratory drugs. For example, in the third quarter (of 2016), two of the three big pharmacy benefit managers (PBMs) excluded the most widely used long acting insulin (Sanofi’s Lantus) from their formularies for 2017 in favour of a biosimilar (Lilly’s basaglar) that hasn’t even reached the market yet, and pricing for the entire class of long acting insulins has declined substantially. In the last year, only 30% of prescriptions written in the US for the new class of cholesterol lowering drugs – the PCSK9s, Praluent (Sanofi/Regeneron) and Repatha (Amgen), to treat patients where statins don’t work or can’t be used – have been filled.
The pharmaceutical and biotechnology industry is fighting back. Speaking last month, Allergan’s CEO Brett Saunders publicaly committed to keeping price increases on branded drugs “to an acceptable level”. More generally, the industry is highlighting that net price inflation i.e., the price the manufacturer realises for supplying a branded drug, has dropped in recent years (see following chart). The gross price is the “sticker price” but that is not the price realised by the manufacturer.
Some manufacturers have gone even further. After, Hilary Clinton recently drew attention to the 400% increase (since 2007) in Mylan’s Epipen gross pricing, Mylan responded by highlighting that the gross price was more than twice the net price it received, blaming the middlemen for the extent of the mark-up on price.
It seems to me that the PBMs are becoming increasingly aggressive in negotiating drug prices and market access in order to justify their profitability to their own customers – the health insurers and employers who utilise their services. They are supporting their arguments for restricting access to drugs citing “real world”, sometimes unpublished, data demonstrating that good compliance to cheaper drug regimens can bring about the same outcomes as newer more expensive drugs.
Consequently, pharmaceutical and biotechnology companies are increasingly looking to generate their own health economic benefit data, both in clinical trials looking at outcomes, and post launch, in order to justify both price and market access to the payer. Realistically the companies may have to take their arguments to the ultimate payers as well as the middlemen in order to maximise the returns on their investment in developing new drugs.
If drug pricing reform fears dissipate post-election as it becomes clearer that the new president has limited scope to act, investments in the pharma/biotech sector may benefit. However, as discussed in a previous blog the broad move from volume to value-based reimbursement of all healthcare in the US, including drugs, is inevitable regardless of whom the next president is. Furthermore, the commercial drug pricing and market access pressures highlighted above won’t fade away. In the long run, companies have to develop drugs that treat real unmet clinical needs and offer a clear health economic benefit to the ultimate payer – the insurer/employer, in order to convince payers to pay and ultimately be successful.
Investing in truly innovative drug companies that grasp this and act on it will be a long-run winning investment strategy.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.