Price hikes are dead – long live price hikes

Big pharma’s freezes have stopped drug price inflation in its tracks, but the temptation to make more hikes could return post-election.

Vantage views

The battle between US lawmakers and biopharma groups over drug prices is at an uneasy truce, with freezes promised by executives having moderated inflation this year and politicians’ rhetoric cooling.

The near-zero drug price inflation recorded by federal statisticians has defied forecasts – in part because the price freezes are an extraordinary event – but it raises the question of how big pharma will behave once the US congressional elections have concluded in less than a month. Price hikes accounted for more than half of the sales increase for high-profile products from big pharma between 2014 and 2017, according to a sellside analyst report, and the temptation to return to that growth strategy will be strong.

Laying low

It is hard to deny that President Trump's bully pulpit has forced biopharma into retreat on pricing. In eight of the 22 months since the 2016 election, the drug consumer price index has been negative, with four of those months coming in 2018, according to the US Bureau of Labor Statistics. In July, prices fell 1%, and in August inflation stood at 0%, according to BLS.

That is a reversal from the years that preceded it. Leerink analyst Geoffrey Porges evaluated revenue from 45 of the largest pharma products between 2014 and 2017 and yesterday concluded that 61% of the growth in sales – $14.3bn of the $23.3bn in revenue growth – was down to price increases. The price hikes were not consistent across all 45 products – for example, Mr Porges suggested that price increases accounted for more than 100% of the revenue growth for Amgen’s Neulasta, implying that the revenue jump came despite falling volumes. For Merck & Co’s Keytruda, however, only 1% of its revenue growth was attributable to increased price.

How US prices increases have affected selected drugs
Company Drug 2014 US revenues ($m) 2017 US revenues ($m) US rev difference, 2014-17 ($m) Leerink’s estimated price contribution to 3yr US rev growth ($m) Leerink’s estimated price share of 3yr US rev growth ($m)
Amgen Neulasta 3,649 3,931 282 644 228%
Johnson & Johnson Remicade 4,155 4,525 370 592 160%
Amgen Enbrel 4,404 5,206 802 1,131 141%
Biogen Tecfidera 2,426 3,294 868 384 44%
Merck & Co Keytruda 48 2,309 2,261 23 1%
Total of all 45 drugs Leerink examined 84,137 107,458 23,321 14,262 61%
Source: adapted from Leerink note.

At mid-year, at least five big pharmas had committed to price freezes, albeit in ways that could cast doubt on their sincerity (Vantage view – More change needed to make US pricing truce permanent, July 24, 2018). With the fiercely fought US midterms approaching, it would probably be unwise to raise prices now and put a target on the back of the sector.

Forecasters from the Centers for Medicare and Medicaid Services had anticipated 4.4% price growth in 2018 because “the dollar value of drugs losing patents in 2018 is smaller than in prior years”. They look only at economic factors, not political ones; when they come to make their forecasts for 2019 their baseline assumptions will need to be redrawn.

Look to 2019

But the CMS’s forecast does speak to the underlying trends in drug prices, and raises the question of what will happen when the heat is off. Certainly, Pfizer made no bones about its freeze remaining in place until the end of the year at the latest, and other big pharmas will likely take their cue from this. 

Third-quarter and year-end earnings reports will be closely watched for signs that sales have begun to falter as a result of price freezes. Beyond that, investors will likely become restless at the idea that biopharma has spent billions to develop projects for which it cannot maximise prices. For example, the expectations building around gene therapies, now expected to hit $13bn in sales in six short years, will certainly have investors presuming pricetags near $1m.

These pressures, combined with a shift in political emphasis to the rebating practices of pharmacy benefit managers, could offer an opportunity for drug makers to quietly raise prices. Look for a window around the end of 2018 for prices to surge again, before a new US Congress can organise itself. But in future, achieving similar growth to that seen in 2014-2017 might be a bigger task.

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