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May 25
State of U.S. Health Care & What’s Next: Pharma Spotlight

​Wednesday, May 16, 2018

Speaker: Curt Wanek, Biotechnology and Pharmaceutical Industries Analyst, Bloomberg Intelligence.

1.   Three pillars of Pharma

  • Large pharma – mature diversified large companies, e.g. Merck &Co, Pfizer, Johnson & Johnson.
    • Challenges: patent expiration, hard to growth given already high revenues, rebate pressures.
    • Opportunities: excess cash (in a highly acquisitive pharma space), diversification, innovation.
  • Biotech companies – Gilead, Amgen, Celgene.
    • Challenges: competition/ patent expiration, rebate pressures, finding ways for the new innovative therapies to be reimbursed.
    • Opportunities: excess cash, expertise, highly innovative (with immature pipelines, however).
  • Specialty generics – Teva, Mylon, Valeant, Mallinckrodt.
    • Challenges: significant price erosion due to competition, manufacturing challenges due to delays of FDA approvals, highly leveraged.
    • Opportunities: biosimilars are the biggest frontier, complex generics, and diversification.

2.    Drug Pricing

  • Drug pricing is extremely tangled involving consumers, pharmacies and pharmacy benefits managers, wholesalers, insurance companies, and manufacturers. This "web" (including rebates and reimbursement negotiations) is a big black box as a lot of information is still not open to the public.
  • The role of rebates has been extremely growing in the past few years – the total rebates for the top 11 bestselling drugs comprised almost $33bn in 2017, or 43% of the gross sales of those drugs reported by the manufacturers (compared to $11bn and 25%, respectively in 2014), meaning that for each $100 worth of drug manufacturers were giving almost $45 back to the supply chain.
  • As a result, even though the gross sales are growing the actual net sales (gross sales less rebates) remain stagnant.
  • Branded drug prices increase at lowest on the record (just below 2-digit price increase y-o-y) due to payer, political and public pushbacks - real innovation is a key for the branded drug prices (e.g. Gilead's Yescarta, AveXis' AVXS-101, Hemophilia Gene Therapy – probably will come to the market with over $1m price).
  • Outcomes/Value based care.
    • Outcomes based care is the idea that a drug should get reimbursed based on the therapeutic benefit it provides to a patient (as not all drug work for every individual and with the current system you will pay whether the drug works for you or not).
    • It is a reimbursement of the future though it has some challenges to overcome before it is adopted widely (no standard definition of outcome etc.).
    • The payment model will thus align the clinical value of the drugs with their price.
  • Generics drug prices are falling at unprecedented rates due to record FDA generic drug approvals, rising competition, and consolidation among buyers.
    • To combat generics price erosion pharma companies build strong pipelines, produce complex generics, biosimilars (at least $130bn per year potential market), use low cost structure and diversification.
    • We think generic price erosion is probably at the bottom (mixed feelings from Pharma companies, FDA generic drug approvals may drop by more than half y-o-y in 2018).  
  • Trump's American Patients First
    • More than 50 initiatives to lower prices, increase competition, and lower out-of-pocket expenses.
    • Key inclusions: incentives to discourage price increases, indication based pricing, various price transparency measures and measures to restrict the use of rebates, promoting competition for biologics, leverage Part D negotiating power for Part B drugs etc.
    • Did not include the ability for Medicare to negotiate prices.
    • Legacy generics may continue to see pricing pressure. Biosimilars and OTC drugs may see upside.

3.    M&A: Pharma is highly acquisitive

  • Mergers and acquisitions are big in 2018 – almost $150bn worth of deals in pharmaceutical sector YTD and more to come.
  • M&A is an urgency for large players: major pharma companies (Bristol Myers, Celgene, Gilead, Sanofi, GlaxoSmithKline and others) set M&A as a top priority – while Celgene and Sanofi have already done big deals there are still more companies that have high urgency for deals.  

4.    Not all ETFs created equal

  • IBB vs XBI: A lot of overlap between the two but the equal weighting of the XBI allows it to capture more of the upside from acquisition targets.
  • Niche ETFs newly created may offer exposure to areas on the edge of science:
    • CNCR offers direct exposure to immunotherapy
    • ARKG - genomic revolution exposure

Q&A: 
1.  Some of those drugs you mentioned are worth $1m: how will the countries/families with single payers be offered to buy them? Or will they not be offered at all?​

  • Those drugs has not yet been approved.
  • The current pricing system needs to be changed.
  • In case of no changes to the pricing system the demand for those drugs could be so low that they may not have significant impact on pharma companies' performance.

 2.  Sources of pricing pressure?

  • Generics players from India are making their way in decreasing prices,
  • All major pharma companies have to compete with decreased prices.

3. Are drug companies willing to use outcome/value based models? What are the drug costs structure?

  • PBM (Pharmacy Benefits Managers) block the initiative.
  • Reimbursement system is a big black box – no public info on how much rebate is given for a drug.
  • Rebate system will be there but in some other form - it has to change.
  • PBM models are going to be changed. Now it's a vicious circle – drug companies increase prices, PBMs increase rebates.
  • Outcome value based care is a reimbursement model of the future.

 4. Talking about margins - how much prices have to go down until pharma companies become bankrupt?

  • Depends on type of drugs and existing margins, e.g. injections have higher margins.
  • Companies have to deal with increasing competition.
  • Drug prices here are elastic.
  • Margins for some of the generic drugs are already negative.

5. One of the recent proposals is to name the price when advertise drugs. Will that have any effect?

  • Absolutely yes.
  • People may not even want to consider buying too expensive drugs regardless of potential positive effect. ​

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