Why US Brand Rx Pricing Has Stalled, and Who’s Most at Risk

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Richard Evans / Scott Hinds / Ryan Baum


203.901.1631 /.1632 / .1627

richard@ / hinds@ / baum@ssrllc.com


September 8, 2015

Why US Brand Rx Pricing Has Stalled, and Who’s Most at Risk

  • Despite continued rapid list-price inflation, on a sales-weighted basis, net (after all rebates and discounts) pricing for US prescription brands grew just 0.7% in 2Q15, as compared to 4.4% in the year prior quarter
  • Net price declines in 4 major categories (rapid-acting and mix insulins, long-acting insulins, COPD combos, and HCV) explain the vast majority of the slowdown. All 4 instances are the result of a shift in formulary management; specifically formulary managers’ (and their plan sponsors’) newfound willingness to exclude major brands (and even category leaders) from formulary, rather than simply relegating these to higher, less-preferred tiers
  • This more aggressive approach to formulary management will likely spread to other drug categories. We believe major brand exclusions and associated net pricing declines are highly likely in the erectile dysfunction (ED), multiple sclerosis (MS), and GLP-1 categories. And, we believe brand exclusions and net pricing erosion is reasonably likely in both the oral anticoagulant and irritable bowel disease (IBD) categories
  • For the large cap pharmaceutical companies, US net pricing gains account for roughly 46% of total WW revenue growth over the past 3 years; as such threats to US pricing power are very potent threats to global revenue and earnings prospects. Among the large caps we anticipate US pricing weakness for ABBV, AZN, Bayer, GSK, LLY, MRK, PFE, and SNY. Conversely we see relatively strong US pricing outlooks for BMY, JNJ, NVS, and Roche


Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. AMGN, BMY, CELG, GILD, SNY, VRTX); Biopharma companies with pending major product approvals (e.g. ABBV, ALIOF, AMGN, AZN, BDSI, BIIB, CLVS, ENDP, GNMSF, HLUYY, HSP, ICPT, JAZZ, LLY, MACK, MRK, NVS, PTCT, RLYP, RPRX, SHPG, SNY, SRPT, TSRO, UCBJY, ZSPH); SNY on undervalued basal insulin franchise and sales potential for Praluent (alirocumab), in addition to its undervalued pipeline; RAD as an acquisition target as WBA and CVS seek to defend against narrowing retail networks; CFN, BCR, CNMD and TFX on rising hospital patient volumes; XRAY and PDCO on rising dental patient volumes and rising average dollar values of dental products and services consumed per visit; CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WBA, CVS); Research Tools & Services companies as growth expectations and valuations are too high in an environment of falling biopharma R&D spend (e.g. CRL, Q, ICLR); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE)

Summary and Conclusions

Quick summary of trailing US pricing growth, by the numbers

US branded pharmaceutical net pricing (adjusted)[1] grew by 0.7% in 2Q15, down from 0.9% in 1Q15 and 4.4% in the year prior quarter (Exhibit 1)

ABBV, Roche, AMGN, BMY and NVS contributed the most to sales-weighted net price gains; conversely GILD, SNY, GSK, CELG, and ALPMY contributed the most to sales-weighted net price losses. Exhibit 2a lists the 5 firms with the largest contributions to net price gains in each quarter since 1Q13, the percentage of sales-weighted net price gains explained by each firm in each quarter, and the rate of net pricing growth for each firm in each quarter. Exhibit 2b provides the same information for the 5 firms contributing the most to net price losses in each quarter since 1Q13

Exhibit 3a lists the ten therapeutic areas that made the largest contributions to net pricing gains in the quarter; gains were dominated by DMARDs, HIV, MS, ED, and hyperphosphatemia. Exhibit 3b lists the ten therapeutic areas that made the largest contributions to net pricing losses in the quarter; losses were dominated by HCV, long-acting insulins, COPD combos, rapid-onset insulins and insulin mixes, and treatments for Wet AMD

  1. Why has US pricing slowed, and is this a permanent shift?

The rate of US brand pricing growth arguably is a balance between two major forces: the rate of innovation, and formulary power. Complicating matters, the rate of innovation is a door that swings in two directions – innovation brings new technologies that generally sell at a premium to the technologies they displace; however the pace of innovation also can be such that major new technologies (e.g. Sovaldi, Harvoni) quickly face competitive versions (e.g. Viekira Pak) of interchangeable technologies

Our view is that the recent deceleration in US brands’ net pricing has been caused mainly by more aggressive use of formulary power. Specifically, formulary managers have gained, and exercised, the right to exclude major brands – even category leaders – from drug formularies

Until recently, formulary managers’ threats of exclusion were relatively weak, particularly in the case of major and/or category-leading brands. The reasons were straightforward – plan sponsors were willing to allow formulary managers to exercise ordinal power, i.e. putting some brands in preferred positions and others in non-preferred positions – but were unwilling to allow formulary managers to exclude major brands outright. In the case of a formulary with some brands in preferred positions and some in non-preferred positions, but with all major brands covered, plan sponsors could be assured that beneficiaries who truly needed the non-preferred brands could gain access to these with at least some financial assistance from the beneficiaries’ health coverage. In the case of a formulary that excludes one or more major brands, plan sponsors have to accept the reality that beneficiaries who might genuinely need an excluded brand cannot access that brand unless they pay full price – which many cannot afford

It stands to reason that plan sponsors are more willing to accept this risk in some categories (e.g. erectile dysfunction) than in others (e.g. life-threatening cancers). What’s been genuinely surprising is that plan sponsors have been willing to exclude brands in categories that fall between these two extremes

In 1Q14 we saw net pricing turn negative in both the rapid-acting / mix insulin and COPD[2] combo markets, as formulary managers excluded Humalog or Novolog in the former category, and as they generally excluded Advair in favor of newer alternatives in the latter category. In 3Q14 we saw net pricing turn negative in the long-acting insulin market, as formulary managers excluded category-leader Lantus in favor of Levemir. Most recently, in 1Q15 formulary managers excluded HCV category leader Sovaldi / Harvoni in favor of the newly approved Viekira Pak. In all of these instances, underlying medical conditions are serious, and the decision to exclude a major brand has genuine clinical as well as economic importance

Co-pay cards have to be mentioned as a major catalyst to plan sponsors’ and formulary managers’ decisions to exclude major brands. Unless formulary managers are willing to exclude major brands, the brands’ worst case scenario is to be on formulary in a non-preferred position, and to use co-pay cards to cover the difference in co-pay between the non-preferred and preferred co-pay amounts. E.g. assume a formulary manager operates a plan with $30 preferred and $75 non-preferred brand co-pays, and that the formulary manager cannot fully exclude a major brand. The worst case scenario for the brand is to accept non-preferred status, and provide $45 subsidies to beneficiaries via co-pay cards – so that beneficiaries’ net out-of-pocket costs are the same as if the drug was on the preferred tier. For obvious reasons, the brand is unwilling to offer an incremental[3] rebate for preferred status that exceeds the $45 difference between the preferred and non-preferred co-pays

If the formulary manager can legitimately threaten to exclude the brand, the calculus changes rather dramatically. From the perspective of the brand manager, it’s now a matter of meeting the formulary manager’s pricing demand or losing the corresponding patient population entirely. For obvious reasons, when formulary managers are willing to exclude brands, co-pay cards offer brand managers (and beneficiaries) no protection, and brand managers must be willing to discount more aggressively

Referring to Exhibit 3b, the four categories contributing the most to net pricing declines (HCV, long-acting insulins, COPD combos, and rapid-acting / mix insulins) in aggregate explain the vast majority of total market pricing declines – and in all cases occurred because of formulary managers’ relatively newfound willingness to exclude major brands from formulary

Having set the precedent of excluding major brands – and having been successful doing so – we expect this approach will be applied to other categories. Specifically, we expect to see major brands excluded from the erectile dysfunction (ED), multiple sclerosis (MS), and GLP-1 categories in the near future. And, we see very real risks that formulary managers soon may choose to exclude major brands in the oral anticoagulant and inflammatory bowel disease categories as well

Major Contributors to Net Pricing Gains, by Category

Disease-Modifying Anti-Rheumatic Drugs (DMARDs)

Growth in DMARD net pricing (17% real, yoy) explains more than 200% of total US net price growth across all US categories (Exhibit 3a, again). Category leader (39% share of net sales) Humira should be the first product in the category to lose exclusivity (+/- December 2016); and, for much of the recent past Humira has been leading the category in terms of net pricing gains (Exhibit 4)

Payors arguably are reluctant to shift patients off of Humira for two important reasons. First, as a practical matter, it’s exceedingly difficult to shift a patient that’s well regulated on a given DMARD onto another DMARD; drug half-lives are quite long, and the risk of over- or under-dosing in the transition period is correspondingly high. And, because the annual number of newly diagnosed patients (+/- 125,000) is substantially less than the number of existing patients (+/- 2 million), a payor decision requiring new patients to start on one drug versus another has limited immediate effect on the broader market

Second, if payors are to benefit (lower costs, higher gross margins) from Humira biosimilars, they need their patients to in fact be on Humira when those biosimilars arrive – which of course means sticking with Humira until then, despite Humira’s very aggressive net pricing growth

Prognosis: Humira’s aggressive pricing is likely to continue up to the point at which follow-on versions of Humira enter the US market (+/- December 2016). At this point a large percentage of current Humira patients likely will be switched to the follow-ons, and these follow-ons are likely to dominate newly diagnosed patients. Remicade follow-ons are due by September 2018 at the latest, and may arrive sooner, though not as soon as the Humira follow-ons. After Humira follow-ons enter Remicade volume demand is likely to decline gradually as patients exiting treatment are less regularly replaced by newly diagnosed patients, who presumably will be captured by Humira follow-ons. Nevertheless Remicade, like Humira and for the same reasons, arguably will have significant pricing power up until the point at which Remicade follow-ons enter. Enbrel is less likely to have a run of pricing power ahead of its own follow-on versions. AMGN recently gained patents that extend US exclusivity to 2028, and while these ultimately may not survive legal challenges, the fact that Enbrel follow-ons are such a distant prospect means payors have little reason to tolerate Enbrel price inflation in exchange for a windfall from the Enbrel follow-ons

HIV Anti-Retrovirals

HIV category net pricing gained 8.4% in real terms yoy, and explains more than half of total US net brand price growth across all categories. Single-pill combination regimens built around tenofovir and emtricitabine are the standard of care for first-line treatment; because GILD controls tenofovir and emtricitabine they exert substantial control over pricing for all regimens that include these agents. Combined, the tenofovir / emtricitabine anchored regimens (Atripla, Stribild, Truvada, Complera) accounted for 51% of 2Q US HIV antiretroviral net sales, and have generally grown net pricing more rapidly than the broader market, and more rapidly than other brands in the category (Exhibit 5)

A well-regulated patient tolerating therapy is unlikely to be switched to an alternative regimen for obvious reasons (likelihood of clinical progression in the individual patient and emergence of resistance at the population level). And, as is the case with DMARDs newly infected patients (about 50,000 annually) are a fraction of the diagnosed population (>1 million), meaning formulary restrictions that force new patients to start on other regimens could have only limited effect

Prognosis: Until the patents on emtricitabine (2016 at the earliest) and tenofovir (2017 at the earliest) have both expired, strong real pricing gains are likely to continue for regimens containing these compounds, all of which are controlled by GILD. However once both patents have expired, category pricing power is likely to diminish, barring the emergence of a new first-line standard of care

Multiple Sclerosis

MS category net price inflation (4.2% real, yoy) explains one-third of inflation across all US brand categories

The dominant interferons (Avonex and Rebif, both interferon beta-1a’s) have both priced aggressively (explaining 51% of category inflation) but arguably are interchangeable and thus subject to exclusion. Notably CVS has removed Avonex from its 2016 formulary, in favor of Rebif

The oral treatment options (e.g. Aubagio, Tecfidera, Gilenya) are reasonably interchangeable, which here too opens the door for formularies to exclude one or more at the expense of the other(s). These brands also have priced aggressively, accounting for 32% of category inflation

Prognosis: We expect real price gains from Avonex and Rebif to subside as formularies increasingly treat them as interchangeable. Similarly, we expect real pricing gains from Aubagio, Tecfidera and Gilenya to slow as formularies can reasonably threaten to exclude at least one of the three agents

Erectile Dysfunction

ED category net price growth (15.9% real, yoy) explains roughly one-quarter (24.4%) of total US net price inflation across all categories

Category pricing growth is driven entirely by Viagra and Cialis, who together hold 97% of total category net sales. Net prices for these two brands have accelerated in unison since 1Q13 (Exhibit 6), and are now growing much faster than brand prices generally (Exhibit 7)

Prognosis: Viagra and Cialis pricing patterns reflect a classic pattern of cooperative duopoly, very much as existed between Lantus and Levemir in the long-acting insulin category prior to late 2014. The brands are sufficiently interchangeable that formularies can exclude one in favor of the other, as CVS has done for its 2016 formulary (excluding Viagra in favor of Cialis). We expect most formularies to move toward exclusive ED agreements, effectively stalling category net pricing gains over the near- to mid-term


Real yoy category net price growth of 41% was driven by the 48.4% net price gain of category leader (84% of net sales) Renvela / Renagel. Genzyme permitted authorized generic versions of Renvela in late 2014, and multiple ANDA’s are pending. Launches of non-authorized generics are possible in 2015, but timing is uncertain

Prognosis: SNY (Genzyme) is likely to continue pushing Renvela pricing higher, though at a less rapid rate, up to the point of US loss of exclusivity


The GLP-1’s 9.5% real net pricing gain yoy explains one-eighth of total net pricing growth across all brand categories

Market share of category-originator Byetta (twice daily dosing) is being steadily eroded by newer brands (Bydureon, Trulicity) with weekly dosing. Category leader Victoza (once-daily dosing) has held roughly constant 70% dollar market share (Exhibit 8)

Victoza pricing dominates the category, carrying the segment’s net pricing growth rate above the industry average (Exhibit 9). Bydureon however has seen net pricing declines on rising discounts (Exhibit 10)

Prognosis: Once Byetta is fully displaced, with a dosing frequency disadvantage Victoza is unlikely to both hold market share and continue its rate of net pricing gains against Bydureon and two newer entrants (Trulicity entered November 2014, Tanzeum entered June 2014), all with weekly dosing

Pricing Risks Faced by Growing Categories

As a first pass, we believe formulary managers are likely to focus their efforts on larger ( $1B annual sales) and growing categories whose prices are increasing. Exhibit 11 graphically summarizes these categories; the x-axis represents the trailing annual rate of growth in net sales, the y-axis represents net price growth, and circle size represents total brand net sales

As covered above under the review of categories making major contributions to price inflation, we believe net pricing gains will continue in the DMARD and HIV categories, but that net pricing will decelerate in the Erectile Dysfunction, GLP-1, and MS categories

Shire and Allergan dominate the Inflammatory Bowel Disease (IBD) segment and have been growing net pricing aggressively since early 2014. The category is relatively small, but given the rate of net pricing and sales gains, and the fact that drugs in the category are highly interchangeable (all are various forms of the same active ingredient, mesalamine), we would expect net pricing gains to end as soon as the category has reached sufficient scale for formulary managers to take the effort to negotiate exclusive positions

Net pricing growth for the Oral Anticoagulants Eliquis and Xarelto is modest; however sales growth is quite rapid, as such the category represents a potent source of rising drug benefit costs. The drugs are highly similar, and given the rate of category sales growth we believe formulary managers are likely to press for exclusive arrangements, at least for newly diagnosed patients

DPP-4 net pricing gains and sales growth are modest, and prescribers appear to increasingly prefer Januvia / Janumet in the wake of new safety concerns for the category. And, emerging competition from an alternative oral antidiabetic category (SGLT2 inhibitors) is limiting unit demand growth, which lessens the pressure on formulary managers to negotiate more aggressively on pricing

The dominant brands in the Osteoporosis category (Prolia, Forteo) are used in different patient populations, meaning there is limited to no interchangeability, and incremental pricing pressure is unlikely

In both the Anticonvulsant and ADHD categories, exclusive / restrictive formularies are made difficult by patient heterogeneity – essentially all options need to be available to have a working chance of getting large numbers of patients to their treatment goals. This plus relatively modest rates of pricing and sales growth make incremental pricing pressures relatively unlikely in the immediate term

US Pricing Outlook by Company – the Large Caps

Companies with Weak and/or Deteriorating US Pricing Power

ABBV (2Q15 US net pricing gains of 22%; US pricing drove median of 112% of 3yr WW revenue growth)

ABBV’s net pricing gains (Exhibit 12) are driven overwhelmingly by Humira (37% of gains over the last 4 quarters) and Synthroid (34% of gains over the last 4 quarters, Exhibit 13)

As discussed previously, Humira pricing gains are likely to continue until Humira follow-ons appear (+/-December 2016). Synthroid (levothyroxine sodium) recently has seen volume declines against its generic versions, made possible by concerns that generic versions’ doses are not as precise or as consistent as Synthroid’s, which can greatly complicate the management of hypothyroidism. It follows that Synthroid should have substantial pricing power until generic versions can prove themselves more precise and consistent

Viekira Pak remains a relatively small portion of total sales (6.7% of US sales in 2Q15); however we do anticipate further HCV category pricing declines when MRK’s regimen launches in 1Q16, which will create at a least a modest drag on net pricing gains produced by Humira and Synthroid

Prognosis: US net pricing gains for ABBV presumably are at or near their peak achievable rate; as Humira follow-ons appear and/or as generic levothyroxines correct their dosing deficiencies, pricing contributions from these products will be lost. Neither Humira nor Synthroid are likely to be major contributors to net pricing gains past 2016

LLY (2Q15 net pricing change of -1.3%; US pricing drove median of 15% of 3yr WW revenue growth)

LLY’s US net pricing pace is modestly negative (Exhibit 14). Cialis and Humulin have been the company’s largest net pricing contributors (Exhibit 15)

As discussed previously we believe ED pricing will weaken as formularies exclude one brand in favor of the other, as CVS has recently done (excluding Viagra in favor of Cialis)

Among short-acting insulins LLY’s Humulin is generally preferred to NVO’s Novolin, and this preference is reflected in the relative market shares and net costs of the two products (Exhibits 16, 17). Recently however NVO’s net pricing for Novolin has turned negative, pulling net price gains for the category down to the industry pace, or even slightly below (Exhibit 18). Despite its advantages, we doubt Humulin can continue its trailing rate of net pricing gains as Novolin’s net pricing declines – just as SNY’s Lantus (the preferred long-acting) has been unable to maintain either pricing or share versus NVO’s Levemir, and as net pricing for the rapid-acting insulins (NovoLog and Humalog) has fallen into negative territory

Prognosis: We have a strong conviction that ED pricing will at least stall and is likely to decline; because of LLY’s reliance on Cialis pricing this inevitably means weaker US pricing gains overall for LLY. We also see a high likelihood that Humulin net pricing will at least stall, though we don’t see as much downside for Humulin as for Cialis

PFE (2Q15 net pricing gain of 0.3%; US pricing gains drove median of 34% of 3yr WW revenue growth)

PFE’s net pricing gains have stalled relative to those of the broader large cap sector (Exhibit 19). Recent gains have been driven by Viagra, Lyrica, and Premarin; and more recently also by Xalkori and Inlyta (Exhibit 20)

As discussed previously we believe ED pricing gains are likely to end, and that net prices in the category may in fact decline

Lyrica list pricing accelerated in 3Q12 and has remained fairly rapid since (Exhibit 21), however Lyrica’s discounts have risen more rapidly since 3Q13 (Exhibit 22), resulting in significant recent net pricing deceleration (Exhibit 23)

Premarin has long dominated the estrogen hormone replacement therapy (HRT) category, and despite recent net price gains its net cost per day remains just less than $3.00. Because of the brand’s category dominance and relatively modest daily cost, we believe Premarin’s net price can continue to grow at or near its current pace

As an anti-cancer agent Inlyta (axitinib, currently indicated for advanced renal cell carcinoma) is selected for reasons other than pricing, as such we see continued opportunity for strong pricing gains

Prognosis: Both of PFE’s two largest contributors to recent net pricing gains (Viagra, Lyrica) are unlikely to drive substantial net pricing gains going forward, and in fact Viagra net pricing is likely to decline. Premarin and Inlyta have continued pricing power, but their effect on overall net pricing gains for PFE is substantially less than the trailing effects of Viagra and Lyrica. Thus on net, PFE’s net pricing gains are likely to slow

GSK (2Q15 net pricing loss of -7.6%; US pricing has not contributed to 3yr WW revenue growth)

GSK legacy drivers of US net pricing gains (Advair, Ventolin) are both now in pricing decline, and since late 2014 the company has had no drivers of significant net pricing gains (Exhibits 24, 25)

Prognosis: Because Advair remains a large percentage of total US sales (Exhibit 26), and continues to see net pricing declines (Exhibit 27), GSK is unlikely to see US net pricing gains until: 1) Advair net pricing stabilizes; and 2) the US product portfolio is updated with new product launches

Bayer (BAYRY; 2Q15 net pricing gain of 2.3%; US pricing drove median of 6.5% of 3yr WW revenue growth)

Bayer’s recent net pricing gains have been driven almost entirely by Stivarga, Mirena, and Nexavar (Exhibit 28)

As anti-cancer agents (advanced colorectal cancer and late-stage kidney cancer, respectively) demand for Stivarga and Nexavar is relatively price-inelastic

Conversely, as a levonorgestrel-based IUD contraceptive, Mirena faces relatively new competition (February 2015) from Medicine360’s Liletta, and so is unlikely to see strong future net pricing gains

Prognosis: Pricing contributions from Mirena are likely to fade. As discussed previously oral anticoagulant pricing is likely to come under pressure because of rapid sales growth, despite the fact that brands in the category have not generated large net pricing gains. Because of this Xarelto net pricing also is at risk of decline. On net, pressures on Mirena and Xarelto are likely to overwhelm pricing gains from Stivarga and Nexavar, pushing Bayer’s net pricing trend into negative territory

MRK (2Q15 US net pricing gain of 2.3%; US pricing gains drove median of 29% of 3yr WW revenue growth)

Recent US net pricing gains are on par with the broader sector (Exhibit 29), and have been driven by Zetia, Vytorin, and Nasonex (Exhibit 30)

Zetia and Vytorin’s annual net costs have grown substantially faster than the broader class, and in particular much faster than Crestor, which remains the dominant brand in the category (Exhibit 31). In the case of Zetia this makes sense, since the brand has been the best option for statin intolerant patients and has pricing power in this niche. This makes less sense for Vytorin, which contains both Zetia and a statin (simvastatin), meaning it doesn’t fall into this same niche. Zetia is by far the larger of the two brands, and its pricing gains are likely to continue; however Vytorin’s gains are likely to stall. The launch of PCSK9s Praluent and Repatha is likely to steal unit volume from Zetia; thus even though Zetia’s pricing gains are likely to continue, its gradual volume declines are likely to worsen, reducing its overall contributions to MRK’s net pricing (Exhibit 32)

Nasonex makes up a very small percentage (3.2%) of MRK’s net US sales and is likely to see generic competition in the very near-term, thus it is very unlikely to factor into MRK’s net pricing power going forward

Prognosis: MRK should soon lose net pricing contributions from Vytorin and Nasonex, which implies decelerating net pricing gains overall

AZN (2Q15 US net pricing loss of -2.2%; US pricing drove median of 19% of 3yr WW revenue growth)

AZN’s net pricing trend is negative (Exhibit 33). The company’s US product mix is dominated by Crestor, Symbicort and Nexium (Exhibit 34); all of which show net pricing declines (Exhibit 35). As a technical matter, we exclude brands with generic equivalents from companies’ net pricing calculations; because Nexium generics were launched in 1Q15 Nexium’s net pricing erosion is no longer factored into the overall rate of net pricing decline for AZN

Byetta and Brilinta have offered small recent net pricing gains that have partially offset declines in the 3 major brands (Exhibit 36)

Prognosis: Crestor competes with effective and low cost generic alternatives (of other molecules) in the statin category, and so is likely to see continued net price pressure. As a member of the COPD combination category Symbicort is caught in that category’s negative net pricing trend (Exhibit 37), and is also likely to see continued pricing pressure. Because these brands dominate AZN’s US net sales, real pricing gains for AZN are unlikely in the near term

SNY (2Q15 US net pricing losses of -7.6%; US pricing drove median of 30% of 3yr WW revenue growth)

Lantus dominated SNY’s US net pricing gains through 2Q14, and has since been driving net pricing losses. Renagel / Renvela has been a significant US net pricing driver since 3Q13, and has been the dominant driver since 3Q14 (Exhibit 38)

US insulin franchise net pricing declines are likely to continue, given SNY’s need to discount Toujeo relative to Lantus in order to displace as much Lantus as possible ahead of the entry of follow-on Lantus versions in the US market

Renagel / Renvela is unlikely to continue as a driver of US net pricing gains, as generic versions are likely to enter the US in 2016

Prognosis: SNY has very little prospect of real net pricing gains in the US for the foreseeable future; however the company does have tremendous potential for product mix gains as its newly-launched PCSK9 Praluent ramps up in the US market

Companies with Stable and/or Improving US Pricing Power

BMY (2Q15 US net pricing gains of 6.1%; US pricing drove median of 47% of 3yr WW revenue growth)

BMY’s net pricing gains exceed the peer group average (Exhibit 39), and are dominated by Sustiva, Orencia, Sprycel, and Reyataz (Exhibit 40). As HIV therapies Sustiva and Reyataz are selected for reasons other than price; this plus the relatively rapid rate of price growth overall in the HIV category implies these two brands will continue to give BMY real pricing gains. As a commonly used agent for various leukemias Sprycel also is chosen for reasons having little or nothing to do with pricing, and we see continued opportunity for strong pricing gains from this brand as well. Orencia has a relatively modest share of the DMARD market; however as a DMARD the brand participates in this category’s relatively rapid net pricing gains, which as previously discussed are likely to continue at least through the entry of Humira follow-ons, and perhaps even through the entry of follow-ons to Remicade (September 2018 at the latest)

Prognosis: BMY’s net pricing gains are driven by four brands across three categories, all of which are likely to offer strong real pricing gains for several more years

Roche (RHHBY; 2Q15 US net pricing gains of 7.6%; US pricing drove median of 34% of 3yr WW revenue growth)

Roche’s US net pricing gains exceed the peer average (Exhibit 41), and have been driven mainly by Avastin, Rituxan, Herceptin, and Xolair (Exhibit 42)

Avastin, Rituxan, and Herceptin all compete in segments where drugs are selected more on the basis of efficacy and safety than on price; accordingly all 3 brands are likely to offer the potential for continued net pricing gains

Xolair (anti-IgE monoclonal antibody) generally is reserved for patients with more severe forms of immune-mediated diseases (e.g. asthma, chronic idiopathic urticaria) that have not responded to first-line treatment; and, Xolair has little if any competition for these patients. Accordingly we believe Xolair pricing can continue to grow for the foreseeable future

Prognosis: The majority of Roche’s US net pricing gains are driven by 4 products, all of which offer the potential for continued net pricing gains on par with those achieved in the immediate past

JNJ (2Q15 US net pricing loss of -0.8%; US pricing drove median of 18% of 3yr WW revenue growth)

JNJ’s recent US net pricing stalled as Olysio became obsolete after the launch of Sovaldi (Exhibit 43); positive contributions have been dominated by Zytiga and Simponi, with much smaller contributions by Stelara and Invega (Exhibit 44). Olysio is now essentially out of the US product sales weighting, ending its negative effect on sales-weighted net pricing

As an anti-cancer agent demand for Zytiga is relatively price-inelastic, thus Zytiga is likely to continue as a source of net pricing gains

Simponi is a relatively minor player in the DMARD category; however the brand is able to ride the tide of price inflation in the broader category. As discussed previously we see DMARD inflation continuing for some time, thus Simponi will likely remain as a contributor to JNJ’s US net pricing gains for the near- to mid-term

Stelara is an injectable monoclonal for psoriasis dosed 4 times yearly; its main competitor is Cosentyx which is dosed monthly. Cosentyx arguably is more effective than Stelara but is plainly less convenient. Cosentyx’ annual cost of therapy is $44,000, much higher than Stelara’s annual cost of $33,000; as such Stelara likely offers continued net pricing gains

Invega competes in the antipsychotic category; because most patients fail many drugs before finding a regimen with reasonable efficacy and tolerability, formularies have generally been unable to exclude any of the significant antipsychotic treatments – thus pricing power in the category favors the manufacturers, and brands like Invega are likely to see continued net pricing gains

Prognosis: JNJ should re-gain net pricing growth and continue with pricing gains for the foreseeable future

NVS (2Q15 US net pricing gain of 3.9%; US pricing drove median of 24% of 3yr WW revenue growth)

NVS’ US net pricing gains have recently been driven by Afinitor, Exjade, Sandostatin LAR, and most recently also Gilenya (Exhibit 45)

As an anti-cancer agent Afinitor demand is largely inelastic, so Afinitor offers potential for continued pricing gains

Exjade is an iron-chelating agent with both advantages and disadvantages relative to other agents in the class; however on net Exjade is often the preferred option. Annual costs of treatment for the class are very high; however Exjade’s annual cost ($108,000) is well below that of its primary competitor (Ferriprox, $182,000)

Generic forms of Sandostatin LAR have been approved by FDA for the US market, and are likely to be launched in the near term, obviating Sandostatin LAR as a source of pricing gains

As discussed previously we believe recent net pricing gains for oral MS regimens (Gilenya, Aubagio, Tecfidera) are likely to stall; as such we doubt Gilenya will be a substantial driver of NVS pricing in the near term

Prognosis: Gilenya’s contributions to net pricing gains are likely to fade, though the remaining drivers of NVS’ pricing gains remain healthy. Accordingly we do expect NVS’ rate of net pricing gains to decelerate; because this occurs at a point when NVS’ overall rate of net pricing growth is on par with the broader industry (Exhibit 46), the effect should be that NVS’ begins to at least modestly lag the industry rate of net gains

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  1. After removing pricing contributions from products facing immediate loss of exclusivity (and thereafter), and after adjusting net price estimates for products that appear to have had very large wholesale inventory swings
  2. Chronic obstructive pulmonary disease
  3. It’s useful to think of rebates as consisting of two components: ‘access’ and ‘preferred’. A brand might pay only enough rebate (‘access’) to get on the formulary, but not enough to be preferred. Or the brand might give a rebate large enough to achieve preferred status; we think of the difference between the amount pay for preferred status and the amount payed for non-preferred status as the ‘incremental’ rebate
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