US Rx brand real net pricing fell 1.1 percent in 4Q17; update and analysis of company outliers

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Richard Evans / Scott Hinds

203.901.1631 /.1632

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March 28, 2018

US Rx brand real net pricing fell 1.1 percent in 4Q17; update and analysis of company outliers

  • In real terms US Rx brand list prices grew by 5.5 percent; net prices fell by 1.1 percent
  • ABBV, ACOR, BIIB, CELG and Sumitomo Dainippon (DNPUF) had relatively rapid US net sales growth that driven mainly by US net pricing gains. ACOR and Sumitomo Dainippon face near term patent losses on their price drivers, which is reflected in valuations. Net price assumptions reflected in consensus for BIIB (Tecfidera) and CELG (Revlimid) appear unrealistically high; expectations for ABBV (Humira) are only realistic if formularies remain permissive to DMARD inflation, an inherently risky bet that ABBV’s valuation arguably ignores
  • AZN, MRK, and SNY had relatively large US nets sales declines driven by significant US net pricing declines. AZN net sales trend was driven by net price declines on Symbicort; these have paused but are soon likely to resume as generics to Symbicort’s key competitor (GSK’s Advair) take hold in the US. MRK’s US net sales decline was driven in large part by net price losses on Januvia/Janumet XR. Consensus’ outlook for this brand’s net price is too pessimistic; however, adjusting consensus to more realistic Januvia/Janumet XR pricing has a modest (circa 3 percent) impact on implied valuation. SNY’s US net sales declines are driven by Lantus/Toujeo net price declines. We expect net prices for these brands to fall much faster than consensus expects; however even after we adjust consensus to a more aggressive price erosion assumption, SNY still appears significantly undervalued


Summary of 4Q17 net pricing drivers; rank of therapeutic segments by net cost of a year or treatment course

In real terms, Us brand list prices grew 5.5 percent y/y in 4Q17; net prices fell 1.1 percent (Exhibit 1). The average gross to net concession was 41.0 percent, or 39.2 percent if we exclude the effect of Medicaid base rebates, and supplementary Medicaid rebates caused by list price inflation in excess of CPI (Exhibit 2). CELG, ABBV, AMGN, Roche (RHHBY) and PFE made the largest positive contributions to the total market net price trend; GILD, NVO, JNJ, SNY and GSK made the largest negative contributions (Exhibit 3)[1]. At the therapeutic category level DMARDs, MS, HIV, anticonvulsants and osteoporosis made the largest positive contributions to net price trend; HCV, long-acting insulins, rapid-acting/mix insulins, plaque psoriasis, and COPD combination inhalers made the largest negative contributions (Exhibit 4)[2]. At the product level Revlimid, Humira, Rituxan, Avastin and Victoza made the largest positive contributions to net price inflation; Epclusa, Harvoni, Stelara, Lantus, and Novolog/mix made the largest negative contributions (Exhibit 5)[3]Exhibit 6 summarizes unit growth, net price / unit growth, and net cost of a treatment course or year of therapy for the therapeutic segments whose net prices we’re able to track

Identification and analysis of companies whose US net sales patterns are dominated by change in US net price

In an effort to identify companies with relatively extreme US net sales trajectories that are in turn driven by relatively extreme changes to their products’ US net prices, we sorted companies by rate of change in US sales (Exhibit 7), and sales-weighted change in US net prices (y-axis). We then focused on the brand-oriented, larger capitalization outliers

Companies with relatively rapid US net sales growth, driven by US net price gains

CELG – US net price growth of 15.7 percent, US net sales growth of 17.6 percent (both 4q rolling); 78.6 percent of 4Q17 US net sales growth explained by pricing gains on a single product (Revlimid)

Revlimid accounts for 65 percent of CELG’s US net sales (Exhibit 8), and showed 18.0 percent (4q rolling) US net price growth through 4Q17 (Exhibit 9)

Revlimid is used in multiple myeloma, autologous hematopoietic stem cell transplant, and myelodysplastic syndromes. Annual net cost of Revlimid therapy is now approximately $180,000 for multiple myeloma, and $240,000 for the latter two indications. Because of the severity of these indications and Revlimid’s key role in each, demand is clearly price inelastic. CELG plainly can continue inflating Revlimid’s net costs; however if this occurs, Revlimid’s price becomes an increasingly large outlier relative to various benchmarks, increasing social and political pressure on the firm. The fact that CELG accelerated pricing actions on Revlimid and Pomalyst is already an attack point being used by incumbent NJ senator Robert Menendez against former CELG chairman and senate challenger Bob Hugin. As one reference point, ICER[4] estimated that, depending on the specific drug combination chosen for second line treatment of multiple myeloma, Revlimid’s cost was between 1.6x and 4.0x higher than is consistent with a standard cost per quality adjusted life year (cost/QALY) benchmark of $150,000[5]. As another reference point, Revlimid’s annual $180k – $240k cost of therapy is already well above typical annual net costs for the PD1/PDL1 class (e.g. Keytruda, Opdivo, Tecentriq; approximately $150k per course or year of therapy

Consensus anticipates 11 percent global net revenue growth for Revlimid through 2022. If we assume ex-US Revlimid demand continues to grow at 9 percent, this implies that net US Revlimid must grow at 12 percent for consensus to be correct about global Revlimid growth of 11 percent. Revlimid units grew 2.7 percent in the US, averaged over the last four quarters, on a decelerating trend. If we assume that US unit demand stabilizes at roughly 2 percent, this implies 10 percent net price growth for Revlimid, annually, through 2022. That pace of inflation would grow the net annual cost of Revlimid to $290k – $390k by 2022, putting Revlimid treatment costs on par with those for cystic fibrosis. We believe this implied pace of US net price inflation is possible (CELG could take these gains and unit demand wouldn’t flinch) but unlikely (Revlimid is already a net price outlier; pushing net price further away from benchmarks places the company under rising social and political pressure)

We believe a more realistic 5-year US net price trend for Revlimid is 5 percent or lower (recall total market net price is actually falling 1.2 percent in real terms as of 4Q17), with a roughly 2 percent unit growth trend. If we assume ex-US growth moderates very slightly from 9 percent trailing to 8 percent through 2022, this implies WW net sales growth of 7 percent for Revlimid through 2022, as compared to 11 percent growth assumed by consensus

On 2022 consensus, CELG carries P/S, P/E, and EV/EBITDA ratios, relative to peers, of 0.84, 0.49, and 0.59, respectively. Adjusting consensus revenues to our Revlimid assumptions produces relative P/S, P/E, and EV/EBITDA ratios of 0.92, 0.62, and 0.78, respectively (Exhibit 10). CELG’s current valuation appears to recognize that Revlimid’s US pricing power ultimately is limited, and/or is accounting for some risk of earlier than anticipated Revlimid generics

Sumitomo Dainippon Pharma (DNPUF) – net price growth of 13.7 percent, net sales growth of 19.9 percent (both 4q rolling); 101 percent of 4Q17 US net sales growth explained by pricing gains on a single product (Latuda)

Latuda accounts for 76 percent of US net sales (Exhibit 11), and showed 17.9 percent (rolling 4Q) net price inflation through 4Q17 (Exhibit 12)

Latuda holds a 29 percent net sales share of the US atypical antipsychotics market (Exhibit 13) but has an average annual net cost of therapy ($8,626) that despite recent inflation remains 25 percent below the class average ($11,566, Exhibit 14). US entry of generics to Latuda is likely in January 2019