US Rx Net Pricing Trends thru 2Q16

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Richard Evans / Scott Hinds / Ryan Baum

SEE END OF THIS REPORT FOR IMPORTANT DISCLOSURES

203.901.1631 /.1632 / .1627

revans@ / shinds@ / rbaum@ssrllc.com

@SSRHealth

October 5, 2016

US Rx Net Pricing Trends thru 2Q16

  • Sales-weighted real gross prices for US Rx brands grew 9.8% in 2Q16, vs. 13.6% in the year prior quarter. Net real prices grew 3.9% in 2Q16, vs. 4.8% in the year prior quarter. The decelerating gross price trend reflects lost contributions from rapid specialty pricing (e.g. VRX, et al) in the year prior, offset by rapid DMARD pricing gains in 2Q16
  • The DMARD category drove 32% of net price inflation; 40% if we include plaque psoriasis in the broader DMARD market. Humira (ABBV) and Enbrel (AMGN) dominate the DMARD category, are driving its net pricing trend, and together account for one-fifth of total market net price inflation
  • We expect Humira/Enbrel price gains to end as formulary managers open bidding for newly diagnosed patients in these brands’ key indications to other clinically viable anti-TNF’s, particularly Cimzia (UCB) and Simponi (JNJ)
  • Other non-anti-TNF DMARDs have been exploiting the price headroom created by Humira/Enbrel; as this price leadership is lost, these other brands’ rates of net pricing gain are likely to stall. Affected brands include Xeljanz (9.4% of PFE’s 2Q16 net price gains), Otezla (28.6% of CELG’s 2Q16 net price gains), and Orencia (55.9% of BMY’s 2Q16 net price gains)
  • At the whole-market level, we sense that the price protection rebate arbitrage game is driving manufacturers to higher list price increases than would otherwise occur, particularly on the eve of a general election. Price protection rebates between brand manufacturers and PBMs are common, as are fixed rebate agreements between PBMs and a significant portion of their plan sponsors. When brand manufacturers’ list increases exceed the price protection threshold, the manufacturers rebate the difference to PBMs, who pocket the difference when these price protection rebates grow faster than the PBMs’ fixed rebate commitments to plan sponsors. Thus all else equal in a given category, the product with the more rapid list price increases is more profitable to the PBM. Manufacturers, realizing this, don’t want their products disadvantaged, and accordingly are driven to keep their rates of list price inflation at least as high, and ideally just a bit higher, than peers’. Durable list price inflation is the natural result. Net price inflation is unaffected, but unit volumes suffer as higher list prices directly impact consumers who have not yet met their deductibles

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. AMGN, BAYER, BMY, GILD, ROCHE, SHPG, SNY, VRTX); Biopharma companies with pending major product approvals (e.g. ACAD, ADMA, ALIOF, BIIB, CHMA, CLVS, CPRX, CTIC, GILD, ICPT, JAZZ, LLY, LPCN, MRK, NVO, OCUL, PTCT, SRPT, TEVA, ZSPH); SNY on sales potential for Praluent (alirocumab); 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); ABBV on Humira US pricing risks; ENDP on risks to branded Rx price premia; 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)

I. Summary

US Rx brand WAC pricing grew in real terms at 9.8% in 2Q16, down from 10.8% in the prior quarter. Net pricing grew 3.9% in real terms, up slightly from 3.7% in 1Q16 (Exhibit 1)

At the company level JNJ, PFE, AMGN, ABBV, and CELG were the largest contributors to net real pricing gains, accounting for 73% of total market net pricing growth. VRX, GILD, SNY, and NVO made the largest negative contributions to the total market net pricing trend; the absolute value of these companies’ negative net price changes equals 20% of total net price growth (Exhibit 2; top set of rows lists companies making largest net price contributions by quarter, 2nd set of rows shows percent of total market net price gain explained by each company; 3rd set of rows shows rate of net pricing growth for each company; 4th set of rows shows companies making largest negative contributions to the total market pricing trend; 5th set of rows shows the share of market net price change explained by each company; 6th set of rows shows rate of net price change for each company

At the therapeutic area level, DMARDs, MS, HIV, plaque psoriasis and ED were the largest contributors to net pricing gains, explaining 66% of total market net price growth. HCV, LA insulins, rapid-acting and mix insulins, DPP-4 inhibitors and COPD combos had the largest negative influences on the net pricing trend. The absolute value of these categories’ net price losses equals 31% of total market net pricing gains (Exhibit 3, layout mirrors Exhibit 2)

At the product level, Humira (DMARD, ABBV), Enbrel (DMARD, AMGN), Revlimid (cancer, CELG), Sovaldi (HCV, GILD), and Copaxone (MS, TEVA) made the largest contributions to net pricing gains, accounting for 37% of total market net pricing growth. Harvoni (HCV, GILD), Lantus (LA insulin, SNY), Cubicin (antibiotic, MRK), Viekira Pak (HCV, ABBV) and Novolog (RA insulin, NOVO) made the largest negative contributions to net pricing. The absolute value of these products’ net price losses is equal to 34% of total market net price gains (Exhibit 4, layout mirrors Exhibits 2 and 3)

II. Price gains by company

JNJ

JNJ’s net gains are driven primarily by Remicade, Stelara, Procrit, Zytiga, and Simponi/Aria (Exhibit 5), and the company benefits from having no major products with net pricing losses. Remicade accounts for just less than a quarter of JNJ’s net pricing gains; the brand’s 9% gain reflects its somewhat subordinate position in the rapidly inflating (13.2% category net inflation) DMARD category. Stelara, a DMARD with a relatively unique mechanism of action that tends to be reserved for psoriasis, psoriatic arthritis and Crohn’s, also is benefitting from inflation in the broader DMARD category. Together Remicade and Stelara account for almost half of JNJ’s net pricing gains. If our DMARD pricing thesis is correct – competition among the first line anti-TNF’s leading to much slower category pricing gains, or even to declines – Remicade and Stelara’s contributions to JNJ pricing gains may stall. Procrit, JNJ’s third largest contributor, almost certainly will lose pricing power as follow-ons (to epoetin alfa) enter the US market in the near- to mid-term. Zytiga, a cornerstone treatment for prostate cancer, arguably has durable pricing power. Finally, Simponi / Aria, like Remicade and Stelara, is likely to lose pricing power as price competition emerges in the DMARD category; however Simponi / Aria stands to see large volume gains from DMARD price competition, resulting in accelerating net sales growth

PFE

Lyrica, Prevnar, Xeljanz, Ibrance, and Premarin account for 75% of PFE’s US real net pricing gains, with Lyrica and Prevnar alone accounting for nearly half (49%) of total gains (Exhibit 6). Lyrica is unique in its class, and is likely to see continued net pricing gains ahead of its 4Q18 loss of exclusivity (LOE). Prevnar’s calculated contribution is likely due to 2015 wholesale inventory expansion from increased use (approval of adult indication), which artificially depressed calculated net price (Exhibit 7). The difference in CDC contract price for children and adults (adult pricing is lower), also contributes to volatility in the Prevnar net price calculation

Xeljanz benefits from inflation in the broader DMARD category, though headroom for Xeljanz pricing may be lost as DMARD prices come under pressure in the aggregate (see later). As an anti-cancer agent having no close alternatives, Ibrance arguably has continued pricing power. Premarin has no direct substitutes and unit demand is declining to an arguably ever more price inelastic base; as such the brand has the potential for continued net pricing gains, though the net impact has been to defend rather than to grow sales

 

AMGN

Enbrel accounts for more than half of AMGN’s net pricing gains (Exhibit 8). AMGN and ABBV have priced Enbrel and Humira cooperatively, and have accelerated net pricing gains to a point at which formulary managers are likely to react. We expect both Enbrel and ABBV’s Humira to lose either net pricing and/or volume; as such we doubt Enbrel will contribute positively to AMGN’s net pricing power by this time next year (see later)

ABBV

Humira accounts for all of ABBV’s US real net pricing gains (Exhibit 9). As explained above under AMGN, we expect competition in the DMARD space to eliminate volume and/or net pricing gains for both Humira and AMGN’s Enbrel, by this time next year (see later)

CELG

The majority (86%) of CELG’s US Rx net price gains were driven by Revlimid and Otezla, with net prices on these brands up 15% and 51%, respectively (Exhibit 10). Revlimid is the cornerstone of treatment for multiple myeloma, and so has continued net pricing power. Otezla is one of several options for psoriasis / psoriatic arthritis, and has the convenience of oral dosing, though at somewhat lower efficacy than the injectable alternatives. Otezla is priced roughly on par with the sales weighted average annual treatment cost for DMARDs, and stands to lose the potential for further significant net pricing gains if pricing in the DMARD category comes under pressure, as we expect (see next)

III. Price gains by category

DMARDs

The DMARD category accounts for 32% of total market US Rx net price inflation in 2Q16. ABBV’s Humira and AMGN’s Enbrel dominate the class (Exhibit 11), and these brands’ pricing actions have set the pace for the broader DMARD class (Exhibit 12)

As we’ve written about extensively[1], we believe formulary managers favored starting newly diagnosed patients on Humira and Enbrel in anticipation of these products being the first to lose exclusivity, and that both brands were able to exploit this payor preference by accelerating net price gains ahead of the anticipated biosimilar launches. However newly issued patents have made the timing of biosimilar entry uncertain, and both brands have further accelerated their net pricing gains in a largely cooperative series of pricing actions. We expect formulary managers to open the 1st-line category generally, and the first-line sub-q anti-TNF category specifically (Humira, Enbrel, Cimzia, Simponi) to bidding, with the result being negative volume and / or pricing impacts to Humira and Enbrel, and the potential for large volume gains (at lower than prevailing net prices) for Cimzia (UCB) and Simponi (JNJ). Consistent with this expectation, in September ESRX announced a DMARD policy that seeks to effectively auction newly diagnosed DMARD patients on an indication-by-indication basis, thus obviating much of the advantage held by Humira and Enbrel in terms of breadth of labelled indications. We expect other major formulary managers (e.g. Caremark unit of CVS, Optum unit of UNH) to follow suit

Because both Humira and Enbrel have circa 10% annual rates of patient attrition (Exhibits 13a, 13b), loss of newly diagnosed patients is sufficient to eliminate just more than a third of unit demand over a five-year timeframe. At a minimum we see this threatened volume loss as sufficient to end the current trend of double-digit net pricing gains, and see genuine risk of outright sales declines for either brand

The non-TNF, 2nd-line DMARDs are not faced with the same volume and price pressures faced by Humira / Enbrel; however the likelihood that Humira / Enbrel can no longer take double-digit net pricing gains means less pricing headroom for the non-TNF, second line brands, nearly all of whom have been following the net pricing pace set by Humira / Enbrel. JNJ stands to lose the net pricing gains from Remicade, Stelara, and Simponi; however on net JNJ stands to gain if Simponi is able to capture newly diagnosed patients as formulary managers put Humira / Enbrel patient starts up for bid. PFE is likely to see diminished net pricing gains for Xeljanz (9.4% of 2Q16 net price gains), CELG is likely to see diminished gains for Otezla (28.6% of 2Q16 net price gains), and BMY is likely to see diminished gains for Orencia (55.9% of 2Q16 net price gains)

MS

Sales weighted net pricing in the multiple sclerosis (MS) category grew 14.5%, accounting for 9.5% of total market net pricing gains. Older brands Copaxone (TEVA, the 20mg strength of which is now available as a generic), Avonex (BIIB), and Tysabri (BIIB) are inflating prices in apparent late-lifecycle attempts to offset unit volume declines (Exhibit 14). Newer brands, in particular the orals Gilenya (NVS), Tecfidera (BIIB), and Aubagio (SNY) have been taking very similar rates of low-teens pricing gains. As the MS oral category continues to grow, we see increased risks of formularies choosing to exclude at least one of the oral brands

HIV

First-line antiretroviral regimens typically consist of two NRTI’s[2], plus a third agent from a different mechanistic class (NNRTI, PI, or INSTI[3]). Before the launch of GSK’s Triumeq in 3Q/2014, GILD had a virtual monopoly on first-line therapy, as preferred regimens were all built around its NRTI tenofovir[4]

GSK’s Triumeq is the only preferred first-line regimen that does not include GILD’s tenofovir, and Triumeq’s efficacy is considered to be on par with the tenofovir-based regimens. Thus Truimeq is a viable alternative to GILD’s first line regimens, with the narrow exception of HLA-B5701 positive patients, who cannot tolerate the abacavir component of Triumeq, but who represent only 4 – 8% of the first-line treatment pool. As of 2Q/2016 Triumeq’s share of US gross HIV sales was 10%, and growing rapidly (Exhibit 15)

GSK’s success with Triumeq marks the end of GILD’s monopoly for first-line HIV treatment, and raises the question of whether category pricing will ease. So far this hasn’t happened; the evidence suggests that GSK entered the market at parity to the GILD regimens, and is basing its share fight on clinical rather than pricing distinctions. Triumeq’s net cost per year (circa $21,500) is on par with Stribild’s, and Stribild’s net cost trajectory has paralleled the recent trend of accelerating growth[5] – so all evidence indicates GSK is joining, rather than altering, the prevailing net pricing trend (Exhibit 16)

Consistent with this general conclusion, share trends in the class reflect clinical rather than pricing dynamics (Exhibit 17). Beyond the simple impact of Triumeq providing an additional option for first-line, preferences are shifting to dolutegravir (part of Triumeq, and branded Tivicay as a single agent) over efavirenz (part of Atripla, and branded Sustiva as a single agent) and elvitegravir (part of both Stribild and Genvoya); as such Truvada + Tivicay is displacing both Atripla and Stribild. Also tenofovir alafenamide (in Genyoya) carries fewer renal and osteoporosis risks than the traditional formulation (tenofovir disoproxil fumarate, found in Truvada, Atripla, Stribild, and Complera), thus Genoya also is displacing Stribild (which is identical to Genvoya save the difference in tenofovir formulation)

We believe HIV net pricing gains can continue at or near 10% pace for the foreseeable future; the category accounts for less than a tenth of total market net price inflation, and it’s early for formulary managers to force Triumeq as an alternative to GILD’s tenofovir-based first-line regimens. The emergence of Triumeq however lowers the upper bound on class pricing power, and as Triumeq matures this upper bound gradually inches lower

Plaque Psoriasis

Calculated net pricing in this DMARD sub-category grew 40% in 2Q16, driving 8% of total market net pricing gains. WAC[6], or list price gains in the sub-category are more on the order of 18%, and we suspect the calculated 40% net price gain reflects inventory changes[7] associated with the recently launched brands. In truth, actual net pricing gains are likely to be closer to the 18% list pricing rate

The biological anti-inflammatory agents Stelara (JNJ) and Cosentyx (NVS) are displacing the more traditional anti-TNF’s (particularly Remicade/JNJ and Humira/ABBV) for the treatment of plaque psoriasis and/or psoriatic arthritis. Otezla (CELG) is a non-biological, oral agent that offers more convenience and tolerability than either Stelara or Cosentyx, though with significantly lower response rates than those seen with the newer biologics. Despite being a small molecule with lower response rates Otezla is priced in range of Stelara and Cosentyx (Exhibit 18), and the trio of brands arguably is simply following the broader DMARD category’s rate of net price inflation, set by Humira and Enbrel (AMGN). As discussed above under DMARDs, we expect formulary managers to aggressively bid the first-line anti-TNFs against one another, resulting in slowed net pricing gains for Humira and Enbrel at the very least. Indirectly, this might reasonably be expected to temper net pricing gains among the trio of psoriasis-focused brands; and, more directly, price competition among the first-line anti-TNFs could spill over into the psoriasis sub-category, since both Remicade and Humira are commonly used in psoriasis

ED

Net prices in the ED category grew 13% in 2Q16 (Exhibit 19), but the category explains only 4% of total market net price inflation. Viagra (PFE) and Cialis (LLY) began accelerating prices when Levitra (GSK) became non-competitive (Exhibits 20, 21). We anticipated that more formularies would restrict to only one of these two brands, as CVS’ Caremark division did in late 2015 when it excluded Viagra in favor of Cialis. This hasn’t occurred on the scale we had anticipated, presumably for two reasons: first, formulary managers’ coverage of the category is restrictive (volume limits and/or high percentage of costs borne by beneficiaries), thus plan sponsors’ exposure to the pricing actions is relatively modest; second, generics to both products are pending in 2017 (though the Viagra generic will be a single authorized generic sold by Teva), as such the present value impacts of these pricing actions are limited from the plan sponsors’ perspective

IV. Price losses by company

VRX

VRX is the single largest headwind to total market pricing gains in 2Q16; VRX’s real net pricing fell by 19.1% in the quarter (Exhibit 22), and the absolute value of VRX’s negative pricing contribution is equal to 6% of total market net pricing growth. VRX’ negative pricing is driven by rising average discount rates on a broad basket of the company’s brands, as payors work to reduce the gap between the net prices of VRX products, and the prices of alternatives[8]

GILD

GILD’s US net pricing fell by 3.2% in 2Q16 (Exhibit 23) as HIV pricing gains were more than offset by net price declines in HCV (Exhibit 24). As we argued above, net pricing gains are likely to continue in HIV as new first-line competitor GSK appears to be joining the market at the prevailing price; however as GSK gains share of first-line patients this limits the potential magnitude of future net price increases. HCV net prices in the US almost certainly will continue to fall, as payors are unlikely to offer relatively unrestricted access at net costs per regimen above +/- $30,000[9] – and current net pricing in the quarter is just over $52,000

SNY

US net real prices fell by 6.7% in 2Q16 (Exhibit 25), as continued net pricing losses for Lantus more than offset gains with Aubagio and Renagel / Renvela (Exhibit 26)

NVO

US net real prices fell 5.9% in 2Q16 (Exhibit 27), as net pricing losses across both the long- and short-acting insulin franchises offset modest pricing gains by Norditropin and Victoza (Exhibit 28)

V. Price losses by category

HCV

Annual net costs per treatment course continue to fall as a consequence of rising average discounts and zero list price growth (Exhibits 29, 30, 31), with the single exception of Sovaldi, whose calculated discount is falling, though this could reflect changes in inventory rather than actual changes in Sovaldi’s net price. As mentioned above under GILD, we expect net costs per regimen to fall to roughly $30,000 from their current level of just over $52,000

Insulin

Sales-weighted net prices for the long-acting insulins fell 12% in 2Q16 (Exhibit 32), driven primarily by continued net price declines for Lantus (SNY), the category’s largest brand. 2Q16 marks the sixth straight quarter of category net price declines, following formulary managers’ move to restrict the category to either of Lantus or Levemir (NVO)

DPP-4 Inhibitors

Net prices for the DPP-4 category fell by 6% in 2Q16 (Exhibit 33), the result of large net pricing declines for the 2nd-tier brands Tradjenta (LLY), Onglyza (AZN), and Kombiglyze (AZN), offset by very modest declines for the category dominating Januvia / Janumet franchise (MRK) (Exhibit 34). Very simply, price declines in the category are a byproduct of the LLY v. AZN race for second place

COPD Combinations

COPD combination net prices fell 3.7% in 2Q16 (Exhibit 35); prices for category leaders Advair (GSK) and Symbicort (AZN) have been in continuous decline since 3Q14 and 4Q14, respectively (Exhibit 36). The newest entrant to the category, GSK’s Anoro Ellipta, features once-daily dosing, as compared to twice daily for the Advair and Symbicort. Anoro Ellipta has been able to maintain a very modest (+/- 4%) premium to the category average, arguably by virtue of its dosing advantage, and the likelihood that it is catching failures from the older brands

 

  1. “ABBV, AMGN, and US DMARD Pricing: The Dog and Its Reflection”, SSR Health LLC, June 27, 2016; “ESRX’ new DMARD formulary points to slowing US sales for Humira (ABBV) and Enbrel (AMGN) …”, SSR Health LLC, September 11, 2016
  2. NRTI = nucleoside (or nucleotide) reverse transcriptase inhibitor
  3. NNRTI = non-nucleoside reverse transcriptase inhibitor; PI = protease inhibitor; INSTI = integrase strand transfer inhibitor
  4. Viread is tenofovir only; Truvada, Atripla (sold with BMY), Genvoya, Stribild, Complera and Odefsey are multi-agent regimens that include tenofovir
  5. Triumeq and Stribild are complete regimens (2 NRTI’s plus a 3rd agent), whereas other products on the graphic are either partial regimens (Truvada, Prezista/Prezcobix) or losing favor (Atripla) – thus the higher net costs for Triumeq and Stribild
  6. Wholesale Acquisition Cost
  7. Net pricing is roughly company-reported sales divided by third-party reported units. Because company sales are ex-factor and third-party units are end-user, changes to wholesale and/or retail inventory can have significant effects on the net price estimate. The relationship between wholesale / retail inventories and end user demand is particularly volatile early in products’ lifecycles. The 40% calculated rate of net pricing growth, as compared to the 18% rate of list pricing growth, implies that wholesale and/or retail inventories rose in 2Q16
  8. “VRX, ENDP, HZNP, and MNK – A Comparison of US Pricing Risks”, SSR Health LLC, March 28, 2016
  9. “GILD/MRK/ABBV: Why Everyone Wins if US Pricing Falls (In a Certain Way), SSR Health LLC, February 3, 2016

 

©2016, SSR, LLC, 225 High Ridge Rd, 2nd Floor, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. In the past 12 months, through a wholly-owned subsidiary SSR Health LLC has provided paid advisory services to Pfizer Inc (PFE) and to Merck (MKGAY) on both securities-related and non-securities-related topics

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