Hillary Clinton’s proposal to constitute a drug price task force following Mylan’s EpiPen pricing will focus on non-innovator BioPharma, according to Morgan Stanley. David Risinger and team point out in their September 7 research piece titled “Epipen controversy drives renewed drug price scrutiny” that R&D productivity has stepped dramatically higher in recent years with new molecular and new biological entity approvals hitting a 19-year high of 45 last year.

Epipen controversy reignites drug price scrutiny

Mylan’s EpiPen delivers a shot used to fight life-threatening allergic reactions to food, insect bites and other allergens. Mylan raised the price from $100 to $500 recently, inciting public wrath. Recently two senators called on Mylan to explain the price increase and asked the FTC to look into the matter.

On September 2, Hillary Clinton proposed a plan to limit “unjustified price hikes” and proposed an oversight panel to levy fines and impose penalties for unjustified, outlier price increases on a long-available drug. She indicated that if she is elected president, she would make new enforcement tools available, including emergency importation of safe treatments.

Risinger and team at Morgan Stanley term the EpiPen case as a special situation and a lightening rod. They consider it special as it’s a monopoly with limited alternatives and is used for life-threatening allergic reactions. The MS analysts point out that Clinton’s plan hovers around a government consumer oversight board which would have the ability to use enforcement tools making alternatives available and increasing competition.

The analysts argue that innovative BioPharma won’t be a target of the Clinton proposal. Drawing reference to Clinton’s latest quotes, the MS analysts believe she appears to want to promote BioPharma investments in R&D while disincentivizing business models in which older drugs are acquired and prices are raised substantially.

The MS analysts believe top-10 drugs’ 5-year CAGR list price increases still highlight risk to BioPharma if the proposed task force were to expand its scope or if government bodies pursue additional drug price scrutiny.

BioPharma net pricing grew in low-single digits

Citing IMS Health data, the MS analysts point out that while list price increases in 2015 were 12.4%, net price increases were only 2.8%, being the lowest in the past five years.

net-price-increases BioPharma

The MS analysts note that the average top 10 drugs by non-discounted U.S. drug dollars, Medicare Part D, and Medicare Part B spending averaged 12%, 11%, and 5% annual price increases, respectively:

top-10-drugs-in-2015 BioPharma

The following chart captures the MS analysts’ estimated impact on 2017 EPS among their firm’s covered biopharmaceutical companies in the scenario of zero U.S. brand drug price growth:

us biopharma

The MS analysts believe near-term investor perception drivers include the Part B demo finalization and the outcomes of the presidential and Senate elections. They anticipate that Centers for Medicare and Medicaid Services (CMS) will finalize the proposed demo soon. The analysts add that investors expect the demo to be watered down. However, the MS analysts are not clear as to how much CMS will back down as it was likely expecting to receive significant criticism when it designed the demo.

In another related and interesting report out today titled In Search of “Normal” Drug Price Increases, Morgan Stanley states:

12% of the drugs in the basket more than tripled in the last seven years (Epipen up 390% in the same period); (3) What was the corresponding increase in R&D costs over the same time period? It was up on average ~22% for North American companies covered by Morgan Stanley’s Therapeutic teams (weighted by total R&D dollars). Our analysis does not address relative value to patients, a metric beyond the scope of this report.

Morgan Stanley also notes and see the chart – emphasis ours

Pricing for 44% of drugs in our basket more than doubled since 2009. To gauge the magnitude of drug price inflation, we analyzed the AWP pricing (gross price) of 269 branded products from 2009 to 2016 year-to-date. As highlighted in exhibit 1, 87 drugs in our basket ( ~ 32% of total) increased by less then 50%, 65 drugs (24%) increased by 50 to 100%, 85 drugs (32%) increased by 100 to 200%, and 32 drugs (12%) by more then 200%. Based on our analysis, average annual drug price inflation accelerated to a rate of 18% to 20% from 2013-15 vs. 10% – 13% in 2010-12. On a cumulative basis, average branded drug pricing increased 65%, 145% and 158% over the last 3, 5 and 7 years, respectively. The median increase for same time periods was 36%, 76%, and 82%, respectively. This compares to CPI which increased 3%, 7%, and 12%, respectively over the same time period.

This only compares to CPI and does not even get into stagnant wages – and Obama wonders why people are angry… maybe he should read this report.

drug-price-increases