Drug pricing has been a hot issue for the past few years and was debated multiple times on the campaign trail by both Trump and Hillary. So far, there’s been little action to curb drug price increases, however, with Trump more focused on arguing with the press and other lawmakers occupied with more urgent matters. For the pharma sector, this is good news, although patients are hardly celebrating.
Still, while it may seem that, for the time being at least, drug pricing is off the political agenda, investors can’t rest easy thanks to a new report from Credit Suisse.
The report, published today claims that drug price increases contributed 100% of 2016 earnings per share growth for pharmaceutical companies.
Drug Price Increases drive earnings
For 2016 as a whole, US list prices rose 9.8%, marginally below the 10.8% rise in 2015. 2017 has also started off with steady price increases with the average price rising by more than 8% during the first quarter.
That said, list prices are not wholly representative of what consumers pay as rebates make medication more affordable. US pharma relies heavily on rebates to push its products with average rebates rising to 37.7% of gross sales in 2016, up from 35.7% in 2015. AstraZeneca has the highest rebates in the entire sector according to Credit Suisse with rebates as a percentage of gross sales coming in at 61.8% for 2016. Analysts expect rebates to grow to 40% of gross industry sales in 2020.
Excluding rebates, net pricing grew by 6% during 2016, representing 100% of industry earnings growth for the year. Price rises provided an important stream of growth for pharma companies during 2012 and 2013 when patent expiry losses began to eat away at revenues from existing legacy products, and companies have continued to lean strategy to improve growth. While some businesses managed to achieve organic growth without taking the easy way out, Credit Suisse’s analysts estimate US net price rises contributed at least 100% of the net income growth seen for Biogen, Eli Lilly, AbbVie, Allergan, Merck, Pfizer, and Amgen. The total dollar value of additional income from price rises is estimated as being $8.7 billion.
The interesting trend that shows through in the data is that while prices are rising, rebates are also increasing indicating that companies are having to give more away to sell products at higher prices. Credit Suisse believes this trend has something to do with the lack of product uniqueness. The report notes:
“Between 2011 and 2015 there was a clear trend showing an increased level of rebates for less unique products (Figure 42). US portfolios with just 15% of sales from unique products saw an increase in rebates from 40% in 2011 to 50% in 2015. However, for unique portfolios of c90%, the level of rebating remained stable at c5%. A new observation for 2016 is that there has been an increase in the level of rebates for more unique portfolios. For a US portfolio with 90% of sales from unique products rebates increased from 5% to 10% between 2015 and 2016. The rebate levels for the less unique portfolios remained broadly consistent with 2015. Nevertheless, the magnitude of the increase in the level of rebating for less unique products since 2011 is still significantly greater.”