Pharma’s pricing power just isn’t what it used to be, and it’s probably not going to recover any time soon.
Pharmacy benefit manager (PBM) Express Scripts Holding Co. last week reported a record-low 1.5 percent increase in drug spending by commercial health insurance plans in 2017. It also said per-beneficiary drug spending fell for many commercial plans and gave a discouraging forecast -- for drugmakers, anyway -- for the years ahead.
Despite this top-line weakness, political pressure on drugmakers continues, threatening their bottom lines.
Spending growth remains strong in some treatment areas. Spending on cancer drugs, for which pricing tends to be aggressive, increased 17.4 percent in 2017. Inflammation-drug prices jumped 15.3 percent as new and expensive new drugs launched and prices for older drugs kept rising.
But other forces were big enough to counteract these gains. Inflation slowed in the increasingly competitive diabetes and multiple sclerosis markets. A big cholesterol drug went off-patent. And spending on hepatitis C drugs continues to plummet as patients are cured and a price war escalates.
The truly scary thing for pharma is the outlook for the future. Express Scripts expects 1 to 3 percent drug-spending growth over each of the next three years, slower than what pharma has traditionally enjoyed.
Express Scripts expects spending on multiple sclerosis, high cholesterol, asthma, and hepatitis C drugs to decline. It expects spending growth for skin and diabetes drugs to be glacial.
The areas that produced the strongest growth in 2017 have some of the most downside. Biosimilar competition has been slow to arrive for inflammation and cancer blockbusters in the U.S., but the combined efforts of the FDA, payers, and the many companies developing these cheaper alternatives will eventually change that. Several potential blockbuster drugs for inflammatory conditions have launched recently or will soon. And while cancer drugs have been largely immune to such pressure, a pile-up of similar medicines in a few categories may finally end that.
Unfortunately for pharma, nobody will look at these numbers and say “mission accomplished” on keeping drug prices under control. Commercial plans that contract with a huge PBM such as Express Scripts probably represent the lower end of drug spending, in terms of population health and negotiating power. Many expensive drugs are covered under medical insurance benefits rather than pharmacy benefits. And slow growth is still growth, atop many years of spending increases. Criticism of pricing isn’t going anywhere.
That’s where the politics comes in, and recent news on that front has been no better for pharma. The stopgap budget Congress passed on Feburary 9 hits drugmakers by forcing them to take on more of the cost of medicines covered by Medicare Part D. This won’t arrest drug spending, just shift it. But it could bite big pharma profits.
Then there’s the Trump administration. So far, outside of what Scott Gottlieb is doing at the FDA, it’s taking little real action on drug pricing. But a paper published last week by the Council of Economic Advisors (CEA) last week and President Donald Trump’s 2018 budget plan released this week both outline policy priorities -- and both have plenty for pharma to dislike.
The CEA paper and the budget suggest changes to the Medicare drug benefit that could cut reimbursement for many blockbuster drugs. And the president’s budget proposes a pilot program letting state Medicaid programs adopt private-sector tactics to reduce costs.
Pharma firms at least can be relieved by the absence of extreme measures Trump mentioned during his presidential campaign, such as letting the federal government negotiate drug prices. Several of his proposals target pharma foes such as insurers and PBMs.
Pharma’s nightmare scenario of aggressive government meddling may not have materialized. But that doesn’t mean the next few years won’t be a slog.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.
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