Drug Pricing Outlook
Drug pricing is an ongoing source of anxiety for biopharma investors. A critical debate in the marketplace is whether the Inflation Reduction Act will cut drug prices.
This episode of Cowen’s Thematic Outlook Podcast Series features Steve Scala, Cowen’s Pharmaceuticals Analyst and teammate Mike Nedelcovych, who joined Cowen four years ago from Johns Hopkins Drug Discovery after co-founding a biotech startup. They discuss the results of Cowen’s 28th Annual Drug Pricing Survey with Bill Bird, Head of Thematic Content. Key topics include what the survey says about the pricing outlook, biosimilar competition, and gross-to-net discounts. They also discuss survey insights related to obesity drugs, and the survey’s historical context.
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Transcript
Steve Scala:
We can confirm that our survey has correctly predicted price direction every year.
Bill Bird:
Hi everyone. My name is Bill Bird, Cowen head of thematic research content, and I’m joined by Steve Scala, Cowen senior research analyst covering the pharmaceutical industry for more than 20 years at Cowen, and his teammate Mike Nedelcovych, who joined Cowen about four years ago from Johns Hopkins Drug Discovery after co-founding a biotech startup.
Today’s topic is drug pricing, an ongoing source of anxiety for biopharm investors. A key debate in the marketplace is, will the Inflation Reduction Act really cut drug prices? Cowen recently published two outstanding Ahead of the Curve Series reports on drug pricing, one on the macro, led by Steve and Mike, and another on the micro, led by Yaron Werber. For the past 28 years, Steve and his team have conducted the leading drug pricing survey on Wall Street, so the team brings a wealth of knowledge and experience on this topic. Steve and Mike, thanks for joining us today.
Steve Scala:
Thanks, Bill.
Mike Nedelcovych:
Thank you.
Bill Bird:
So let’s dive right in. Steve, let’s start at a high level. Tell us about your 28th annual drug pricing survey.
Steve Scala:
Sure, thanks. So in the past 28 years, we at Cowen have surveyed buyers of drugs in the United States. This year’s survey reflects responses from 26 payers who collectively purchased $90 billion of drug in 2022, or about two-fifths of total US retail drug purchases.
But to set the stage, we of course started this survey 28 years ago. Bill Clinton was our President, and he and Hillary Clinton were proposing to reconfigure how healthcare was delivered in the United States. Investors were very fearful and sold pharma. At that time, Cowen launched its first survey and results showed drug prices were poised to rise over subsequent years. Investors didn’t believe it, but prices did rise as our survey predicted. During the next 27 years, our survey also showed prices would rise and of course investors were doubtful, but drug prices rose throughout this time. Roll forward a quarter-century, and our survey continues to look for drug price increases and investors are doubtful. You may note a trend.
Bill Bird:
Thanks, Steve. That’s very helpful context. The more things change, the more they stay the same. Steve, what did the survey say brand drug prices did in the past one year?
Steve Scala:
Yep, so that’s another good question. In our survey, in addition to asking what future prices might do, we also ask payers what they experienced in terms of drug price movement in the past year. This gives us a way to check our results, because we can compare what actually happened in the prior three years versus what payers believe would occur in the next three years, three years ago. By this test, we can confirm that our survey has correctly predicted price direction every year.
Now, during the past 12 months, drug prices increased an average of 4% and on a weighted average basis, the increase was 6%. The waiting is relative to total drug purchases. We also ask to what extent buyers attribute the price increases to various factors. 19% attribute a substantial portion, which we define as 75%, to mix shift to higher-cost drugs, while 27% attribute a moderate portion, which we define as 50%, to mix. About half of respondents attribute a modest portion to mix. In terms of categories, oncology, diabetes, and rheumatology were the biggest influencers of drug price increases during this time.
Bill Bird:
Steve, what does the survey suggest brand drug prices will do in the next three years?
Steve Scala:
This is the absolute most important question of our entire survey. Over the next three years, respondents to our survey anticipate drug prices to increase 8% on average and 10% on a weighted average. This implies annual increases of low single-digit each year and a slightly higher than last year’s three-year-forward expectation. Only one respondent looks for prices to decline, while four looked for prices to decline when we asked the same question last year. So the number who expect drug prices to decline has indeed declined. About one-third of respondents expect mix to be a moderate influence, while about half think mix will be a moderate factor. In terms of categories, diabetes, oncology, and specialty drugs are likely to impact price to the greatest extent.
I would like to raise one more point, because this was new in this year’s survey. We asked payers for their expectations on the impact of the Inflation Reduction Act, or IRA, on both price and usage. On price, about half of respondents deem the bill likely to make a modest contribution to drug price changes, while about a quarter believe it will have no impact. Most vulnerable categories include diabetes, oncology, and specialty drugs. On usage, about 40% of respondents believe the bill will have no impact and about 20% believe units could increase 1% to 5%, while about a quarter believe units could increase more at about 6% to 10%.
Bill Bird:
Let’s bring Mike into the conversation. Mike, biosimilars have historically led to price erosion, and biosimilar competition on certain big selling drugs is imminent. What does the survey suggest relative to pricing on biosimilars?
Mike Nedelcovych:
Across therapeutic categories on average, the payers we surveyed look for a roughly 30% to 45% price discount relative to the branded alternative in order to adopt the biosimilar. This response has been pretty similar for several years now. When it comes to adoption rates of biosimilars, for drugs for which one biosimilar is available, about 30% to 40% of prescriptions dispensed by a given payer’s organization is reported to be a biosimilar as opposed to the originator brand. That number jumps to about 50% to 65% when three biosimilars are available. And overall, this adoption rate has been trending slightly upward in our survey over the last few years. That trend likely reflects the greater availability of biosimilars in general, and especially the availability of biosimilars for widely-used drugs.
And speaking of, as you mentioned, we are expecting biosimilar competition in the US this year for the world’s best-selling drug, Humira, which is marketed by AbbVie for various immunological and gastrointestinal diseases. In our survey this year, we asked payers what they were looking for in terms of a biosimilar Humira discount in order to adopt the biosimilar as opposed to the branded originator, and they reported on average that they’re looking for a discount of 20% or more. However, when you weight that response by annual drug spend, so payers who spend more on drugs than other payers, the number was closer to a 40% required discount.
Bill Bird:
Mike, you and the team published a great Ahead of the Curve Series report on the obesity market back in November, and in the report you discussed payer barriers around obesity that will need to be cleared to unleash obesity drug spending potential. From your survey, what insights did you glean on obesity drug payer coverage?
Mike Nedelcovych:
Our survey suggested that the issue of private insurance coverage of new obesity drugs such as Novo Nordisk’s Wegovy is still very much in flux. We received scattered responses to the question of what coverage currently looks like and what it’s predicted to look like, ranging from complete coverage with no significant hurdles to less than 25% coverage. Though it was far from a consensus, the most popular responses indicated by surveyed payers seem to suggest that current coverage is probably around 30% or less, and in three years, that number is expected to grow modestly. This is largely consistent with the commentary that we get from KOLs we’ve surveyed that run large obesity clinics. Interestingly, this was actually the first survey in decades in which obesity received mention as a therapeutic category that could drive increased drug costs in the future, but that was noted by only one payer.
Bill Bird:
And, Mike, net drug prices have declined since 2017 on higher rebates and discounts. What did the survey report on gross to net discounts?
Mike Nedelcovych:
Payers indicated that across categories, the average gross to net discount is roughly 20%. It’s higher for categories like cardiovascular disease and lower for categories like rare disease. Here again, respondents that accounted for the bulk of annual drug spending in our survey place that gross to net discount higher, closer to about 40%. This is actually the first time we asked this question on the survey, but we know from other sources including company reports amongst those companies that we follow, that gross to net discounts generally seem to be growing, but so have list prices, and the magnitude of those changes very much depend on the drug and the category.
Bill Bird:
Steve, what are some of the things you’re watching to gauge how drug pricing is developing in the market right now?
Steve Scala:
Well, of course we’ll continue to do our survey in years to come, which we have found to be a very good metric and barometer on the landscape, but also we are eager to see how the US government takes the steps to implement the inflation reduction act as it relates to drug pricing. And the first steps are to start occurring later this year, so that will be something that we’ll monitor and assess relative to the impact it could have on pricing.
Bill Bird:
Steve and Mike, throughout the year, you do a lot of events and conferences. In addition to Cowen’s March Health Care Conference, what are some of the other events you’ll host that are worth highlighting for our listeners? And maybe you could tell us a little bit more about this year’s Health Care Conference.
Steve Scala:
Well, first I would like to emphasize Cowen’s 43rd Annual Health Care Conference, which is March 6th through the 8th in Boston. Hundreds of leading healthcare companies will participate. Additionally, we will host about 35 KOL-driven panels on diverse areas spanning all of healthcare, including pharma, biotech, med tech, and services. This is a very unique element of the Cowen conference. I don’t think there’s another conference on Wall Street quite like it, and therefore we feel it’s a must-attend event.
Beyond that, we do have our therapeutics conference, which occurs in the fall, and we do, throughout the year, KOL weekly calls on various events and topics and other research as events require. So those are the events that I would highlight to investors.
Bill Bird:
As we wrap up today’s podcast, Steve and Mike, thanks for sharing your insights. And to our listeners, thanks for taking time out to be with us this week, and see you next month.