The TD Cowen Insight
Our survey shows a majority of payors believe brand drug prices will rise by a low single-digit rate annually over the next three years, similar to the last few years. The impact of Inflation Reduction Act (IRA) is expected to be very modest, both in terms of implications for price and utilization. Biosimilar usage expectations appear to be growing.
Innovation Benefits Patients and Drug Pricing
Drug prices are an ongoing source of anxiety for biopharma investors. In contrast to this fear, we believe U.S. drug prices will continue to increase because the innovation that many medications provide offers real benefit to patients. As long as biopharma continues to deliver innovation, we see no change in the upward trend in drug prices.
TD Cowen Drug Pricing Survey
We have conducted our annual survey of buyers of drugs in the U.S. for the past 29 years. During this time, our survey has predicted that drug prices would rise, despite multiple reform initiatives, pricing scares, and election cycles. And indeed, prices have increased during this time.
This year’s survey results are based on responses from 27 HMOs, pharmacy benefit managers (PBMs), and hospitals. Collectively, they purchased about $144B of drugs in 2023, or about one-fifth of total U.S. drug expenditures.
Respondents Expect Drug Acquisition Costs to Rise
This year’s sample of purchasers – who responded to our survey in December 2023 – anticipate that brand drug acquisition cost per unit will increase by an average of 8% over the next three years (+12% by weighted average). This is broadly similar to last year’s forecast. Fifteen percent of respondents attribute a substantial (75%) portion of the anticipated increase over the next three years to a mix shift to higher-priced, newer therapies vs. 19% last year. Only one respondent, representing only 1% of drug spend amongst surveyed payors, predicts a decline in drug prices over the next three years.
Strong Biopharma Pipelines Expected to Drive Growth
We are constructive on the biopharma sector given strength of pipelines, favorable unit dynamics, and the fact that U.S. drug prices do not appear to be a drag on this outlook, blunting price erosion outside the U.S. This backdrop allows us to have greater conviction in our product forecasts, many of which are critical drivers of growth for years to come.
Inflation Reduction Act Not Expected to Impact Drug Pricing
The IRA includes mechanisms to curb drug prices beginning in 2026. Clearly this needs to be monitored closely, so we asked about it once again in this year’s survey. The answers might surprise some. Half of respondents deemed the bill likely to make a modest (25%) contribution to drug price changes over the next 3 years. No payors anticipate a substantial (75%) effect on drug prices and 23% of purchasers think the IRA will have zero impact. These responses are largely in line with last year’s survey. When asked to what degree the co-pay assistance provision of IRA is likely to impact drug usage in 5 years, 42% of payors responded, “Likely no impact” (same as last year).
Biosimilars Expected to Take More Share
Also in flux is the outlook for biosimilars. Over the last few years, there has been a relatively steady trend in which payors expect more and more share to be taken by biosimilars. This is especially true when multiple biosimilars are competing against a single originator product. This trend has coincided with an increasing number of high volume, high cost branded biologics going off patent. It is notable that despite erosion of off-patent blockbusters, overall average drug prices are still anticipated to rise in line with previous years.
This year’s survey results should reassure investors. Innovation commands higher prices, so the most innovative companies should benefit most from what our survey shows.
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