The Revolt Against Big Pharma's Astronomical Prices
Don't be caught off-guard. Drugmakers are facing a new mandate -- cut prices or be banned.
Here's what's afoot. Health plans are increasingly refusing to cover certain drugs unless companies -- including Pfizer and GlaxoSmithKline -- charge less for them.
CVS Caremark, the nation's second-largest pharmacy benefit manager, excluded 70 drugs this year. In 2015, CVS plans to exclude around 200. Express Scripts this year excluded 48 drugs or medical products from its formulary.
Formularies are lists of drugs a health plan covers. Once a drug is dropped from a formulary, individuals have to pay full price, or switch to a rival company's drug. Both Pfizer and Glaxo have been taking a hard line about pricing, and expecting customers to stick with their drugs. But they're finding out that's dead wrong.
When Express Scripts, the nation's biggest pharmacy benefit manager, refused to pay Advair's price last year, Advair volume dropped by 5% (although revenue still increased due to a bump from pricing).
This signifies the beginning of a potentially exciting trend for patients, as drugmakers willing to price more reasonably are the new winners. For example, picking up Advair's lost sales was AstraZeneca's rival inhaler Symbicort.
Symbicort has been coming in second best to Advair for years. But no doubt in part because the less-expensive inhaler remained on the formulary lists, sales of Symbicort grew 13% in Q1, according to SEC filings.
Big Pharma has been depending on drug pricing increases to offset the patent cliff for years. Last year, patent expiries reduced spending on medicines by $19 billion, according to a report issued by IMS Institute for Healthcare Informatics. However, total dollars spent on medications actually increased 3.2% to $329.2 billion. The primary driver of the increase was $20 billion in drug pricing increases.
Pfizer's faltering sales on Xeljanz
Xeljanz, Pfizer's rheumatoid arthritis treatment, was also banned from the Express Scripts formulary.
That's particularly bad news for Pfizer, because Xeljanz was supposed to be a blockbuster. Early projections forecast peak annual sales of $3 billion a year. Instead, Xeljanz sold a wretched $114 million last year (although to be fair, sales are definitely still ramping). Analysts are now saying Xeljanz will be lucky to hit half its projected peak -- $1.6 billion by 2016.
Pfizer has been depending on two potential blockbusters, Xeljanz and Eliquis, to help fill the gaping hole left by the patent loss of Lipitor. But unfortunately, blood thinner Eliquis is also in trouble. Peak sales for Eliquis were projected at $3 billion to $5 billion. Analysts now peg Eliquis sales (for Pfizer, Bristol Myers is also a partner) at a measly $615 million.
During last quarter's conference call, Pfizer executives were asked specifically whether the company would be willing to discount the price of Xeljanz to counter its loss of market share. Pfizer execs took a hard line in the conference call -- insisting they would build on the drug's positive results in clinical trials instead.
A June study of a generic cocktail could complicate things further for Xeljanz. Data showed that a combination of methotrexate and two other generics worked as well at a fraction of the price -- about $1,000 a year, compared with the $25,000 Pfizer charges for Xeljanz.
Notably, Eli Lilly executives, who were also grilled about soaring prices and excluded drugs in their company call, took a different tack. Enrique Conterno, who runs the diabetes business at Eli Lilly, said, "We need to be competitive whenever a payer basically makes the decision that they are going to narrow the formulary."
Pfizer is weathering a difficult period, and I think that Pfizer may be showing overconfidence in their refusal to discount. Pfizer's overconfidence was also on display in the company's unsuccessful pursuit of AstraZeneca.
In terms of Glaxo, the company seems to be having a lot of trouble right now. What with the bribery scandal in China, and increasing inroads of generic competitors, the loss of sales in Advair comes at a particularly bad time.
Glaxo is pinning a lot of its hopes on Breo, its new entrant into chronic obstructive pulmonary disease field. According to Bloomberg however, Breo has only captured less than 1% of the market since its launch late last year.
Some analysts believe drug companies will keep their pricing power -- after all, drug prices in the U.S. are not regulated.
But hindsight is not foresight. Two years ago government austerity measures in Europe targeted soaring drug costs and revenue flattened for many pharmaceutical companies. If the United States follows suit, and measures like the Medicare bill to negotiate prices that recently stalled in Congress eventually get passed, things could change significantly.
No one knows when -- or even if -- that will happen. But even having key drugs banned from formulary lists is enough of a jolt to create some significant risks.
Leaked: This coming blockbuster will make every biotech jealous
The best biotech investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool's new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.
The article The Revolt Against Big Pharma's Astronomical Prices originally appeared on Fool.com.Cheryl Swanson has no position in any stocks mentioned. The Motley Fool recommends CVS Caremark and Express Scripts. The Motley Fool owns shares of Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.