Health

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.

The defining story of the past year in biopharma has been drug pricing, as much as the industry might wish otherwise. 

But though much of the anxiety has been over politically driven criticism and the potential for government price curbs, the only real pricing pressure in the U.S. has come from the private sector. Pharmacy benefit managers have gotten more aggressive about refusing to cover certain drugs and negotiating discounts, which means biopharma's annual and biannual price hikes on aging drugs aren't nearly the sales drivers they used to be. 

This phenomenon is unlikely to stay quiet much longer, as this pressure has mounting and negative impacts on some of the biggest companies and drugs in the industry.

Down Year
Pricing scrutiny and disappointing results have weighed on large pharma stocks this year
Source: Bloomberg

The most fully realized example of this phenomenon is the diabetes market.

It's a perfect environment for payer pricing pressure. Millions of Americans suffer from the disease, so there's a major incentive to cut costs. There are many drugs in each treatment category, letting payers pit companies against each other to extract discounts. Cheaper copies of widely used medications are beginning to hit the market; for example, CVS Health Corp. is doing something unprecedented in the U.S. next year by excluding Sanofi's Lantus in favor of an Eli Lilly & Co. knockoff. Many insulins are years old and have seen sales volume growth slacken in the U.S.. 

The only way companies have generated any kind of sales growth in this environment is through consistent list-price hikes. The chart below shows how Eli Lilly's pre-discount U.S. sales of its best-selling insulin Humalog have skyrocketed, even as the actual number of prescriptions dispensed has fallen. But the discounts Lilly is paying to maintain market share mean its actual U.S. revenue is starting to decline in spite of price increases. 

max-humalog

Other companies in crowded drug classes that depend on price hikes rather than volume to boost revenue should be deeply concerned by that chart. 

A set of blockbuster drugs that treat inflammatory conditions such as arthritis will likely be the next to face a major pricing pinch. The three biggest drugs in the class, Humira, Remicade and Enbrel, are expected to combine for more than $30 billion in sales this year.

Amgen Inc., the maker of Enbrel -- which Wall Street expects to near $5.8 billion in sales this year -- conceded in its third-quarter earnings call in October that sales of the drug would not get much of a boost from price hikes in 2017. That's borne out by the data: By raising list prices, Amgen has managed to boost pre-discount sales numbers even as volume has declined, but post-discount sales have flattened:

max-enbrel

Johnson & Johnson's Remicade, the second-biggest inflammation drug, with nearly $7 billion in sales expected this year, is starting to face competition from knock-off drugs in the U.S. That affects not only J&J, but will drive down prices throughout the class.

AbbVie Inc.'s Humira -- the leading inflammation drug, with analysts projecting $17 billion in sales next year --  is in a slightly better position than its competitors, with sales volumes still rising.

But Humira, too, uses price hikes to boost revenue growth. The list price of a Humira Pen has more than doubled since 2012:  

Doubling Up
The cost of Humira has dramatically increased over the past four years
Source; Bloomberg/First DataBank

And AbbVie is heavily dependent on Humira, which is expected to account for more than 60 percent of its revenue this year.

A structural decline in U.S. pricing power is ominous for every pharmaceutical company -- particularly if it extends to brand-new drugs, or to areas, such as cancer, that traditionally have strong pricing power. Highly effective new cholesterol-lowering drugs from Amgen and Sanofi/Regeneron have had notably sluggish launches since being approved in 2015, as a result of cost-driven roadblocks to patient access. 

Meanwhile, the market for expensive, immune-boosting cancer drugs -- dominated by Merck & Co. Inc. and Bristol-Myers Squibb Co. when 2016 began -- gained a new entrant this year in Roche Holding AG. Pfizer Inc. and AstraZeneca PLC may join next year. Having five similar drugs on the market would make pricing pressure all but inevitable

These trends quietly gathered strength in 2016, and 2017 will give us more of a sense of just how far they will go. This, regardless of what Donald Trump decides to do, could well be the defining biopharma story of the year. 

-- With graphics by Rani Molla

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net