Big Pharma Losing Leverage as Payers Raise Pressure on Price

(Bloomberg) -- The world’s biggest drugmakers don’t have the muscle they used to have.

Pharmaceutical and biotechnology giants are finding it more difficult to charge high prices for a range of medications, their latest quarterly results show. That’s raising the pressure to pump up sales volumes and find lucrative new treatments for niche markets.

“You had an environment in which you could just price your drug anywhere you wanted, and generally people were paying for it -- that’s great,” Sean Harper, Amgen Inc.’s head of research and development, said in an interview in Boston. “But to my view, those days are coming to an end.”

The reason: The big companies that pay for drugs are getting bigger. A series of tie-ups among insurers and pharmacy benefit managers has left drugmakers negotiating with a handful of powerful players. List prices for medications are still rising, but drugmakers are forced to give large rebates to insurers and pharmacy benefit companies that bestow spots on their coveted formularies -- the rosters of drugs covered by payers.

“We do have a payer environment that’s been consolidating, and with that consolidation, there’s better negotiating power against pharmaceutical firms on price,” said Damien Conover, an analyst at Morningstar Inc.

Flexing Muscle

The shift comes after years of outcry over rising drug prices. Executives from Mylan NV, the maker of allergy shot EpiPen, and Valeant Pharmaceuticals International Inc. were brought before Congress to explain what they charge. The drugmakers’ trade group launched an ad campaign to highlight its scientific contributions and is reviewing its membership rules to force out gougers.

Payers are flexing their muscles against drugmakers, particularly when a cheaper drug, such as a generic, can easily be swapped for a branded version that sells for more. The result is more pricing pressure in crowded disease areas like diabetes. 

On Tuesday, Merck & Co. became the latest drugmaker to report a slowdown for diabetes drugs, after Johnson & Johnson and AstraZeneca Plc both blamed price pressures for hurting sales in the first quarter. Eli Lilly & Co. also posted sales for a diabetes drug that were lower than expected.

“We’ve seen the pricing pressure and the pushback from the payers is even greater than what was initially expected,” said Ashtyn Evans, an analyst at Edward Jones & Co.

Spreading the Blame

With the added pressure, less-competitive disease areas could become more attractive for drugmakers hoping to maintain leverage, according to analysts and investors. Those could include cancer or rare diseases. 

“There’s less that the payers are able to do,” Vamil Divan, a Credit Suisse analyst, said in a telephone interview. Some of Amgen’s investors have been pushing the company to double down on cancer and rare diseases, Harper said.

To be sure, drugmakers also say they aren’t the only ones to blame for the high prices that have upset consumers and politicians. In March, Jim Meyers, executive vice president of worldwide commercial operations at Gilead Sciences Inc., said that PBMs encouraged high prices on its hepatitis C drug in order to receive bigger rebates. For its part, PBM Express Scripts Holding Co. responded that if the drug is worth less than Gilead’s price, payers should be made whole.

Volume Emphasis

Amgen Inc. has been struck coming and going by the growing power of the PBMs. Payer pushback has limited its ability to raise the price of its biggest drug, the arthritis treatment Enbrel. At the same time, PBMs have restricted access to Amgen’s new potential blockbuster, the heart drug Repatha, to only the sickest patients. Even after the company showed that the therapy helped reduce heart and stroke risks-- albeit less than investors hoped -- sales have been slow.

While payers drive harder bargains, drugmakers are emphasizing sales volume as a way to draw attention from pricing, analysts said. On Lilly’s recent earnings call, the company said its U.S. pharma revenue increased 16 percent, primarily because of higher volume. Bristol-Myers Squibb Co. said blood thinner Eliquis is leading its class in total prescriptions. AbbVie Inc. said its Humira sales volumes are rising.

“If they have a new drug they’re very focused on saying, ‘this growth is due to volume and not a price increase we took,’” Edward Jones & Co.’s Evans said.

But it’s unclear whether relying on volume growth is sustainable, according to Credit Suisse’s Divan. Price increases accounted for all of the industry’s earnings growth last year, he wrote in a recent note to clients.

Amgen’s Harper said the solution is value-based pricing, in which some money may be refunded to insurers if a drug doesn’t work as expected. The concept is hard to execute, as conditions like diabetes can be tracked easily but other areas are murkier. There’s also little evidence that pay-for-performance will significantly lower drug prices overall.

While Amgen has gotten at least one insurer to consent to a performance-based agreement, PBMs are still more interested in maximizing their rebates, Harper said.

“They say, ‘great data guys, we get it,’” he said. “’But you know, if your list price was higher and your rebate was bigger, it would be an incentive for us.’”

To contact the reporters on this story: Jared S. Hopkins in New York at jhopkins38@bloomberg.net, Doni Bloomfield in Boston at mbloomfiel12@bloomberg.net.

To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, Timothy Annett, John Lauerman