Report: Price hikes are still driving pharma's earnings growth. Who's most at risk?

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Bristol-Myers Squibb, AbbVie and Roche face higher risks from pricing pressure and scrutiny than their peers do, according to a new report from Credit Suisse.

Defying pressure from politicians and the public, pharma largely continued its price-hiking ways in 2016, with the corresponding sales windfall equal to 100% of the industry’s EPS growth for the year.

That’s one conclusion in a new report from Credit Suisse, which found that net price hikes in the U.S. last year created $8.7 billion in net income for top pharma companies, equivalent to all of the sector’s earnings growth.

That's an industrywide stat, so it doesn't hold true for every individual pharma company. But for Biogen, Eli Lilly, AbbVie, Allergan, Merck & Co., Pfizer and Amgen, net price hikes created additional sales equal to all of their net income growth for the year, according to the analysts' calculations.

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Different companies also bear different levels of risk to their pricing power, and that's where market watchers need to focus, Credit Suisse analysts argued. Pricing is the “most important issue for a pharma investor today,” they wrote in a 120-page analysis of the industry's pricing and financials.

As the analysts see it, companies dependent on sales in costly therapeutic areas with high competition are susceptible to pricing risks, as are those that rely heavily on sales to Medicare Part B. In the report, Credit Suisse listed HIV, multiple sclerosis and rheumatoid arthritis biologics as three risky disease areas going forward, while also noting that Medicare Part B is a potential target for cost controls.

Which major pharmas face the most risk from threats to pricing on key products going forward? Bristol-Myers Squibb, AbbVie and Roche, to name a few.

The Credit Suisse analysts determined Bristol-Myers’ pricing risk to be the highest among the top pharma companies they examined. That's because PD-1/PD-L1 immuno-oncology therapies, such as the company’s key cancer-fighter Opdivo, are “discountable” as the field of competitors grows. Pfizer and Merck KGaA's new entrant Bavencio (avelumab) won approval just last month, and AstraZeneca could nab its own PD-L1 approval later this year.

Meanwhile, BMS could see growing payer pressure on big-selling Eliquis, an anticoagulant that's been gaining on Bayer and Johnson & Johnson's rival Xarelto, and the anti-inflammatory med Orencia, which could soon face more rivals in rheumatoid arthritis. J&J, in fact, cited pricing pressure in the anticoagulant market for Xarelto's poor first-quarter showing.

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Plus, BMS faces potential regulatory risk in the medical benefit and Medicare Part B market.

That segment, according to Credit Suisse, “may come under increasing scrutiny as a large area of unmanaged cost today," not just for BMS but for other drugmakers, too. Companies well-positioned to weather the pricing storm include BioMarin, Gilead Sciences, Novo Nordisk and Regeneron Pharmaceuticals, according to Credit Suisse.

All told, U.S. pharmaceutical list prices grew 9.8% last year, according to the analysis, coming up just short of a 10.8% jump in 2015. Rebates grew to 37.3% from 35.7%, and net pricing growth “remained a very healthy 6%,” the analysts wrote.

For companies hoping to push back at increasingly tough payers, the analysts found that portfolio uniqueness is one important safeguard.

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“Companies with more unique products typically report lower levels of rebates and we believe should be able to maintain higher long-term pricing, access to patients and, ultimately, profitability,” they wrote in the report.

As industry watchers know, Credit Suisse unveils its calculations amid a tense time in the drug industry, with politicians pledging to fight high costs and various lobbying groups pointing fingers about which segment of the drug supply chain is to blame. In response to the scrutiny, pharma, pharmacy benefit managers and hospital groups have argued one another's role in drug expenses as government officials weigh potential action.