Drug discounting to insurers soars from 28% to 41% in 5 years, with no end in sight: report

Increasing drug prices
Just how much do drug companies net when they hike prices? That's a matter of continuing debate.

In the ongoing debate about rising drug prices, pharma companies often gripe that insurers are demanding sky-high rebates, leaving them with no choice but to raise list prices to cover those discounts. Insurers and pharmacy benefits managers (PBMs) counter by saying drugmakers have plenty of power to refuse to offer volume-based discounts and other deals.

The question of who’s right will likely dominate the drug-pricing debate for years to come, but it’s not what investors should be focusing on as earnings season kicks off, say Wells Fargo analysts in a new report. The analysts discovered that the average sale, rebate and allowance (SRA) offered to payers has jumped from 28% to 41% since 2012. The upward trend is likely to continue, they predict, even if the midterm elections revive political attacks on drug companies over their pricing practices—and that, in turn, should raise questions in investors’ minds about the impact of rising drug prices on the industry’s bottom line.

Many pharma CEOs claim they only net half of any price increase on a particular drug, but the true picture may be more nuanced than that, Wells Fargo argues. “In reality, we believe that drug price increases are both a way to ‘feed the beast’ (as one company CEO described it) and [a] way to increase product profitability,” the analysts wrote.

Among large-cap pharma companies, Eli Lilly has seen the largest increase in the average rebates and discounts over the last five years, from 19% to 39%, according to Wells Fargo. But Merck & Co. wasn’t far behind, with its discounts jumping from 22% to 41%. Some specialty pharma companies also hiked their discounts over that time period, including Horizon (from 18% to 70%) and Valeant (19% to 41%).

RELATED: Bring it on, pharma: Finger-pointing at insurers provokes AHIP tweetstorm

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Merck CEO Ken Frazier and Lilly CEO David Ricks have been vocal on the drug-pricing topic of late—but they haven’t always been in agreement about it. At the J.P. Morgan Healthcare Conference earlier this month in San Francisco, Frazier predicted the industry will “continue to see incremental pressure on pricing” but no “significant jump” in the demand to lower prices. At the same event, Ricks took the opposite stance, arguing that the industry needs to face the criticism head-on or be prepared to suffer consequences.

Pharma companies can’t just point to advances they’re making in science “and do nothing on the affordability side,” Ricks said. “We need to do more. If not, people will do things for us." In March of last year, Lilly revealed that it raised list prices by 14% on average in 2016, but that because of SRAs it granted to payers, its net increase was just 2.4%. It was quite a different picture from 2015, when Lilly netted 9.4% on an average price increase of 16.3%

Just days after Ricks made that comment, the hospital industry did take matters into its own hands, announcing the launch of a nonprofit drugmaker that will manufacture its own generic products. Five large health chains representing more than 450 hospitals are participating, with the aim of combating drug shortages and high prices slapped on older products.

RELATED: Price-hike king Valeant could be hit hardest by FDA generics push: analyst

Valeant is one of the companies that has taken heat for hiking prices of old drugs. In fact, Wells Fargo called out the company last summer as one that will be particularly vulnerable to the FDA's push to spur generic competition on aging meds. The agency released a list of off-patent drugs with no competition, flagging 19 Valeant products.

The upward trend in Valeant’s discounts to payers continues, Wells Fargo notes in its new report. In the third quarter of 2017, the company reported average SRAs of 42%, up from 40% in the same period the prior year.

Wells Fargo predicts that the pharma industry will lobby heavily in favor of drug co-pays—which are often a percentage of the price rather than a flat rate—being calculated based on discounted prices, not list prices. Whether they’ll make any headway remains to be seen, but one thing can be said for certain: The debate about who’s to blame for rising drug prices isn’t likely to go away anytime soon.

“As focus eventually turns to the midterm elections, we would expect that a greater scrutiny on drug pricing will re-emerge,” the analysts wrote.