Woe to pharmas that rely on price hikes, analyst says. Who can go without? BMS, Lilly and Regeneron, for three

It’s time for drugmakers to stop relying so much on price increases to grow sales. That’s not a politician speaking; it’s influential Goldman Sachs analyst Jami Rubin, who analyzed pharma’s dependence on price hikes in a recent investor note.

Some pharmas have juiced growth by raising prices more than others, of course. Goldman flagged Jazz ($JAZZ), Horizon Pharmaceuticals ($HZNP), and Concordia International ($CXRX) as the three companies that have benefited most from inflation-beating price hikes over the past 5 years. The three that relied least on price increases to fuel growth were Eli Lilly ($LLY), Regeneron ($REGN) and Gilead Sciences ($GILD).

Now, the environment has changed, and pharma’s response to previous pricing brouhahas--tamping down controversy by pulling back on hikes temporarily--won’t work this time, Rubin figures, partly because lawmakers from both sides of the aisle are calling out high prescription costs. What with pricing scandal following pricing scandal--and lawmakers and presidential candidates alike pressing for action, as unlikely as that action might be with a split Congress--companies that can adapt to a “more restrained pricing environment” will outperform those that can’t, Rubin contends.

That’s essentially what Allergan ($AGN) CEO Brent Saunders said in his much-publicized blog post about pharma’s “social contract.” He pledged to raise prices only once a year, where some companies put through increases twice yearly or more, and to keep those increases under 10%. Still higher than inflation, but so far, most other companies aren’t jumping on the bandwagon.

Perhaps more data will do the trick, and Goldman has plenty. Because many drugmakers don’t disclose their growth breakdowns--price versus volume--Goldman came to these conclusions by crunching “an extensive set of data,” the firm said in its report. Not only company by company, but drug by drug.

Consider a few big-name meds Rubin highlights, illustrating three different strategies for mixing price and volume to yield sales growth. Merck & Co’s ($MRK) Zetia, for instance, grew sales via price increases, even as volume dropped--a 57% increase in sales over the past 5 years, on a volume decrease of 20%. AbbVie’s ($ABBV) Humira saw big sales growth off increases to prices volume, though the price hikes were a much bigger factor. And Gilead’s Harvoni, hit by payer-forced price discounts, has leaned on volume to deliver overall growth, albeit at a slower pace.

Specialty drugmakers are more likely to leverage price hikes, as some of the oft-quoted names would indicate. Jazz’s price hikes on Xyrem, its narcolepsy drug, have been highlighted before, and Rubin now calculates that its average increase over the past five years was 30%--not the eye-popping number of an EpiPen hike from Mylan’s ($MYL) specialty division (400%-plus) or Isuprel from Valeant ($VRX) (500%-plus), but still substantial.

The question is, which companies are in the best position to adapt? Rubin flags Eli LIlly, Bristol-Myers Squibb ($BMY) and Regeneron, for three. Lilly and Bristol-Myers already rely little on above-inflation price growth, the note says.

Lilly’s price hikes have been offset by discounts in recent years, the note states, and its newer drugs are expected to chip in a full 50% of Lilly’s sales in 2020. That sets the company up “for a long period of above-average earnings growth,” with limited political pressure coming to bear, Rubin writes.

For Bristol-Myers, even after a recent setback for the cancer immunotherapy Opdivo, Goldman expects new products to account for 35% of 2020 sales, plenty of fuel to keep sales on the upswing without big price hikes. Regeneron, meanwhile, relies heavily on its eye drug Eylea, but that’s not a bad thing; it has racked up new indications in the U.S. and Europe, and Rubin figures it can grow by 22% next year--“all volume, no price.”

But the past doesn’t necessarily predict the future here, and a company that’s relied on price hikes previously might be able to dial back. Jazz, for instance, might not have to rely so much on Xyrem hikes going forward, she says.

Meanwhile, some companies haven’t been able to raise prices on key products, thanks to competition from new meds and pressure from payers. Merck’s Januvia, for instance, has seen its price stagnate as the new SGLT2 class--including Lilly’s Jardiance, partnered with Boehringer Ingelheim--came online. And payer demands have been intense in diabetes.

All of this adds up to one thing: Investors are already pulling away from companies that depend on price hikes and gravitating to those that have strong new meds on the market and coming down the pike. Simply put, the firm expects "innovation to continue to drive returns,” Rubin wrote in the note. It’s certainly less risky, these days, to depend on drugs that really move into new territory, rather than the “buy-and-hike” approach.

Special Report: 10 big brands keep pumping out big bucks, with a little help from price hikes

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