The Trump administration is considering getting rid of a little-known practice in the pharmaceutical industry — here's who Goldman says are the winners and losers
- As the pressure to lower drug prices increases, the Trump administration and the pharmaceutical industry are shifting the blame for high costs onto pharmacy benefit managers, the middlemen of the drug operation.
- Eliminating PBMs would mean getting rid of rebates — a payment that acts as a discount to the list price drugmakers set.
- Goldman Sachs published a research report last week saying rebate retractions could be positive for pharmaceutical companies with diverse portfolios of new and innovative drugs. They could have adverse effects, however, on companies that rely heavily on legacy drugs in overcrowded markets.
In the hunt over whom to blame for high costs in drug pricing, the latest target has been pharmacy benefit managers.
Dubbed the middlemen of the drug industry, PBMs include companies like Express Scripts, CVS Caremark, and Optum RX that work with insurers that pay for drugs to negotiate lower prices with drug companies. As part of this process, drugmakers pay out more than $100 billion in rebates to PBMs, a financial arrangement that Health and Human Services Secretary Alex Azar has criticized.
Azar says PBMs have an incentive to keep drug prices high because of rebates.
“Right now, everybody in the system makes their money off a percentage of list prices,” Azar testified in June before a Senate committee. “We may need to move toward a system without rebates.”
Pfizer CEO Ian Read said a healthcare model without rebates would benefit patients and the industry broadly.
“With the removal of rebates, we will remove the sort of, what we call the rebate trap, whereby access is denied to innovative products because of a strong position over another products with its rebates,” he said Tuesday on a company earnings call.
“I believe we are going to go to a marketplace where we don’t have rebates.”
A research report released by Goldman Sachs last Tuesday took a look at how eliminating rebates may affect pharmaceutical companies. Rebates have been used historically to promote healthy market competition among drugmakers. But these systems are sometimes hijacked by larger pharmaceutical companies to protect their drugs. Because of the way drug markets are shaped, some pharmaceutical companies tend to benefit from rebates, while others lose out.
Goldman Sachs categorized the drug portfolio of major pharmaceutical companies into three categories: innovative, stable, and legacy. Innovative portfolios boast new drugs and therapies that have little to no competition in the market. Stable portfolios contain drugs that treat general consumer and animal health and vaccines. These are drugs with steady sales but no remarkable growth or profitability. Then there are the legacy drugs, which have been used for a long time with proven safety and efficacy but which face a lot of competition from generic brands.
Goldman says if the rebate structure were to change, drug companies with a higher proportion of innovative drugs, like AbbVie or Bristol-Myers Squibb, will fare better than those heavily reliant on legacy drugs in crowded markets, such as Eli Lilly.
Innovative, newly approved drugs tend to be sold at higher prices since there’s virtually no competition. This means there’s been no need for discounts or rebates for them.
At the same time, Eli Lilly’s main drug for diabetes, for example, resides in a crowded market, which most likely means it has to pay higher rebates, harming profits.
Companies like Merck and Pfizer have drug portfolios that are divided halfway between legacy drugs and innovative or stable drugs. An end to rebates therefore would most likely have a neutral impact on these types of drugmakers.
AbbVie, which also has a mix of innovative and legacy drugs, is likely to be a winner in the long run. Though its best-known drug, Humira, is thought to have gained its success from today’s rebate structures, Goldman believes that the drug’s strong clinical data could allow it to retain its leadership in the market even without rebates.
Rebates also affect disease treatments differently. Iqvia, the drug-research firm, found that rebates were more likely to lower list prices for diseases like diabetes than for cancer.
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